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F500-2020_312_BorgWarner

Headquartered in Auburn Hills, Mich., BorgWarner is an automotive industry components and parts supplier best known for powertrain products such as transmissions and clutches. It also makes and sells turbochargers and four-wheel drive system components.

This year's Fortune 500 marks the 65th running of the list.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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BorgWarner is one of the world’s largest suppliers of drivetrain components, whether they be turbochargers for combustion engines or 800-volt silicon carbide inverters used in electric vehicles. The company actively manages its portfolio, requiring businesses to demonstrate they can achieve a minimum 15% return on capital. As a result, the board decided to shut down its once-promising EV charging business. The company is closely associated with the Indianapolis 500, with its name gracing the trophy since 1936.

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BorgWarner (BWA): Company Profile, Stock Price, News, Rankings

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BorgWarner

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Good morning. My name is Wyatt, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner twenty twenty five First Quarter Results Conference Call. All participants will be in listen only mode. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations.

Mr. Nolan, you may begin your conference.

Thank you, Wyatt. Good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on the homepage and on our Investor Relations homepage.

With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our earnings release. Please see the Events section of our IR 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 ks. 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 on a comparable basis, that means excluding the impact of FX, net M and A and other non comparable items. 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 and net M and A. We will also refer to our incremental margin performance. Our incremental margin performance is defined as the organic change in our adjusted operating income divided by the organic change in sales.

Lastly, we refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial 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.

Thank you, Pat, and good morning, everyone. I'm pleased to share our results for the first quarter of twenty twenty five and provide an overall company update starting on Slide five. I wish to begin by thanking our employees, our customers and suppliers for all of their trust and efforts. With just over $3,500,000,000 our organic sales were relatively flat despite a decline in market production. Our sales outgrowth in the quarter was strong at 3.7%, which was primarily driven by a 47% increase in light vehicle e product sales.

This growth was well ahead of the 25% increase in global hybrid and BEV production in the quarter, which we believe further validates our product leadership position and leading edge technology that our customers demand to solve the world's mobility needs. We continue to secure multiple new product awards for both foundational and e products across our portfolio. I'm pleased to announce a wide array of new business awards that I expect will support our focus on long term profitable growth. Our adjusted operating margin performance was strong in the first quarter coming in at 10%. This strong underlying operational performance was once again driven by e products growth and our focus on cost controls across our business.

Next, we made two important portfolio decisions in the quarter that will drive focus and competitiveness of our product portfolio. It's important that we continuously review our portfolio to ensure we stay focused on products that we can scale and achieve BorgWarner's fifteen percent ROIC threshold. With that in mind, we made the difficult decision to exit our charging business. Ultimately, we did not see this business creating shareholder value within our planning horizon. Additionally, we began capacity consolidation actions within our North American battery systems business during the quarter.

This was done to adjust our cost structure to current market dynamics and create a more competitive business. As I reflect back on my first ninety days as CEO, I couldn't be more excited about the future of BorgWarner. I continue to believe that we have the right product portfolio, leadership and focus on operational performance to drive profitable growth and significant shareholder value for years to come. I'm very pleased with our first quarter results, the momentum behind our continued product awards and the strength of our portfolio that we can continue to build upon. Now, let's look at some new product awards on Slide six, which I continue to believe are a strong indicator of our future profitable growth.

First, BorgWarner has secured a hybrid e motor award with a major North American OEM. Our 400 volt Eswine e motor will be used on a series of hybrid full size trucks and SUVs, as well as a performance vehicle application. This business is expected to launch in 2028. We are so excited and looking forward to deepening our relationship with this OEM. Second, BorgWarner has secured a high voltage coolant heater award in North America with a global OEM for their plug in hybrid electric vehicle platforms.

The award includes PHEV applications spanning midsize pickup trucks, SUVs and minivans. This business is expected to launch in 2027. Next, BorgWarner is extending four programs for exhaust gas recirculation components including valves, coolers and complete modules with a major North American OEM. BorgWarner's EGR systems are used on several of the automakers passenger and light commercial vehicle platforms. Production of these components is expected to continue through the end of twenty twenty nine.

