BorgWarner Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 31, 2024

There are 12 speakers on the call.

Operator

Good morning, everyone. My name is Beau, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 20 24 Second Quarter Results Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. 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, Beau. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our homepage and our Investor Relations homepage. 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.

Speaker 1

Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non GAAP measures in order to provide a clearer picture of how the core business performed and for comparison M and A and other non comparable items. When you 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.

Speaker 1

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 margin includes our planned investment in ER and D, any impact from net inflationary items and other cost items. We will also refer to our growth compared to our margins. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.

Speaker 1

Please note that we've 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 Q2 of 2024 and provide an overall company update starting on Slide 5. At approximately $3,600,000,000 our Q2 sales were relatively flat year over year, outperforming a modest decline in production. For the first half of the year, we outgrew our market by about 3 50 basis points. Once again, this sales outgrowth shows the resiliency of our efficiency focused portfolio, which is, I believe, positioned to outgrow the market in any type of propulsion mix scenario.

Speaker 2

We secured multiple new product awards across combustion, hybrid and electric for both passenger cars and commercial vehicles. Turning to our bottom line for the quarter, we delivered a very strong 10.4 percent margin, which was up 30 basis points versus prior year. We delivered EPS of $1.19 per share, which was $0.13 increase versus prior year. Our first half 2024 margin and EPS performance has allowed us to increase our full year margin and earnings guidance as Craig will detail later. We carried on our restructuring actions, now focusing on our eProbulsions segment to adjust our cost structure to current market dynamics.

Speaker 2

We expect that these actions will result in annual run rate cost savings of about $100,000,000 by 2026 with immediate positive impacts. We also introduced a new business unit structure designed to maximize cost synergies, enhance our go to market global strategies and bring further simplicity and clarity to our shareholders. Lastly, we remain focused on efficient deployment of our capital and announced our intention to repurchase $300,000,000 of BorgWarner stock in the second half of twenty twenty four. Next, on Slide 6, I would like to take a moment to highlight our 2024 Sustainability Report, which was published earlier this month. BorgWarner's vision is a clean energy efficient world, and I'm proud to lead a company where our business goals go hand in hand with our sustainability goals.

Speaker 2

At BorgWarner, sustainability means delivering value to all stakeholders for today and tomorrow. I would like to highlight just a few points of progress described in the report. First, BorgWarner has reduced scope 1 and 2 greenhouse gas emissions by 32% from the 2021 baseline, making progress on our SBTI validated goal to reduce it 85% by 2,030. 2nd, the company engaged our supply chain management and engineering teams to advance the company's goal of reducing Scope 3 emissions 25% by 2,030 compared to a 2021 baseline. And third, we performed above all benchmarks on employee sense of inclusion and belonging on the company's engagement survey.

Speaker 2

I would like to thank our entire team for their dedication and excellence in innovating products for cleaner mobility, making leaps towards achieving our climate and other sustainability goals and investing in our people. Now let's look at some new product awards on Slide 7. First, BorgWarner has secured multiple contracts to supply its electric cross differential or EXD to 3 major OEMs. The companies will incorporate BorgWarner EXD technology into both rear and front wheel drives of electrified powertrain application. Startup production is expected in 20242026.

Speaker 2

Our EXD is part of our electric torque management system, which offers a range of products that intelligently controls wheel torque to increase stability, provide superior dynamic performance and improve traction during launch and acceleration. Next, BorgWarner secured awards to deliver high voltage e fan systems for use on the major global OEM series of electrical commercial vehicles in North America. This marks the largest e fan business win in North America for us with expected start of production in Q4 2027. BorgWarner's complete e fan system is comprised of 3 components, including a fan, an e motor and an integrated high voltage inverter with the capacity to reach up to 10 kilowatt of power and 40 Newton meters of torque. Lastly, BorgWarner has secured 2 EGR cooler awards with a prominent North American based commercial vehicle customer.

Speaker 2

Start of production is expected to be in Q4 2027 with implementation across various medium duty commercial trucks. Our emissions reducing EGR solution offers high robustness against thermal fatigue and optimizes coolant distribution throughout the engine for increased performance. We continue to see strong interest across our EGR product portfolio, which supports the need for highly efficient combustion engine that meets increased fuel economy needs and stringent emission requirements across the world for combustion and hybrids. Now let's turn to Slide 8, where I would like to discuss our new business unit structure. As we have continued to outgrow the market and leveraged the leadership, robustness and scale of our product portfolio, it is now the right time to align our business in its structure to further enhance our ability to execute our strategy.

