BorgWarner Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer period.

Operator

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

Speaker 1

Thank you, Britney. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, forgorner.com, both on our homepage and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release.

Speaker 1

Please see the Events section of our Investor Relations homepage 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.

Speaker 1

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 is defined as the organic change in our adjusted operating income divided by the organic change in our sales. Our all in incremental includes our planned investment in ER and D, any impact in net inflationary impacts and other cost items.

Speaker 1

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 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 Fred.

Speaker 2

Thank you, Pat, and good day, everyone. I'm very pleased to share our results for the Q1 of 2024 and provide an overall company update starting on Slide 5. With approximately $3,600,000,000 in sales, we delivered close to 7% organic growth in the quarter despite a modest industry decline. We delivered strong incremental performance in the quarter on an all in basis, which allowed us to achieve a 9.4% margin. This Q1 performance provides a nice start to the year and we believe it positions us well to deliver on our full year guidance.

Speaker 2

Additionally, we continued to take steps in the quarter to create long term value for our shareholders. We secured multiple new e product awards. These awards once again demonstrate our focus on taking leading edge technology, working closely with our customers to help support them as they transition towards electrification. And as I will discuss, we expand our product offerings for electrified vehicles. We focused on the efficient deployment of our capital by repurchasing $100,000,000 of stock during the Q1.

Speaker 2

As Craig will highlight, we received an increased share repurchase authorization of $500,000,000 from our Board of Directors. Now let's look at some new e product awards on Slide 6. 1st, BorgWarner has secured additional e motor award with Xiaoping. These awards include BorgWarner's 800 volts eMotor systems comprised of stator and rotor components, which are customers for use on 2 upcoming SUV models. Startup production is planned for 2025.

Speaker 2

BorgWarner's HVH220 E motor offers high torque density, enhanced efficiency and superior durability. We are thrilled to expand our e motor business with Xiaoping and build upon our strong partnership with them. Next, I would like to highlight a new product line for electrified vehicles, which is our electric torque vectoring disconnect or ETVB. Portconer secured new business awards with Polestar and an additional major European OEM to supply ETVD for their battery electric vehicles. ETVD is currently in production for the Polestar 3 SUV and production for the major European OEM is expected to begin later in 2024.

Speaker 2

The ETVD offers a 3 in-one system, replacing the differential and featuring both torque vectoring and an on demand disconnect functionality for BEVs and hybrids. ETVD is part of BorgWarner's electric torque management system portfolio, which helps improve electrified vehicles traction and stability. The added weight in hybrids and battery electric vehicles often results in reduced agility and safety performance. Powerwaller Systems helps overcome this by enabling a lighter field and increasing traction, which improves safety. The ETVD is a great example of applying our foundational expertise and capabilities to develop an innovative solution to address our customers' needs as they transition towards electrification.

Speaker 1

Now I want to take

Speaker 2

a few moments to remind you of the strength of our foundational portfolio on Slide 7. First, it's important to highlight Forerunner's estimated average content opportunity per combustion vehicle, which is approximately $5.50 on a global basis. You'll note that this content opportunity varies by region. I would point out that our content opportunity in North America is the highest of the 3 major regions we operate in. So to the extent that combustion vehicles have a longer tail in North America, that could provide a positive sales margin and cash flow tailwind for BorgWarner.

Speaker 2

We also continue to see potential opportunities for growth across our foundational portfolio, which added 2023 revenue of about $12,000,000 I would like to list just a few. In Turbo, we continue to see North America opportunities as penetration in the region is about 44% compared to 92% penetration in Europe and 69% penetration in China. If EV growth slows in North America, the remaining combustion vehicles may need to improve efficiency and turbo challenging is one of the biggest enablers to make this happen. For our EGR business, we see penetration opportunities on hybrid architectures. The efficiency benefit of EGR and cooling on hybrids is higher than traditional combustion only vehicles as the internal combustion engine operates in a steadier state.

