I guess we're starting a little early. Okay, cool. I guess I'll kick it off. Thank you everyone for joining us for the next Fireside Chat with BorgWarner. As you all probably know, Borg is my topic. It's been my topic for a while now. I think if you're looking at the auto sector, I think suppliers are in a tough spot in general, but I think Borg checks a lot of the boxes people probably are looking for. Good balance sheet with potential to do buybacks. You have a positive trend, I think, from the shift in sentiment toward, I think, from BEV to PHEV. I think there's a good offset that most suppliers don't really have in terms of content that's pretty strong on PHEV.
Very strong position in China that I don't think people fully appreciate, given the, you know, strong, local presence in China with the domestics that have been taking all the growth. And then from my perspective, obviously my opinion, but I think the guidance is probably one of the more conservative in the group right now, particularly not banking on sort of a huge second half recovery. So, pretty well positioned on all the fronts that I think people should be looking at from the supplier side. So I think, Fred, you're gonna kick it off with some slides to start-
Yeah, let's start.
- and then, we'll... I'll do some Q&A, and we can open up to the group. So.
Good. Thank you. Thank you for the intro. I just have a few slides to ground ourselves on, on who we are and what we're doing. So first, our vision is clean energy, efficient world. We're moving vehicles from point A to point B as efficiently as possible. So we're talking about fuel efficiency when there is fuel, and we're talking about electron efficiency when there is electrons, and we're talking about fuel and electrons on a hybrid. We are implementing a strategy called Charging Forward, which calls for growth in e-products. Our e-products are applicable for the e-drive of hybrids and for BEVs. Profitable growth, and growing these e-product profitability, profitably. I will talk about the fact that we're now in a position to convert mid to high teens, no matter where the additional revenue comes from.
Last, but certainly not least, 80% of our business is with combustion products, and we are number one or number two in the world in anything we do in combustion, and we want to maximize that value for our shareholders on this business segment. Just wanted to take just a few seconds to remind you what we do from a product standpoint. So you know Borg for many, many decades being one of the world leader in combustion, making mobility as lean and as clean as possible, driving fuel efficiency and engine downsizing. Over the past X number of years, five to seven years, we've created a pretty robust portfolio, from inverters, to power electronics, to motors, to thermal management systems, to also battery packs for commercial vehicle, that are very instrumental in efficient mobility of BEVs.
Hybrid is right at the intersection of having a lean combustion engine and having an e-drive for hybrid, which is no more, no less than a BEV drive. What you gain into hybrid is you get a third of the necessary battery pack. And so the products on the left are fully fungible between combustion and hybrid, and the products on the right are fully fungible between a BEV and a hybrid, and we most probably will talk more about that, too. So our goals for 2024 is, deliver outgrowth in each and to, each and every market segment, combustion, hybrid, and BEV. Convert mid-teens incremental margin on those, on those additional sales. And generate strong operating cash flow. That's what we're known for.
I would say, if you see this, if you look at what we've done over the past decades, this is back to the BorgWarner basics: convert mid- to high-teens on additional revenue, wherever those revenue comes from, and generate cash. Back to you, Colin.
Oh, cool. And just to remind everybody, I think, so the guidance had previously been up until this year when you converted, you excluded the eR&D investments.
Right.
So
Now it's all in. All in.
You're kind of at scale on the EV product?
That's right.
So that, you know. Okay.
So we're guiding $2.5 billion-$2.8 billion of e-products, BEV and hybrids, right? The e side of hybrids. Which I consider being at scale. I mean, at $2.65 billion at the midpoint, this is the size of a, of a tier one or a tier two supplier, taken in isolation. So combined with our $12 billion of combustion business, we now consider that we're back to the Borg Warner basics of incrementing without any caveat of year-over-year R&D increase. That's behind us, converting mid to high-teen, high-teens, all in.
Got it. And the slides did touch on hybrid, which obviously I mentioned in my comments as well. I mean, any color on, just remind us what the content per vehicle is for a full hybrid or PHEV, and are you seeing any shift to PHEV yet? I mean, I think the EPA rules, you know, in, you know, May, I guess...
Mm-hmm
... was the last update, seemed very pro PHEV. I'm not sure how quickly the OEMs-
Mm-hmm
Can respond to that. Are you seeing business start coming up-
Yeah
on some of the stuff yet, or is it just too early?