And finally, BorgWarner has secured two dual clutch transmission awards in China, including a seven year extension with a German OEM in China and a new award with a prominent transmission manufacturer with production expected to start at the end of twenty twenty five. We believe these awards further validate the strength of our product portfolio and the need for our technology across combustion, hybrid and bev platforms. Now let's turn to Slide seven and review our decision to exit our charging business. We actively assess our portfolio to position it to grow above industry production. As part of our ongoing assessment, we reached the difficult decision to exit our charging business based on our analysis of the current market and mid term financial outlook for this business.

Unfortunately, the charging market is not growing as anticipated in both North America and Europe. The market also remains highly competitive and disaggregated. This backdrop is causing challenges in achieving scale and our ROIC thresholds. As a result, we believe our charging business is unlikely to create shareholder value in the near to mid term. Therefore, we have made the difficult decision to cease global charging operations.

To achieve this, we will shut down or sell five locations across three regions. These actions are expected to be completed during the second quarter of the year. We expect this will create a more focused portfolio and eliminate approximately $30,000,000 of annualized operating losses. Compared to our previous 2025 guidance, the exit of our charging business is approximately a $30,000,000 headwind to sales, but a $15,000,000 increase to operating income. While the decision to exit charging was not easy, we believe that it will further strengthen our product portfolio and position BorgWarner to continue to grow profitably.

Now let's turn to Slide eight and discuss capacity consolidation actions that we are undertaking within our Battery Systems business. While we remain pleased with the technological and competitive positioning of our Battery Systems business, we do see lower demand in North America than we had expected at the beginning of the year. Therefore, it was critical for us to right size our North American battery system capacity to current market dynamics with consolidation actions that started late in the first quarter. These actions include shifting all battery production from our Hazel Park and Warren, Michigan locations to our Seneca, South Carolina plant. We estimate cumulative cash cost of these actions to be approximately $10,000,000 that will extend through 2026.

These actions are expected to result in annual cost savings of approximately $20,000,000 by 2026. After these actions, all our North American battery capacity will be consolidated into our Seneca plant, which is one of our largest facilities in North America. The intention of this restructuring is to improve the near term earnings of this business, but also position the business for long term success. To summarize, the key takeaways from today are the following. First, BorgWarner's first quarter results were strong.

Sales performance once again outperformed industry production supported by a 47% increase in our light vehicle e products business across the world. Our adjusted operating margin expanded 60 basis points despite a 20 basis point headwind from tariffs reflecting our continued focus on cost controls and turning sales growth into income. Second, we secured multiple new business awards in the quarter across our entire portfolio, which we believe further demonstrates our focus on product leadership across combustion, hybrid and bev architectures. And finally, we took meaningful steps to manage our cost structure and create a more focused portfolio in response to changing market dynamics. While we acknowledge that we are operating in a challenging and uncertain environment, I'm confident in our team and their ability to effectively manage through another uncertain production environment.

We have the right portfolio, a decentralized operating model and the financial strength to deliver our revised guidance and drive long term profitable growth. With that, I'll turn the call over to Craig.

Thank you, Joe, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our first quarter results. First, we reported just over $3,500,000,000 in sales, which was relatively flat versus prior year excluding FX and M and A. Market production in the quarter was down approximately 3.6. So we saw sales outgrowth in the quarter of approximately 3.7%.

This was driven by strong light vehicle e product growth across all major regions of the world and foundational growth outside of China. Second, we had strong adjusted operating margin performance in the quarter at 10%. This performance was achieved despite $6,000,000 or a 20 basis tariff headwind in the quarter. This also represents the fourth quarter in a row with a margin at or above 10%, which I believe demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter with our results improving by over $270,000,000 or 89% year over year.