Speaker 2

Our timing system business also sees penetration opportunities in plug in hybrids and range extended EVs as engine timing chain is the preferred technology in those hybrids due to its superior durability and strength. And finally, we see our all wheel drive business benefiting from penetrations growth on combustion vehicles in Southeast Asia and from a longer tail for North American vehicles. Maximizing the value of our foundational products means capitalizing on these potential growth opportunities, while at the same time maintaining the strong margin and cash profiles of these businesses. Now let's turn to Slide 8 and take a step back. Let's discuss how we believe our foundational and e product portfolios are positioned for growth under various combustion, hybrid or best growth scenarios.

Speaker 2

Starting with our combustion, or foundational portfolio, which are on the top left of the slide, BorgWarner has decades of experience in product leadership in these fields. We have a number 1 or number 2 market share for these products and can support our customers around the globe. This is critically important as customers potentially consolidate their supply base and look to industry leaders that have the financial strength and long term technology leadership to support them. Let's jump to the right side of this page where you see the breadth of our e product portfolio. This portfolio has grown organically and through M and A over the past several years.

Speaker 2

We have systematically built a technology focused portfolio that supports our customers' needs in EVs from grid to wheel. This has allowed us to establish product leadership in multiple areas of our portfolio, including inverters, e motors, high voltage coolant heaters and batteries. We expect that our technological differentiation, scale and share leadership will continue to enable us to secure new business. Quite simply, our foundational and e product portfolio support hybrid propulsion since the hybrid vehicle needs both a downside combustion engine as well as an electric powertrain. We can utilize the expertise of both our portfolios to support our customers, which we are already doing successfully in Europe and in China.

Speaker 2

Importantly, when we sell products for hybrid applications, we're able to utilize the same engineering resources, modular design, manufacturing footprint and sometimes even actual product lines that are utilized for BEVs and combustion vehicles. We believe BorgWar is well positioned to be successful under various electrification adoption scenarios, including regional specificities. Our product has been purposefully built for this type of run of an environment. We are focused on achieving above market growth regardless of varying levels of electrified propulsion adoption. Our focus is to convert growth into income at the mid to high teens level on an all in basis.

Speaker 2

To summarize, the takeaways from today are this. BorgWarner's 1st quarter results were strong. Our sales growth once again outperformed the industry and we delivered strong conversion on an all in basis. We secured multiple new e product awards in the quarter, which further demonstrate our our product leadership position. We're focused on efficient powertrains and we believe that we have a resilient portfolio of products that allows us to convert mid to high teens wherever the incremental revenue comes from.

Speaker 2

And we continue to return capital to our shareholders through our Q1 share repurchases and increased authorization from our Board. As we look forward, we expect to continue to manage our business holistically. We plan to take the necessary steps to manage our costs while continuing to preserve our long term profitable growth. While we cannot control the near term volatility in propulsion mix across the globe, we can focus on what BorgWarner does best, driving sales growth above market through technology focused product leadership, converting that growth into earnings on an all in basis and following a balanced capital allocation strategy that creates long term value for our shareholders. With that, I will turn the call over to Craig.

Speaker 1

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our Q1 results. First, we reported close to 7% organic sales growth despite a modest decline in industry volume. 2nd, we had strong margin performance, which was driven by solid conversion on higher revenue as well as appropriately managing our costs. This led to a year over year incremental conversion of over 23% on an all in basis.

Speaker 1

Now let's turn to Slide 9 for a look at our year over year sales walk for Q1. Last year's Q1 sales from continuing operations was just under 3,400,000,000 dollars You can see that the strengthening U. S. Dollar drove a year over year decrease in sales of almost 1% or 32,000,000 dollars Then you can see the increase in organic sales, which was up roughly 7% year over year driven by growth in China and in Europe. Finally, the acquisitions of Elador and SSE added $11,000,000 to sales year over year.

Speaker 1

Some of all this was just under $3,600,000 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 $339,000,000 equating to a 9.4% margin. That compares to adjusted operating income from continuing operations of comparable basis, excluding the impact of foreign exchange and M and A, adjusted operating income increased $54,000,000 on $233,000,000 of higher sales. That translates to an all in incremental margin of roughly 23% driven by our higher year over year sales and strong cost controls.