Speaker 2

We believe this will drive cost synergies, higher focus and clarity for all stakeholders. As such, beginning in the Q3, BorgWarner will reorganize its 4 business unit and associated financial reporting segments as follows. Our Turbos and Thermal Technology business unit is led by Doctor. Volker Wang. This business unit is unchanged.

Speaker 2

Our Power Drive system, which today is our externally reported eProportion segment, will continue to be led by Doctor. Stephane Demeler. This business unit is also unchanged. Our drivetrain and more systems businesses are now combined into 1 business unit and is led by Isabelle McKenzie. We've combined our commercial vehicle battery and charging businesses into 1 business unit, which is led by Henk von Tonout.

Speaker 2

To summarize, the takeaways from today are this. BorgWarner's 2nd quarter results were strong. Our sales performance once again outperformed the industry. Our adjusted operating margin was the highest since the Finneas spin off and our cash generation was very strong and support our $300,000,000 of intended share repurchase in the second half of the year. We secured multiple new business awards in the quarter, which we believe further demonstrate our product leadership position in all powertrain architectures.

Speaker 2

BorgWarner is focused on powertrain efficiency. This includes combustion fuel efficiency and electron efficiency, whether it is for hybrids or BEVs. I believe BorgWarner can support any powertrain architecture. We are a world leader in efficient mobility with a product portfolio that we believe is uniquely positioned to outgrow industry production for years to come. This quarter, we took additional meaningful steps to manage our cost structure in response to the industry mix dynamics as well as to provide increased clarity and transparency from a global product line organization.

Speaker 2

As we look forward, we expect to continue to secure global growth opportunities as the world transitions to more efficient mobility, thanks to our product leadership position in combustion, hybrids and BEVs. At the same time, we will continue to appropriately manage our cost structure as industry volumes and production mix outlook change, while continuing to preserve our long term profitable growth and technological edge. This will allow BorgWarner to continue to deliver sales performance through organic growth above market production, convert that growth into higher earnings and create long term value for our shareholders. With that, let me turn the call over to Craig.

Speaker 3

Thank you, Fred, and good morning, everyone. Let's start on Slide 9 with a look at our year over year sales walk for Q2. Last year's Q2 sales from continuing operations were just under $3,700,000,000 You can see that the strengthening U. S. Dollar drove a year over year decrease in sales of almost 2% or $62,000,000 Then you can see a modest decrease in organic sales, which was 120 basis points above market production.

Speaker 3

Finally, the acquisition of Eldor added $6,000,000 to sales year over year. The sum of all this was just over $3,600,000,000 of sales in Q2. Turning to Slide 10, you can see our earnings and cash flow performance for the quarter. Our 2nd quarter adjusted operating income was $376,000,000 equating to a strong 10.4% margin. That compares to adjusted operating income from continuing operations of $372,000,000 or a 10.1% margin from a year ago.

Speaker 3

On a comparable basis, excluding the impact of foreign exchange and M and A, adjusted operating income increased $22,000,000 on $12,000,000 of lower sales. This is a great result and reflects our ability to deliver profitability despite a declining production environment. This performance was partially helped by $15,000,000 of favorable items, including the initial benefits from our e Propulsion restructuring, stock forfeiture related to a senior executive retirement and timing of a supplier cost reduction. The net impact of Eldor was a $9,000,000 drag on operating income year over year. Our adjusted EPS from continuing operations was up $0.13 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.

Speaker 3

And finally, free cash flow from continuing operations was $297,000,000 during the Q2, which was up $267,000,000 from a year ago as a result of strong working capital and capital expenditure performance. Now, let's take a look at our full year outlook on Slide 11. We are projecting total 2024 sales in the range of $14,100,000,000 to $14,400,000,000 which is a reduction from our prior guidance of 14.4 dollars to $14,900,000,000 This reduction is due to weaker foreign currencies, a lower market production outlook and e products coming in at the low end of our prior guidance range. Despite this revenue reduction, we expect the company to outgrow market production by 350 basis points to 4.50 basis points, which once again demonstrates the resiliency of our technology focused portfolio that we believe is positioned to outgrow market production during any kind of propulsion mix environment. Starting with foreign currencies, our guidance now assumes an expected full year sales headwind from weaker foreign currencies of 1 $175,000,000 compared to 2023.