Now, let's turn to Slide nine for a look at our year over year sales walk for the first quarter. Last year's Q1 sales were just under 3,600,000,000.0 You can see that the weakening U. S. Dollar drove a year over year decrease in sales of $85,000,000 Then you can see a slight increase in organic sales, which was 3.7% above market production. This outgrowth was due to a 47% increase in light vehicle e product growth across all major regions as well as foundational growth in Europe, North America and the rest of the world.

The sum of all this was just over $3,500,000,000 of sales in Q1. Turning to Slide 10, you can see our earnings and cash flow performance for the quarter. Our first quarter adjusted operating income was $352,000,000 equating to a strong 10% adjusted operating margin, which includes a 20 basis point headwind from tariff costs. That compares to adjusted operating income from continuing operations of $339,000,000 or a 9.4% adjusted operating margin from a year ago. On a comparable basis, adjusted operating income increased $23,000,000 on $5,000,000 of higher sales.

This is a great result and reflects our ability to deliver profitability despite a declining production environment. This performance was driven by the benefit of our restructuring efforts as well as our continued focus on cost controls across our business. Our adjusted EPS from continuing operations was up $08 compared to a year ago as a result of strong adjusted operating income and the impact of our share repurchases during 2024. And finally, free cash flow from continuing operations was a usage of $35,000,000 during the first quarter, which was a significantly lower usage than a year ago, driven by higher operating income, better working capital efficiency and lower capital spending. Now, let's take a look at our full year outlook on Slide 11.

First, it's important to note that our guidance includes estimated net tariff costs related to all previously announced U. S. And retaliatory tariffs. We are now projecting total 2025 sales in the range of $13,600,000,000 to $14,200,000,000 which is an increase from our prior guidance of $13,400,000,000 to $14,000,000,000 This increase is due to stronger foreign currencies and the impact of anticipated tariff cost recoveries, partially offset by a lower market production outlook and the exit of our charging business. Now, let's review our year over year sales walk.

Starting with foreign currencies, our guidance now assumes an expected full year sales headwind from weaker foreign currencies of $160,000,000 compared to 2024. However, this is a sales tailwind of $250,000,000 versus our prior guidance, primarily due to the strengthening of the euro and the Chinese renminbi versus the U. S. Dollar. Within our guidance, our full year end market assumption has been reduced to down 2% to 4% versus down 1% to 3% previously.

This reduction reflects our estimated impact of tariffs on customer demand primarily in North America. We also incorporated a $30,000,000 sales headwind related to the exit of our charging business during the first quarter. Within this guidance, we expect a tailwind from tariff related recoveries of up to 1.6% of sales as this is a pass through recovery of our costs from our customers. Additionally, we expect the company's full year sales outgrowth to be approximately 200 to 400 basis points. Based on these assumptions, we expect our 2025 organic sales change to be down 2% to up 2% year over year, in line with our previous guidance.

Now let's switch to margin. We expect our full year adjusted operating margin to be in the range of 9.6% to 10.2% compared to our previous guidance of 10% to 10.2%. This revised guidance now assumes 20 basis points of dilution from tariffs as estimated tariff recoveries will flow through sales with no benefit to margin. Our wider margin range incorporates various industry volume outcomes and a range of results related to tariff cost recoveries. Overall, we view this as strong underlying performance supported by our solid first quarter operational execution, which we expect to continue for the remainder of 2025.

Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $4 to $4.45 per diluted share with the midpoint unchanged from our previous guidance. And we continue to expect full year free cash flow to be in the range of $650,000,000 to $750,000,000 With that, that's our 2025 outlook. So let me summarize my financial remarks. Overall, we were very pleased with our first quarter results. Our sales outgrowth, margin and free cash flow performance represents a strong start to the year and we believe positions us well to meet or exceed our revised guidance.

I'm confident in our global teams and their ability to effectively manage through any near term uncertainty from tariffs or other events. As we look ahead to the balance of 2025, our outlook aligns with our best assessment of market dynamics and the financial impacts of currently announced tariffs. As we continue to focus on what we can control, we are still expecting to deliver on our financial priorities. First, we still expect to continue to outperform market production with an expected full year sales outgrowth of 200 to 400 basis points. Second, the midpoint of our EPS guidance is unchanged despite the headwinds of tariff related costs and a lower market production outlook.