Speaker 1

The net impact of M and A was a $12,000,000 drag on operating income year over year. Our adjusted EPS from continuing operations was up $0.22 compared to a year ago as a result of higher adjusted operating income, a decline in our effective tax rate and the impact of our recent share repurchases on our share count. And finally, free cash flow from continuing operations was a usage of $308,000,000 during the Q1, which was a higher usage than a year ago as our working capital performance was impacted by the timing of customer collections due to the Easter holiday as well as the timing of tax payments. Now let's take a look at our full year outlook on Slide 11. Starting with foreign currencies, our guidance now assumes an expected full year sales headwind from weaker foreign currencies of $100,000,000 compared to 2023.

Speaker 1

This also is a sales headwind of $100,000,000 versus our prior guidance with the Chinese renbi and Korean won being the largest drivers of the change in our outlook. Next, we expect organic growth of approximately 2% to 5% year over year compared to our prior guidance of 1% to 5%. This increase is predominantly driven by strong sales growth in the Q1. Within this guidance, our full year end market assumptions of flat to down 2.5% is unchanged. Additionally, we continue to expect to deliver between $2,500,000,000 to $2,800,000,000 in e product sales, which is significantly from approximately $2,000,000,000 in 2023.

Speaker 1

Finally, the Eldor and SSC acquisitions are expected to add approximately $30,000,000 to 2024 sales. Based on these expectations, we're projecting total 2024 sales in the range of $14,400,000,000 to $14,900,000,000 which is in line with our prior guidance despite the additional FX headwinds. Now let's switch to margin. We continue to expect our full year adjusted operating margin to be in the range of 9.2% to 9.6%. Excluding the impact of Eldor related losses in 2024, our outlook contemplates the business delivering full year incrementals in the mid to high teens on an all in basis.

Speaker 1

We believe this margin performance reflects the underlying earnings power of our company and our focus on delivering strong conversion on higher sales while also appropriately managing costs. Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $3.80 $4.15 per diluted share. This increase compared to our prior outlook is being driven by the impact of our share repurchases and full year share count and a reduction in our tax rate outlook compared to our prior guidance. Turning to prior guidance. Turning to free cash flow, we continue to expect that we'll deliver free cash flow of $475,000,000 to $575,000,000 for the full year.

Speaker 1

Let's turn to Slide 12 and discuss our recently increased share repurchase authorization. As Fred highlighted in his opening remarks, we repurchased approximately $100,000,000 in Board Warner stock during the Q1. This brings our share repurchases since 2020 to approximately 733,000,000 dollars In addition, our Board of Directors approved an increase in our share repurchase authorization of up to $500,000,000 over the next 3 years. When combined with the $267,000,000 remaining under our prior authorization, management has the ability to to the share repurchases I just highlighted, we have also returned about $623,000,000 to shareholders in dividends since the start of 2020. We also completed the tax free spin off of Finian, which returned roughly $1,700,000,000 of additional capital to shareholders.

Speaker 1

Adding this all together, BorgWarner has distributed roughly $3,100,000,000 of capital to shareholders since 2020, while also investing in the company's future. Our return of capital to shareholders has been a significant area of focus over the past several years. We believe our ability to return capital to shareholders while also investing in the business demonstrates the underlying strength of the company and the importance of a balanced capital allocation approach that is focused on maximizing shareholder value. The $500,000,000 increase in our share repurchase authorization is simply another example of our commitment towards a balanced capital allocation approach. So let me summarize my financial remarks.

Speaker 1

Overall, we delivered a solid Q1. Our revenue growth was ahead of our expectations and importantly we delivered strong conversion on this revenue growth on an all in basis. As this is my first call as Boardwalkner's CFO, I wanted to share how I think about the key financial goals for Boardwalkner for the remainder of 2024 and beyond. As we move forward, I expect the company to first deliver organic growth despite volatility in the global V and hybrid markets. 2nd, drive strong incremental margin performance on an all in basis and third, generate strong operating cash flow that allows the company to make organic and inorganic investments to support our long term profitable growth, while also returning capital to shareholders through a consistent quarterly dividend and opportunistic share repurchases.