Speaker 3

This is also a sales headwind of $75,000,000 versus our prior guidance with the euro, Chinese renbi and Korean won being the largest drivers of the change in our outlook. Within this guidance, our full year end market assumption has been reduced to down 2% to 3% versus flat to down 2 point 5% previously. Finally, the Elador and SSE acquisitions are expected to add approximately $30,000,000 to 2024 sales. Based on end market and e product headwinds, we expect organic growth of approximately 0.5 percent to 2.5% year over year compared to our prior guidance of 2% to 5%. However, our expected overall growth above market production remains strong at 350 basis points to 4.50 basis points.

Speaker 3

Now let's switch to margin. We are increasing our full year margin outlook to 9.6% to 9.8% from our prior guidance of 9.2% to 9.6%. This is based on our year to date performance and the expected benefit of our e Propulsion restructuring actions, which I'll discuss in a few moments. We believe this margin guidance increase reflects our ability to drive profitability in very volatile end markets, Excluding the impact of Eldor related losses in 2024 and the benefit of our e Propulsion restructuring, the high end of our second half outlook contemplates the business delivering an incremental conversion in the mid teens, while the low end of our guidance provides a decremental conversion in the low double digits. We view this as strong underlying performance given the anticipated 3.5% to 5.5% expecting full year adjusted EPS in the range of $3.95 to $4.15 per diluted share.

Speaker 3

This increase compared to our prior outlook is being driven by the impact of our higher margin guidance and $300,000,000 in share repurchases that we expect to execute before the end of the year. With an expected 475 to $575,000,000 in 2024 free cash flow, we expect to allocate all of our cash flow to shareholders through share repurchases and dividends. In summary, this is simply another example of the company utilizing its strong free cash flow to deliver value to shareholders. Let's turn to Slide 12 our planned restructuring actions within our E Propulsion segment. As mentioned earlier, the initial benefits of these actions helped our Q2 result by $5,000,000 We continue to see short term sales challenges in this business due to various individual platform shortfalls and other regional market dynamics.

Speaker 3

Therefore, it was critical to right size the e Propulsion cost structure to their current level of sales with restructuring actions that we started in June. We estimate cumulative cash restructuring costs of approximately $75,000,000 that will extend through 2026. These actions are expected to generate cost savings of $20,000,000 to $30,000,000 in 2024 and approximately $100,000,000 by 2026. The intention of this restructuring is to improve the near term earnings of this business, but it also positions the business to be able to lever mid teens incremental margins on future growth. So let me summarize my financial remarks.

Speaker 3

Overall, we delivered a strong second quarter with sales performance better than market production. We delivered a very strong 10.4% margin, which was 30 basis points higher than 2023. And we generated $297,000,000 in free cash flow, which was $267,000,000 higher than 2023. And we did this despite declining market production in the quarter. I believe this once again demonstrates the resiliency of our technology focused portfolio that is positioned to outgrow market production and to deliver strong profitability and free cash flow in any type of end market environment.

Speaker 3

Last quarter, I shared 3 financial goals for BoardwalkWarner for 2024 and beyond. I would like to give you my view of these goals as it relates to our 2024 outlook. First, we outperformed market production by approximately 3.50 basis points during the first half of the year. And despite an anticipated weaker second half production environment, we expect to outperform the market by 3.50 to 4.50 basis points for the full year. This is a reflection of our leading edge technology that we believe is positioned to outgrow a very volatile powertrain mix environment.

Speaker 3

2nd, our margin profile remained extremely strong through the first half of the year. When combined with our continued focus on profitable growth, including our planned e Propulsion restructuring actions, This allowed us to increase our full year margin outlook by 30 basis points despite a challenging production environment. And lastly, we generated strong free cash flow during the Q2 and we have strong liquidity, which supports our intention to repurchase 300,000,000 of additional shares during the second half of the year. This means that we expect all of our 2024 free cash flow will be returned to shareholders through the combination of a consistent quarterly dividend and intended share repurchases. The combination of our 2023 and intended 2024 share repurchases represents more than 7% of our outstanding shares post the Finneas spin off.

Speaker 3

And we expect to do this while also continuing to invest in our business to support our focus on long term profitable growth. As I look back at the first half of the year, I'm very proud with how we've performed and I'm equally excited to see our results in the back half of the year. With that, I'd like to turn the call back over to Pat.

Speaker 1

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

Operator

Certainly, Mr. We'll go first this morning to John Murphy with Bank of America.