...So let me give you some color on your question, Colin. So first, this narrative change from combustion to BEV and now to hybrid is very American. Outside of the U.S., the world's already moved pretty much 50/50 BEV and hybrid. Actually, the real number is 40% hybrid, 60% BEV. In China, under the new energy vehicle umbrella, it's 40% hybrids, 60% BEV. We all talk about BYD. BYD is 50% hybrid, 50% BEV. In Europe, it's pretty much the same. Actually, if you look at the IR website, on our guide for e-products, for light vehicle, we're also 40% hybrids and 60% BEV, which is logical because we are bigger where the music is being played, being in China first and Europe second.
So now, how the American automakers are gonna deal with the powertrain mix that they need in this country and outside of the U.S., I think is a little early to draw conclusions. Hopefully, since now that market has scale in other parts of the world, and we have scale, too, the time to market, the necessary time to market that they need to launch product will leverage what we do at scale in other parts of the world. And we certainly are in discussion with the Detroit Three in order to make sure that they get the right powertrain in the right mix at the right time. Did you have another element of your question that I didn't-
So it's still... There's not a lot coming up yet because it's still too early.
In the U.S.?
-for a lot of the over the U.S. Okay.
But for example, in China, we've announced, and outside of China, too, in Europe, we've announced, for example, dual inverters for plug-in hybrids. Those are inverters that manage with the drive motor and also the regenerative motor. We're launching that. We're in production with that. At the end of the day, it's the same inverter, maybe not the same shape, but it's the same guts. It does the same thing. It controls the motor. Motors that we're producing in China goes flawlessly in a hybrid or in a BEV. It's the same product. It's the same manufacturing line. An iDM can be a P4 for a hybrid, can be the main drive for a BEV. For us, it doesn't really matter.
I guess this is more of a U.S. question, I guess. We've seen pretty significant, I think even GM yesterday lowered their EV targets for this year. So we've seen a pretty big slowdown in EV penetration. I mean, from the automaker side, there was all this talk about vertical integration.
Mm-hmm.
But now I think there must be a view on their side that the volumes are gonna be lower, and so then are you seeing more interest in outsourcing as they maybe don't have the scale that they were anticipating?
Mm-hmm.
Or is that, again, just too early for any sort of change there yet?
I think it's a little early, but if you look at the IR page, out of the $1.9 billion of light vehicle guide for e-products, only 15% is for North America. The rest is for outside of North America. For the reason you alluded to, because they were planning to do everything in-house, so we didn't count on these businesses to grow our e-products. I think we need to wait another two, three months to really see what they want to do. There are intense discussions, but I think they need a little bit of time to just figure that out.
What about Europe, though? Because some of the data in Europe, it seems like, I was reading a book the other day, like, talked about how the ICE has a longer life or whatever.
Yeah.
You're not seeing changes over there as much as in the U.S.?
Yeah. So we see. So back to the U.S. a little bit. If BEV reduces, and if the regulations are staying identical, it means that the carmaker is gonna have to increase the plug-in hybrids and also increase the downsizing of combustion engines. The turbo take rate is a good proxy to see how downsized engines are in a particular region. So in the U.S., the take rate of turbo is about 44% versus 92% in Europe. That gives you an idea of the room to maneuver that the carmakers in this country have to downsize engines. So when you have less BEV, you need more hybrids and more efficient combustion, which is, at the end of the day, good for us, too, right? We see extensions of combustion lineups. We see usage of combustion engines for hybrid powertrains.
We see fine-tunings of some of the combustion businesses and products that we do to be tailored and very efficiently designed for hybrid application. We see all those trends.
Okay.
We actually see, if you look at China over the past three to four months, the fastest-growing segment is high-voltage plug-in hybrids.
Oh, that's a good point. How about... When we think about hybridization of PHEVs, how does that impact, I mean, you're kind of known for turbos, how does it impact turbos on your core ICE portfolio? Do you see a higher or lower take rate, lower content on some of those? Because you do have that whole giant chunk of-
That's right
... motor and e-powertrain stuff that, you know, maybe you don't need as big of a turbo or something.