Speaker 1

Executing towards these goals is how we measure financial success at BorgWarner and how we hope to create long term value for our shareholders for years to come. With that, I'd like to turn the call back over to Pat. Thank you, Craig. Great Dane, we're ready to open up for questions.

Operator

Your first question comes from Colin Leegan with Wells Fargo. Your line is now open.

Speaker 3

Great. Thanks for taking my questions. You started off very strong here, I think something like 8% growth over market in Q1. Your margin seemed to be in the midpoint of your full year guidance. But the guide for the year is it implies sort of growth over market would actually moderate a bit and maybe at the midpoint margins wouldn't change.

Speaker 3

Anything sort of one time 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?

Speaker 1

Thanks, Colin, for the question. Nothing unique in the quarter. It was just a really strong operational performance for our business units. They did an exceptional job. As you think about our full year guide, it implies a 13% to 16% incremental conversion, 13% on the low end, 16% on the high end.

Speaker 1

We feel really good about our Q1 performance, sets us up quite well for the remainder of the year. We're just focused on executing towards the near term and we're going to keep doing that as we move into the Q2. It's just a really good operational performance for the company.

Speaker 2

Okay. That sounds good. Slide 8

Speaker 3

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, it's quite early on interest in that given the rules seem to be more favorable

Speaker 4

toward PHEV?

Speaker 2

Yes, Colin. The PHEV is one architecture where we have our foundational products coming in and also most of our products coming in. I don't think we have given the granularity of our per plug in hybrid content. But on the hybrid overall, full hybrid, plug in hybrid and range extended EV, about 40% of our light vehicle e product, which is guided at the midpoint at $1,900,000,000 this year is going into those advanced hybrids.

Speaker 3

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

Speaker 2

So globally the interest of PHEV has always been there. In the U. S, I would say that it's a little bit early to see request for quotes from some of the American OEMs. But outside of the U. S, plug in hybrids and advanced hybrids are an important part of new energy vehicle and we have our fair share of those.

Speaker 3

Great. Thanks for taking my question.

Speaker 2

Thank you, Colin.

Operator

Your next question comes from Zurn Murphy with Bank of America. Your line is now open.

Speaker 4

Good morning. I just want to follow-up on that question Colin asked on hybrids, UniFrid. Is there any increase in schedules that you're seeing for hybrids

Speaker 2

at the moment? I know you said

Speaker 4

you mentioned 40% of the e products is the $1,900,000,000 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?

Speaker 2

Yes. In China and in Europe, we see upticks in hybrids. Actually, if you look at the share of growth of new energy vehicle in China, actually hybrids are growing faster than that over the past few months. So and we're part of those. So the answer to your question is on a global basis, yes.

Speaker 2

And in North America, it's too early to say. Okay.

Speaker 4

And then just a second question, there's a 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 and D side or the capital invested side, do you have the ability to pull back and maybe spend it at a slightly more measured pace?

Speaker 4

Or is it just because there's such a push in China and Europe

Speaker 2

that you

Speaker 4

can't pull back and there's nothing you can really 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 and D side and then also sort of on the CapEx or capacity add side?

Speaker 2

Yes. We are managing our costs holistically in line with the current sales outlook. As Craig and I mentioned in our prepared remarks, we are setting up the company to convert mid to high teens no matter where the incremental revenue comes from. What I would say is, try not to box BorgWarner into a BorgWarner is a bad player or hybrid player or combustion player. We are focused on efficient powertrain and we are now having scale in all those architectures in order to convert mid to high teens no matter what.

Speaker 4

And on the capacity side, is there any way to potentially be a little bit more capital efficient? Or is that possible?

Speaker 1

And I would certainly box you into a powertrain tech company across the board. That's where I'd

Speaker 4

box you Fred. I didn't mean to put

Speaker 5

you in one direction or the other.

Speaker 2

I think from a facility standpoint, we're flexible for some of the products that I alluded to in the prepared remarks. We have the same engineering, the same sometimes the same production equipment, sometimes actually the same product. Let me give you an example. We've talked about the past few years of dual inverters for hybrids and we've talked about inverters for beds. Well, those are the same animals.