Speaker 4

Good morning, guys. Just a main question here around the e products restructuring. 1, why doesn't it include why does it not include Europe? Why is it only North America and China? And is this just in response to program cancellations or push outs, meaning that the business is just not materializing the way you're expecting.

Speaker 4

And it appears, just given the very quick savings that some of these programs may have been loss making for you even if they had come through. So maybe just kind of confirm that. So why not Europe? Is it just program cancellations and push outs? And were these programs loss making to start with?

Speaker 4

And maybe any other color around this?

Speaker 2

Yes, John. From an engineering and SANO footprint perspective, this business unit is essentially tilted to North America and China. That's where most of the restructuring will happen because this is where we have the weight. But it also touches some parts of Europe. The restructuring is sized so that when PDS carries on launching so many products for major OEMs globally, we're converting mid teens on the way up, and that's how we size the restructuring.

Speaker 2

We're focusing on launching the products that we've booked and we've also focused on very defined programs for long term product leadership and enhanced product efficiencies.

Speaker 4

Okay. And then maybe just a follow-up on the seesaw on the ICE and potentially on the hybrid side. Are you seeing any benefits that might come to that side of the business where you're gaining a little bit of revenue that might come in at higher incrementals that maybe it's this year or maybe it is we go through 2025 and 2026 through the course of this program?

Speaker 2

Yes. So the propulsion mix is volatile and unpredictable. And what we're doing at Borg is making sure that we are converting on the additional revenue wherever the revenue comes from. We are focusing on launching our new business that we have booked and this is what translates in the numbers and the updated guide.

Speaker 4

Okay. And just one just Bob, most of

Speaker 5

this is it sounds like

Speaker 4

it's headcount on R and D. Is that a fair statement?

Speaker 2

It is headcount and other types of spend.

Speaker 6

Okay. All

Speaker 2

right. But it's more SCNO than any other things as CNO overall.

Speaker 4

Got it. That's very helpful. All right. Thank you, guys.

Speaker 2

Thank you, John.

Operator

Thank you. We go next now to Colin Langan at Wells Fargo.

Speaker 7

Thanks for taking my questions and congrats on a

Speaker 6

If I look at the midpoint of full year guidance, it does imply something like over a 30% decremental if I go first half to second half on those lower sales, kind of a higher end of the conversion on lower sales. And on top

Speaker 7

of it, I think you mentioned there's actually a little bit of savings from the restructuring program into the second half. What is driving that? Is that just normal seasonality? How should we be

Speaker 6

thinking about first half to second half decremental?

Speaker 3

Yes. So when we think about first half second half, I think actually the better way to look at it is year over year. And when you think about our margin 9.3% to 9.6% in the second half of the year, when you look at the high end of our guide, we're incrementing in the mid teens. On the low end, we're decrementing in the low double digits. That's excluding the benefits of guide, we're holding flat.

Speaker 3

For us, I think that's really good underlying performance. And so that's how we're looking at it year over year.

Speaker 6

Got it. And if I look at growth over market, I think it came down a little bit less than 100 basis points.

Speaker 7

It seems pretty small considering some of the issues. I mean, what is driving that slight change? Is that all the EV delays? And is there any customer mix as other suppliers have reported? Or is that not an issue for you given your pretty strong position in China with domestic?

Speaker 2

Yes. Alan, the outlook for Q2 is 120 basis points. And this is essentially impacted by e product revenue at the low end of our guide and also essentially a program in North America, BEV program in North America that's not really performing well. I would not really look at a smooth outgrowth quarter over quarter as a good proxy. I think 300 basis points for the first half is where we want to be and will be around 400 basis points for the full year, which is also where we kind of want to be.

Speaker 7

I was kind of referring to the full year guide growth of the market that was implied. It seems like it's slightly lower. Is that also all EV related?

Speaker 2

It is. Okay. All right.

Speaker 6

Thanks for taking my question.

Speaker 2

Thank you.

Operator

Thank you. We go next now to Chris McNally at Evercore.

Speaker 5

Thanks so much, team. Maybe if I step back for the impressive guide raise of 30 bps. I mean, basically, the way I think about it is essentially given the organic revenue reduction of a little bit less than $300,000,000 you probably would have lost 20 basis points or 30 basis points on normal incremental. So if you add those 2, it's about a 50 to 60 feet of operational sort of better than expected performance. And I think what we're all trying to work out is, if you look at Q2 and a 10.4% margin, while you still have e Propulsion losses in the double digits, Can you just walk us through some of the concepts why we can't sort of propel out that 10% plus margin for 25%, 26%, where obviously we're you've discussed lower.