And finally, we expect to have another year of strong free cash flow of $700,000,000 at the midpoint of our guidance, which is consistent with our prior guidance. We believe our ability to drive strong free cash flow in combination with our investment grade balance sheet allows us to continue to create shareholder value through a balanced capital allocation approach. With that, I'd like to turn the call back over to Pat.

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

And our first question will come from John Murphy with Bank of America. Please go ahead.

Good morning, guys. I'm going to try to steer clear of tariffs and get to the core business. If we think about Slide six, Joe, I mean, you have some great extensions here and some great wins. I'm just curious, as you look at those business extensions on foundational products, what that ultimately means for the need to maybe reinvest a bit as those programs get extended in tooling and other PP and E and what that could mean for returns and margins. But then also as we think about these e product awards, which sound like they're pretty good wins here, some pretty big products.

Kind of the return characteristics you're expecting there? And one of the big things that's happening right now is there's concern around rare earths. So as we think about eMotors, and other eProducts, is there any kind of risk that we should think about there or solutions that you found?

Sure. So good morning, John. So I'll speak to the extensions first. I think this highlights really the strength and the stickiness of our portfolio. We're excited when we get an extension.

So you can expect continued strong margins and similar profiles of what we have today. With regard to some of the newer wins I mentioned, this is fantastic, especially because they're related to hybrids. We're starting to get more clarity from the OEMs as they finalize some of their cycle plan changes. And I think the first quarter wins really gives me confidence that we've got great products and our customers are demanding them and they're fitting into this hybrid space, which we've all been waiting to see some of the growth there. And then finally, with regard to Rare Earth, so we do have products that consume rare earth elements and specifically magnets.

So as with any constrained component area, we have teams in place to manage through that. There is a license you can submit with a forty five day lead time to the China government on that, and we're hopeful to get approval on those. And in the meantime, we continue to look for other options to make sure we can continue with supply.

Okay. And if I could just sneak in one follow-up on the portfolio actions. It seems like these are really great returns. I mean, is there anything else that is in the portfolio or you're just constantly reviewing this Joe as you kind of stepped into this new role in leading the company and making some tough decisions that maybe weren't made in the past with the market shifting? Is that battery exit of $10,000,000 cash cost and then $20,000,000 benefit operating income next year is quite phenomenal.

Right now, just curious if there's anything else like that out there?

Yes. So you're right. I mean, we have taken a critical eye to the portfolio, and I think that's important for us to do to be decisive around areas of the portfolio that we don't see us building the scale we expect or reaching our 15% ROIC target. So that's exactly what happened with regard to charging and also the battery consolidation. The battery consolidation of capacity in North America, we really got there due to this lower volume we expect in North America than when we started the year.

So we think it's going to position us well for the long term, improve our competitiveness as well as bring some short term returns due to the cost reduction. So we still feel technologically and from a competitive standpoint really good about that business. But as usual, we want to take decisive actions when we see some of the market dynamics that we see today.

And the next question will come from Colin Langan with Wells Fargo. Please go ahead.

Great. Thanks for taking my questions. On the slide, you indicate China growth over market was modest positive, which is a pretty good start because that's been a point of investor concern. I thought the comps actually start to get better next quarter. So how should we think about this trending through the rest of the year?

Is this sort of the start of things turning in that market?

Yes, Colin, I'm not going to comment on the rest of the year. Obviously, a lot of moving pieces right now. But as we look at Q1, we feel really good about our growth in general, our outgrowth in general, and especially our China business. Again, just a couple of numbers for you. We outgrew the industry by about 3.7% overall.

And where did that come from? A lot of it was on the light vehicle side of our portfolio. Light vehicle e product growth of 47%. We've been talking about for some time, really watch PDS. PDS grew quite significantly in the quarter, about 30% year over year.

But when you look at the light vehicle e product portion of the portfolio, they grew by over 60% year over year. And the good news is we saw that across all regions of the world, North America, Europe, China. So we're really seeing a nice pull from that business. So that's the comments I would have on your question.