Speaker 2

They might not look exactly the same from a space and form perspective, but all the inside of the guts of those things are similar. So it's difficult to answer without a specific program. But overall, we're quite flexible across those different elements that both go in bevs and hybrids.

Speaker 1

Great. Thank you very much.

Operator

Your next question comes from Dan Leidy with Barclays. Your line is open.

Speaker 6

Hi, good morning. Thank you for taking the questions. Maybe in the quarter, you could just break out what was the split of revenue between e product and foundational? And then foundational, I assume, is still putting up pretty solid growth of the market. Maybe you could just talk

Speaker 1

about some of the dynamics

Speaker 6

driving that, please?

Speaker 1

Products and foundational in the quarter was about $500,000,000 a little over $500,000,000 e products, the rest was foundational. And I'm sorry, your other question just was growth in the quarter?

Speaker 6

Yes. Within the growth over market, do you

Speaker 2

have a sense of what the growth of

Speaker 6

the market for foundational and what regions or products were driving that?

Speaker 1

Yes. So I would say overall the growth was both in China and in Europe and that includes both the growth that you saw on the foundational side

Speaker 2

of the business as well

Speaker 1

as the e product side of the business.

Speaker 6

And the outgrowth within foundational was any sense on where to want?

Speaker 1

You can see a lot of it in the drivetrain side of our business.

Speaker 6

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 foundational products, is it possible that we actually are seeing higher incremental margin simply because there's less R and D that you've incurred, less application engineering, more that you are leveraging?

Speaker 6

Just getting a sense whether there is some split in that contribution margin between e product versus foundational?

Speaker 2

I would say that we are balancing all holistically and taking cost actions so that all product lines are being able over time to deliver those incrementals.

Speaker 6

Okay. Thank you.

Operator

Your next question comes from Noah Kaye with Oppenheimer. Your line is now open.

Speaker 1

Thanks very much. Craig, after the dividend and repurchases you've done year to date, it kind of leaves me with around 250 $1,000,000 $300,000,000 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?

Speaker 1

Are you remaining optimistic? Yes. Thanks for the question, Noah. So I just want to take a step back. We repurchased 277,000,000 of the company's shares over the last two quarters.

Speaker 1

So 177,000,000 in the 4th quarter of last year, 100,000,000 in the Q1 of this year. Obviously pleased with our Board of Directors, we got that additional authorization, takes our total authorization up to $700,000,000 a little over $760,000,000 We're going to continue to repurchase opportunistically just like we did in Q4 and just like we did in Q1. I'd say as we think about capital allocation, we take a holistic approach to it. So we look at liquidity, we look at leverage, we look at is there any short term funding for M and A that's needed. Obviously, as you mentioned, we have a dividend.

Speaker 1

That's a fixed obligation. We don't want to turn that on and turn that off. And we look at stock buybacks as a lever as well. So I think as we move forward, continue to think about it that we'll do it opportunistically. That's how you should think about it.

Speaker 1

Okay. Helpful. Thanks. And then, good to get the housekeeping on e product sales in the Q1. Just can you give us some guideposts and even getting to the midpoint of guide for the year around how you're thinking about the cadence of ramp?

Speaker 1

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 in particular quarter? Can you just help us think through how the ramp should proceed over the course of the year?

Speaker 2

Yes, Noah. So in Q1, our e products revenue went up 25% and this is in line with our full year outlook of 20 percent to 40% for the year. And you're right, in the next quarter, in our e propulsion segment, we're launching numerous programs with VW Group, with Daimler, HMC, BYD and others. We're ramping up our battery capacity in silicon later in the year in Europe. We're also launching in other areas of e products.

Speaker 2

So you're right, it's going to increase over the next quarters.

Speaker 1

Thanks very much for taking the questions.

Operator

Your next question comes from Joe Spak with UBS. Your line is open.

Speaker 7

Thanks, everyone. Fred, I know you sort of already touched on plug ins a little bit in the Q and 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 power transition. But presumably, your customers would need to do at least some engineering and it's going take time to sort of have 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?