Speaker 5

What rolls off? Anything just qualitative? I know there's a lot of moving parts and 1 quarter doesn't make sort of a trend, but we're all trying to figure out if ICE is here for a little bit longer, what is the negative that drains that down because obviously e Propulsion you will get better than this minus sort of double digit margin. It's a long question, but curious why we can't see more strength in the foundational business?

Speaker 3

Chris, I'd say the way to look at it is when you look at Q2, we're at 10.4%. There was, as I mentioned in my script, about 15,000,000 dollars benefit in the quarter with some items. So when you remove that, it's about 10% for Q2. As we move into the second half of the year, as you mentioned, revenues coming down about $200,000,000 purely market, dollars 75,000,000 foreign exchange and the balances on the e product side of our portfolio. And ultimately, at the midpoint, operating income is unchanged.

Speaker 3

So I think your question is how are we doing that? And I think it's coming from our strong first half performance and our restructuring benefits is offsetting the sales decline. I think it's really as simple as that.

Speaker 5

And then this idea as obviously we're going to see pure ICE, right, so ex plug in, ex hybrid, ex EV volumes decline over the next couple of years. Should we assume that if we were to able to isolate that margin of business that that's coming down meaning they'll see decrementals because also often at the end of life of a lot of these programs you actually see R and D sort of also come down. So that's one of the things that we're trying to figure out. If we were to isolate specifically ICE foundational programs, will they see margin decline as units go down over the next couple of years? And obviously, then the question will some of these programs may be extended or your volumes may come down less.

Speaker 5

But just if we were to think about it, it's not how you report, but sort of should we see margins on a like for like basis on pure ice come down?

Speaker 2

Yes. So I would say, first, a lot of our combustion products go into hybrids and are a key element of making the combustion side of hybrid lean and efficient. So I think when you think about BorgWarner, I don't think you should try and split combustion, hybrid and bev. Bev. Because our combustion product goes on combustion and hybrid, our e product also are very versatile and go on EV and hybrid.

Speaker 2

Those are the same products. And so we have the portfolio to play in all three segments, if you call that segments and outgrow those segments and convert on that outgrowth. It is as simple as this.

Speaker 5

Now that's helpful. I know it's a tough one to isolate. And I think as you as we also see in the 4 new segments, some of the margin progression, I think, Fred, that actually may be easier for the investment community to kind of see the trend segmented in sort of these segments where we do get a little interplay of ICE, EV and hybrid. Thanks so much. Really appreciate it.

Speaker 5

Thank you.

Operator

Thank you. We go next now to Joe Spak at UBS.

Speaker 6

Thanks. Good morning. Just I think before you were looking for ER and D to be plus $40,000,000 to $50,000,000 for the year. Now with this restructuring and it does sound like it's again mostly people, is that now like a $20,000,000 year over year pace? Or is there some other sort of savings from the restructuring?

Speaker 3

Yes. Thanks, Joe, for the question. You're right. Yes, we said $40,000,000 to $50,000,000 starting the year. Now after this restructuring, it's going to be down to $20,000,000 to 30, and how I look at it is our e products portfolio is still growing $500,000,000 It's still going to be up about 25% year over year and that $20,000,000 to $30,000,000 is supporting a lot of launches that are going to be happening in the future.

Speaker 3

It's really focused on application engineering and that's really what that $20,000,000 to $30,000,000 represents year over year.

Speaker 6

So I guess just to follow on and more importantly, like how should we think about R and D there and capital investment on the e products given your new view as sort of how this market is going to evolve here?

Speaker 3

On that growth, we're going to continue to support those programs with ER and D, and we're still focused as always on 15% return on invested capital on all new programs. New programs.

Speaker 6

Okay. And then maybe just one more quick one here on e products sort of at the lower end here. I apologize if I missed this, but is that is the battery ramp still on track? I think you're looking for that to be like $700,000,000 to $800,000,000 So the reduction is really in some of those other e products or was there a revision to the battery side as

Speaker 2

well? Yes. Back to your prior question, I just want to add that we are incrementing mid teens, including that year over year additional $20,000,000 ER and D spend. Right. On battery, it's on track.