And maybe to add a little bit of color to that, I just returned from China at the Shanghai Auto Show. And it just confirms to me in that market, there's still a lot of demand for our competitive technology. Our speed that we're operating in that market really sets us apart from our competition. Just one example, we launched with a leading Chinese customer a dual inverter second half of last year, and we launched that in ten months. Now they're asking for us a capacity uplift.

In fact, want to double the capacity, and they're asking for it to be installed in June. So the speed of that market, combined with the success we're having, we're really optimistic about the growth potential there.

That's great color. And then just normally, you guys take a very conservative approach. If I look at the slides, I think the midpoint of the light vehicle market outlook is down 2%. I think that's just in line with S and P, which I think for the last couple of years you've been hair cutting. What gives you confidence that that's right?

of broaden the range on the downside to kind of help frame things because of the uncertainty?

Yes. So just to recap, where were we in our February guide? We assumed overall light vehicle production down 1% to 3%. We're now expanding that to 2% to 4%. The question is why?

It's really North America. When we think about North American production, that's where we're a little concerned. We were assuming down 3% to 4% in February, and now we're assuming 7% to 12%. So that was really the shift that you see in those figures.

That's very helpful. Thanks. Thanks for taking my questions.

Next question will come from James Picariello with BNP Paribas. Please go ahead.

Good morning, everybody. Yes, I actually was going hit on North America light vehicle production down 7% to 12%. I think that's quite conservative for the second half and a great sign with respect to the implications of your guidance framework. Just curious if you're seeing anything in build schedules this quarter or launch intentions for the second half that informs this view for North America? Thanks.

Yes. So maybe starting with the first quarter, production very strong or what we expected. Second quarter orders also look good. There's nothing really in the midterm order bank where we see that there's going to be a major reduction here. But I think we all are anticipating some changes in the market as these tariffs take hold and due to the overall macro uncertainty.

So I think our guide is appropriate. And as things change, we're going

Understood. And then, Craig, just to clarify, FX is an incremental headwind in terms of the guidance revision. I just want to clarify that. And then to also confirm your tariff recoveries are embedded in your core sales range. Is that correct?

Sure. Yes. So from an FX standpoint, FX is a tailwind to our prior guidance. It's about a $250,000,000 tailwind. It's really coming from the euro and the Chinese renminbi, so against the U.

S. Dollar. So that's how to think about it from an FX standpoint. We have included tariff related recoveries into our guide. We've effectively assumed and we're expecting 100% recovery from our customers.

As we get to the lower end of the guide, we did provide some discount and that's really related to timing. A good example of that is in the second quarter where we will have an impact from tariffs, but we're going to be working through the recovery process with our customers and there may be a timing component there.

Your next question will come from Joseph Spak with UBS. Please go ahead.

Thanks, everyone. Maybe just sticking with tariffs for a second. So you're basically saying something over $200,000,000 of impact for this year. It actually seems a little bit high relative to some disclosure you gave in the past, is $865,000,000 of annual imports into The U. S, but like 60% of that was Mexico, Canada.

I know you've got some from Europe and a little bit from China that obviously has a very high tariff rate, but it still seems like a pretty high number. So can you just help us understand how you're getting to that level

Sure. Yes, I can bring you some color there. So maybe first of all, it's important to know, our updated guidance includes everything we know about tariffs. So whether it's AIPA tariffs, $2.32 auto parts, reciprocal tariffs or these retaliatory tariffs, everything we know is in the guide.

We've already started mitigation plans and customer recovery where short term mitigation is not possible. From our view, this is a manageable item overall. So compared to six weeks ago, there's a lot more clarity out there. And I believe from a tariff impact, it's more manageable. My bigger concern is on the production outlook.

But I'm confident and our teams will manage through that just as they always have. To your point around, it's a little bit larger than maybe expected. Just as a reminder, 55% to 60% of our COGS is material. So compared to some of our peers where maybe labor is higher content, That's our material portion of sales. 100% in this market of our Canadian imports are USMCA compliant and 70% of Mexico.