Speaker 2

And Joe, I guess you are thinking about North America here in your question, aren't you? Yes. Okay. Yes, because in the rest of the world, as I alluded to before, it's happening. I think we have all the building blocks to support our customers here in North America as they also want to have those advanced hybrids.

Speaker 2

I feel that it's still a little bit early to get into the specific cities of which products they need from BorgWarner. We are in the early phases of discussion about architecture. So I think it's going to take a little bit more time.

Speaker 7

And Craig, obviously, great job sort of managing to the all incrementals. You talked about continuing to manage to that. And I think in the past, you've talked about on the foundational side, right, if things continue to go down, you're going to 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 volatility on the programs within that. Is there an opportunity, not this year, it's probably locked, but is there an opportunity as you think about ER and D for next year to maybe push some of that?

Speaker 7

Or is there even a pricing opportunity on some of the products stuff if the volumes don't hit certain thresholds?

Speaker 2

Joe, you may have seen that our eProbulsome segment is running at about 30% decremental year and we're not satisfied with that. So we'll take some steps to improve the margin performance. And again, we have a strategy to adjust costs to wherever the market is going. And we are doing that wherever it is necessary. And this is what we're looking at right now.

Speaker 7

One follow-up on the decrementals, I guess, in well, I guess the battery stuff is not in the product. So never mind if

Speaker 2

I can correct the question. Yes. Thank you.

Operator

Your next question comes from Douglas Jensen with Evercore ISI. Your line is open.

Speaker 1

Hey, team. Thanks for taking my question. 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?

Speaker 2

You're talking about e products?

Speaker 8

Correct, yes.

Speaker 2

So on e products for 2024, about 45% of the $1,900,000,000 in light vehicle is for China. Within that, 95% is for the Chinese OEMs.

Speaker 1

Okay, great. Thank you. 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, Xiaomi's of the world?

Speaker 2

I unfortunately can't disclose some of those names and I can't disclose which product we have with those names in particular. So not that I would not love to do it, but I just can't.

Speaker 1

Okay. Got to ask the question. Thank you very much.

Operator

Your next question comes from Alex Potter with Piper Sandler. Your line is open.

Speaker 5

Great. Thanks, guys. 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 a foreshadowing or a harbinger of the way the rest of the world will evolve? Obviously, China has been moving much more quickly toward electrification.

Speaker 5

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 world doing their own thing?

Speaker 2

In China, under the umbrella of new energy vehicle, you will see that hybrids, essentially the advanced hybrids are having about 40% shares in China and actually growing faster within that segment or growing the fastest within that segment. That is also our ratio of e products versus e products within hybrids and devs. For us, I wouldn't say that it doesn't matter, but it kind of doesn't matter. We have the right product portfolio to support customers around the globe. And we don't we're not attached to any regional specificities.

Speaker 2

We are resilient to any propulsion scenarios, fuel combustion, hybrids or BEVs. So I'm not I don't have a crystal ball. I won't I can't tell you China is a good proxy for the rest of the world. But we believe that you will see a variety of electrified propulsion architecture and we're ready to support those on a global basis at Boro.

Speaker 5

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 OEM.

Speaker 5

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. Thanks.

Speaker 2

Yes. I don't have that granularity of what happened over the past 2 weeks, but overall, for the full year, our view of the market is already below companies like IHS. So but we will adjust to whatever comes to us.

Speaker 5

Great. Thanks, guys.

Operator

Your next question comes from James Picariello with BNP Paribas. Your line is open.

Speaker 8

Hi, everybody. Just back to e product, based on the Q1's performance and the visibility into the year, can you just speak to Akastal's battery systems revenue? I believe this business, the guidance called for $700,000,000 to $800,000,000 in revenue. Just curious if there are any moving pieces tied to this within the product range? And can you clarify what portion of this year's e product sales attribute to hybrid?

Speaker 2

Thanks. So this year's guidance, $2,650,000,000 for e products at the midpoint, out of which $750,000,000 are battery packs for commercial vehicle. So $1,900,000,000 is for light vehicle, 40% of which is for hybrids on a global basis. Regarding your first question on battery packs, there is nothing particular in Q1. The ramp up is to plan.