Speaker 2

Seneca is doing a great job and they are now fully in production. We are on track also for Europe. And the battery business performance is, of course, contributing positively to the incremental margins that we are delivering for the first half and also an important part of our guiding up for the full year.

Speaker 6

Okay. Thank you. I'll pass it on.

Operator

Thank you. We go next now to Dan Levy at Barclays.

Speaker 8

Hi, good morning. Thank you for taking the question. Wanted to start first with the question on the drive train and battery systems segment, which is another really strong quarter. So maybe you can help us disaggregate the margin strength. How much of this was on the core foundational piece versus the battery side where you just talked to it a second ago, but that's obviously ramping?

Speaker 3

Yes. The quick answer is coming from both. Really, really strong growth in the quarter like you saw. It's coming from both sides of the portfolio on the battery business and the foundational business. And I think we're also so we're converting on that extra sales at the same time really focused on cost, taking productivity actions, supplier savings, restructuring.

Speaker 3

Those are all the benefits that you're seeing come through our P and L. But the short answer, it's really coming from both sides of the business.

Speaker 8

And the foundational side within Drivetrain, is there one particular region or one particular product that's trending through? I mean, just trying to get a sense of how sustainable when I recognize the margins the segments are getting reshuffled, how sustainable these drivetrain foundational

Speaker 3

results are? Yes. The drivetrain, the foundational side, seeing good strength out

Speaker 4

of Asia.

Speaker 8

Got it. Thank you. Maybe as a follow-up, maybe you can help us understand on the forward assumptions on the end markets. We've obviously seen the negative revisions, but maybe what you're seeing in terms of a customer mix standpoint, How much conservatism you might be including because we've seen a number of reductions to the end market outlook, talk about production cuts, just your views on customer mix and the conservatism on schedules, please?

Speaker 2

Dan, our guide reflects what we see in the market and we expect the market to be down 2% to 3% year over year with the biggest reduction being in China followed by North America and Europe. In China, we see a bit of a weaker consumer demand now impacting production rates. In North America, we're seeing some customers working to address their inventory level. And in Europe, there is also a bit of a weaker demand and depletion of backlog. But all that is embedded in our guide, both on the top line and bottom line.

Speaker 8

Great. Thank you.

Operator

We'll go next now to Mark Delaney at Goldman Sachs.

Speaker 9

Yes. Good morning. Thanks very much for taking the question. One area I was hoping to better understand was e products within China and that's a market where EV sales have held up better than some of the other regions and the company has spoken about some good design wins within e products products with the domestic Chinese OEM. So maybe you could speak a little bit more around what you're seeing in the China market with e products and to what extent if at all are some of the incremental tariffs that the U.

Speaker 9

S. And Europe have placed on Chinese imports having an effect on your e products business for Chinese domestic

Speaker 2

Yes, Mark. So remember, e products are go both into hybrids and BEVs. And in China, NEVs encompasses both hybrids and dev. The fastest growth is hybrids in China. We're launching a lot of new products in China.

Speaker 2

About 95% of our e products in China are made with the big Chinese carmakers. A lot of our products also are used for potential exports and also potential localization. So we're very happy with our business in China. The impact of the tariff, I think it's a little early to anticipate. But China is certainly a part of the world where we're gaining scale and that's very helpful when we go with those e products supporting the e side of hybrids and bev in other parts of the world.

Speaker 5

That's helpful. My other question

Speaker 9

was on capital allocation. And I understand that the plan for the balance of this year is for the As you think beyond 2024, can you help us better understand how you're thinking about allocating capital? We've seen the company use tuck in M and A in recent years to bolster the capabilities. Is that something you think maybe part of the calculus going forward? Or would you think the preference for shareholder returns or buybacks will be more of the uses of capital as you're looking at it into 2025?

Speaker 9

Thank you.

Speaker 2

Thanks. Yes, acquisition together with organic product development has allowed us to create that very unique portfolio that we're growing organically. Acquisition may remain an important part of the strategy over the long term, but I can tell you that I would classify our approach as being even more stringent and prudent than in the past. And I don't see M and A highly likely to be announced over the next couple of 2, 3 quarters. Thus, our intention to repurchase $300,000,000 of stock or pretty much giving back to shareholders 100% of our cash generation.

Speaker 2

That's what I would tell you, Mark.

Speaker 9

Thank you.

Operator

Thank you. We go next now to Adam Jonas of Morgan Stanley.