So that gives you a little more color about the size of it. And I would say the IIPA portion of this is really only a quarter of the total amount. So for us, it's really important to take a global view, identify mitigating actions and customer recovery. And I'm really confident in our team and their ability to manage through this.

Just maybe a quick follow-up. I just want to make sure I understand. You're saying that the imports you mentioned on the compliance, that's sort of more direct, but then because you're buying some components, the cost of those components is going higher because either your sub suppliers are facing tariff headwinds, so they're passing it on for you to pass on. Is that what you mean?

That's correct. We have both direct, we call them direct impacts where we're producing, let's say, in Mexico, and we're striving to get to USMCA requirements. And then we have other ones that are more indirect, and that's where we purchase components that are being tariffed inbound. And that could be tariffed inbound in this part of the world or it could be somewhere else in the world. And I'm sure Pat is happy to walk you through that in detail.

Second question is, just cash balance, expected free cash flow for the year. Clearly, you guys are in a really good position here. I'm just wondering how you're thinking about deploying some of that cash and what you admit is a little bit of a uncertain environment, least for the back half. And I guess the other part of that is, are you reconsidering any timing of buybacks given the multiples near five year lows?

Yes. Thanks for the question. So agree, we have a nice strong balance sheet at the end of the quarter, and we're still expecting to generate about $700,000,000 in free cash flow at the midpoint of our guide. Q1, great execution, 89% increase in free cash flow, better by $280,000,000 year over year. So great Q1.

When we take a step back, what's our goal with our cash and the strength of our balance sheet, our focus is creating additional shareholder value. And it's going to come in multiple areas. It's going to either come from inorganic investment, dividends or buybacks. Like you saw last year, we continue to look at buybacks as a lever to create shareholder value. In fact, we repurchased $400,000,000 last year.

We're going to continue to look at it opportunistically as we work through Q2 and the balance of the year.

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

Great. Good morning. Thanks for taking the questions. Wanted to start first with a question on some of the M and A deals in the past. And so recognize that charging you've come to the conclusion that it's just it's not a profitable business.

But maybe we can go back to some of the other deals you've done, Akasol, Central. The market is different. We appreciate that. You've done some restructuring. But are these deals still driving the initial benefits that you expected?

And so charging was a bit of a different situation. Just wondering how you're viewing maybe what other actions you may need to take to the portfolio?

Yes. So first of all, we won't comment on any particular acquisition that we've We're continuously reviewing the portfolio to see areas we can strengthen it. In the case of charging, our overall assumptions change for that business, starting with the market outlook and then second, our inability to build scale in a timely period where we could reach our 15% return on invested capital target. So we're going to take the same discipline that we're reviewing our portfolio with into future M and A. I think it's important that when things change that we give it a critical eye and we take decisions as appropriate.

Okay. Thank you. And then similar as a follow-up, I wanted to ask about the margins in PowerDrive and Battery, recognizing there's been obviously some lumpiness in the volumes you're taking actions here. On the portfolio side, you do have some restructuring, but maybe you could just refresh us on the path for both of those to reach breakeven, what other actions there are and maybe just anything that's going to impact the direction of margins here?

Dan, maybe I'll just comment on the first quarter. So when you look at Power Drive Systems, really strong growth in the quarter, up 30% year over year. I mentioned earlier, Light Vehicle e product growth up over 60% year over year across every major region of the world, North America, Europe and China. How did they convert on that growth? About $0.15 on the dollar.

It's a nice strong conversion. Gives Joe and I a lot of confidence that we have that cost structure right. We fully expect that business to grow and we expect it to increment in the mid teens. When you look at our battery business down about 15% year over year, not because of units, but because of battery cell prices coming down, which we spoke about throughout the first quarter, they did decrement at about $0.26 on the dollar. That's higher than we'd like and that's why we took some of the actions to restructure North America that Joe spoke about.

BorgWarner (BWA) Q1 2025 Earnings Call Transcript

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