Speaker 2

And what we've seen in silica and the preparation of increasing capacity in Europe is also in line with our expectations.

Speaker 8

Got it. That's helpful. And then just as we think about foundational profitability versus e product the rest of the year, and I think this touches on Colin's question regarding margin cadence given that the Q1 was squarely in line with your full year range. As your e product 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,

Speaker 1

if that makes sense? Thanks. Yes. I think the way we're looking at it is we're focused on executing at the mid to high teens on an all in basis, wherever that growth may come from. So I think that's how you should think about it.

Speaker 1

We're really pleased with our 23% all in, in the Q1. We think it sets us up quite well to execute for the full year. So that's how we're looking at it. We're really focused on incrementing at an all in basis regardless of where that revenue growth comes from. Okay.

Speaker 1

Thank you.

Operator

Your next question comes from Luke Young with Baird. Your line is open.

Speaker 9

Good morning. Thanks for taking the questions. 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 this quarter sounded like that was foundation related in large part, maybe just sustainability of that strength. And then the margin there stepped up nicely sequentially, especially as well. I don't know if there's anything specific to point to.

Speaker 9

Thank you.

Speaker 2

Yes. I would say it

Speaker 1

was just overall good performance from a margin perspective. Again, 23% all in, great performance by our business units. When you think about growth, it's really China and Europe, both on the foundational side of the business and on the battery side of the business, particularly in that DBS segment. But we also had nice growth overall, just in general both in China and in Europe. But again, you can see most of it in the DBS segment.

Speaker 1

That's where I would point you to.

Speaker 9

Got it. And then for my follow-up, maybe a bigger picture question, Fred, and just thinking about e product net engineering requirements going forward, both as you think about on a gross basis and e propulsion margins going forward here and how 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 build in structures to pay for more of that engineering?

Speaker 2

Yes. I mean, we're looking at all this from an engineering recovery. We're also looking at adjusting costs, especially in lower segments for which growth is not happening as fast as we thought in order to improve the margin performance. So in those e product segments, we fully expect this business to grow going forward and with those upcoming cost actions to get to mid high teens incremental when it ramps.

Speaker 9

Got it. Thank you.

Operator

We have time for one final question and that question comes from Mark Delaney with Goldman Sachs. Your line is now open.

Speaker 5

Good morning. Thanks for fitting me in. I think that a part of BorgWarner's customer value proposition for e products 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?

Speaker 2

Well, you're absolutely right. Power Electronics is a key strength of the company. Borg has always been focused on efficient systems and efficient mobility and power electronics is the new frontier of efficiency in bev and or hybrids fighting against those switching losses and fighting against those mechanical losses downstream, the inverter. So the answer to your question is absolutely yes, we're focused on that. And at the system level, at the power electronics level, at the power module level and that's our DNA.

Speaker 2

That's what we do best.

Speaker 5

Thanks for that Fred. And on e Products, the company reiterated the $2,500,000,000 to $2,800,000,000 e Products revenue outlook for this year. Of course, you'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, any products of $4,500,000,000 to $5,000,000,000 is that something you still see as achievable? And as you think about the revenue ramp and what be for 2025, maybe you could also touch on how you're thinking about e products profitability, not only this year, but into 2025?

Speaker 5

Thanks.

Speaker 2

So you're right. It will absolutely depend upon customer volume and that will ultimately decide what time 2025 will be. We are, as we mentioned, focused on what we can control, which is securing new businesses for bev and hybrids, focusing on strengthening our portfolio for it to remain in a great position and managing our cost in order to overall deliver mid to high teens incremental on an all in basis. That's our focus. And we'll give you more color on closer to 25.

Speaker 2

Understood. Thanks. Thank you.

Speaker 1

Thank you all for your great questions today. If you have any follow ups, you can follow-up with me or my team. With that, Britney, you can go ahead and conclude today's call.

Operator

That does conclude the BorgWarner 2024 First Quarter Results Conference Call. You may now disconnect.

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Earnings Conference Call
BorgWarner Q1 2024
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