Speaker 10

Hey, Freddie and team. I just got a couple of questions. So Boar Warner ranks around 490 out of 500 companies in the S and P 500 and PE multiple. It is by far the cheapest auto supplier, auto related supplier in the S and P 500, which is really astonishing given, in my opinion, I think in yours too, Freddie, this is one of the most accomplished engineering firms in the industry, maybe in the world. You have custom alloys and the tolerances and the pressures that your products are used.

Speaker 10

It's just it's very, very high-tech stuff. Why what in your opinion, your team's opinion, what is the market telling you about your capital allocation strategy? And I don't know what clues you're getting from today's share price reaction, for example, versus other it seems like the market is penalizing investments in E and then rewarding pulling back or rewarding capital return. I don't know if you agree with that message or you're tune with that or do you have a different hypothesis?

Speaker 2

And then I have a follow-up. Thanks. Adam, I think we need to focus on what we can control. What we can control is create a great product that is versatile across different production mix scenario, outgrow the market, increment generating cash and be smart about the cash utilization. I mentioned before in Mark's prior question, M and A was essential and helped us together with organic product development to create that very unique portfolio.

Speaker 2

Now, I think we have a great portfolio and we're focusing on growing it organically and going back to the board on the basics of outgrowing, converting generic in cash.

Speaker 10

Okay. That's great. My follow-up is a simple question, I guess. What is the logic for advertising the share buybacks? Why I mean like to me, it's like going to someone's and like you want to buy a house and you tell the owner, hey, I love your house.

Speaker 10

It's fantastic, and then making a bid later, why advertise the target, in this case, being your own stock in a way that might make you a hostage to your own fortune? I just don't understand the logic. Can you explain why you do that? Thanks.

Speaker 2

Yes. I think for

Speaker 3

us, it's about transparency to our shareholders. When you look at the Q2, we were blacked out for the majority of the Q2 and we wanted to provide clarity to the investment community that we wanted to allocate all of our free cash flow to shareholders. It was the right time given Fred's comments earlier about M and A. So we wanted to provide clarity and transparency.

Speaker 10

Okay. My only feedback is you can do that in real time and you don't always have to have the forward time horizon with the amount, but that's just feedback and you guys run the business. I appreciate you taking the time to answer the questions.

Speaker 2

Thank you, Adam.

Operator

Thank you. And we do have time for one final question and that will come from James Picariello of BNP Paribas.

Speaker 11

Hi, everyone. Just as we think about e product sales now trending toward $2,500,000,000 for the year, the Q1 finished at $500,000,000 per your 10 Q filing. Can you confirm how the 2nd quarter trended so we could gain a sense for what's implied in the second half? And on AKASOL specifically, another and I think a few other questions we're getting at this. Another supplier this morning that is pretty decent commercial vehicle bev exposure just cut its commercial resales expectation for the year by a substantial clip.

Speaker 11

That supplier doesn't compete directly against Borg, but from an end market perspective, is this something that BorgWarner is seeing at all in your battery systems business? Thanks.

Speaker 3

Okay. Thanks, James. And I'll confirm Q2 sales were $576,000,000 You'll see that in our 10 Q later today. And I'll turn it over to Fred on your other question.

Speaker 2

Yes, I think our numbers in commercial vehicle have been adjusted a little bit in the prior quarter. The impact of e products is essentially linked to light vehicle at this point in time. I would just remind you that we're growing 25% year over year on e products from about $2,000,000,000 to about 2,500,000,000 dollars which is if you take a step back in outgrowth versus what you see in powertrain electrification.

Speaker 11

Understood. And then just last, can you provide color on how Eldor losses are now slated to trend for this year? I believe the prior guidance, call it, for $45,000,000 or so. And will your repropulsion restructuring actions also include future efforts at Eldor? Thanks.

Speaker 3

Yes. Right now, Eldor is unchanged, and that's how you should think about it. Obviously, we're focused on the total business and targeting $100,000,000 in cost savings by 2026.

Speaker 5

Thanks.

Speaker 1

With that, I'd like to thank you all for your questions today. If you have any follow ups, feel free to reach out to me or my team. Bo, you can go ahead and conclude today's call.

Operator

Thank you, Mr. Nolan. Again, ladies and gentlemen, that will conclude today's BorgWarner second quarter earnings call. Again, thanks so much for joining us everyone. We wish you all a great day.

Operator

Goodbye.

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Earnings Conference Call
BorgWarner Q2 2024
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