Yeah. So from a content of vehicle, we have about, I'm gonna round it up, $500 per combustion powertrain, I think it's $548, but let's say $500. And we have a 5x content, whether it's a BEV or high-voltage plug-in hybrid. Because on high-voltage plug-in hybrid, most of the combustion carries through. You're right, you might not need a turbo VTG because you don't have a transient behavior anymore. The transient behavior is done by the motor, so maybe a slightly lower content in combustion in the plug-in hybrid, but all the e-products are pretty similar. That's what I just said, right? Between a BEV and a high-voltage plug-in hybrid. So content per vehicle is about 5x on BEV and high-voltage plug-in hybrid versus the ones that we have in combustion.
And take an example, an inverter, average price, maybe $750, is more than the $550 of content per combustion vehicle, should we or could we sell all the content in one engine, right? So that shows you that electrification being hybrids or BEV accelerates the ball on this growth. And with that acceleration, we're converting mid- to high-teens.
Okay. And as you mentioned, that there might be a lower cost turbo in a hybrid. Is the historically, the take rate was higher, though. There's actually more turbos?
Yes, even more turbos, you know-
So you're actually paying a higher percent-
Yeah.
but maybe a little bit less dollar.
Correct.
Makes sense.
Correct.
For just that product.
That's right.
Okay. Okay. And then maybe if you could just talk about the turbo market overall, which I know-
Yeah
It hasn't been a focus until I guess maybe the last few months when EVs have slowed down. But how is that landscape, you know, trending? Because I think really you and Garrett are, like, the two big players. Are you seeing some of the smaller players exit? Is there some opportunities to gain market share and continue to grow well above the ICE market there?
So you're right. Garrett and I are sharing about 50% of the market. We've got another three or four, and a little bit more, turbo players around the globe. Listen, as far as, as far as we're concerned, everything that we're quoting, being e-products, being combustion products, being turbo, or any other products that we do, we are brutally disciplined to quote at 15% return on invested capital. And so we're not gonna chase market share, we're not gonna chase whatever volume. This is what we do for a living, and, and the business in the present know that there is no need to quote below that, because capital is not gonna be allocated to them.
But are you seeing smaller players exit or no? You're -- or are you saying that some of the players are being maybe a little more aggressive?
Pretty stable. Pretty stable.
Oh, okay. But how are the smaller players... I mean, what's-- I would have thought one or two, at least, might exit the market if they don't have any growth opportunity, and you have to invest in some of the more complicated turbos. You're not seeing that, though?
The auto space is a long hysteresis. It takes time. Things take time.
In Q1, one of the big standouts was Air Management. I think it was up three, which is, like, 4% over market. You know, what was sort of the driver there? Is that sustainable? I think it was a big surprise in the quarter.
Yeah, so it was what's nice about the Air Management segment in Q1, was we saw growth on both sides of the portfolio. So like Fred mentioned, one of the benefits of our turbo and EGR business, is that it's creating a more efficient engine for the OEMs. We saw a nice growth from the quarter from our combustion products. At the same time, on the e-product side of the portfolio, in that segment, we sell high voltage coolants, which heats the cabin within a battery electric vehicle and hybrid, at the same time, it keeps the battery cool. So we saw a nice growth there. So it was really a combination of both sides of the portfolio, which is exactly what we like to see.
Then on the drivetrain and battery, also an extremely good quarter. I mean, how sustainable is that? And maybe some update on the battery side of the business, because I-
Yeah
... some of that is maybe a bit more sustainable now that the plant's up and running.
So similar story on the drivetrain and battery system segment. Saw nice growth on our all-wheel drive components that are on the foundational side of the portfolio, both in China and in Europe. And then the battery business, obviously, that's growing pretty dramatically year-over-year. It's $460 million in revenue last year, at the midpoint of our guide, right around $750 million. Right now, demand is higher than our ability to supply, so we've been putting capacity in over the course of this year. In the first half of the year, we were ramping up our Seneca, South Carolina facilities to support our customers in North America. That's complete. We're in the process of ramping up our German location. That will be complete by the end of the year.
When you look overall, we're gonna be, our, our overall capacity will triple between 2023 and 2024, and that really will support us from a revenue perspective for the next several years. Everything's on track, and so far, it's been a really nice success story for us.
Q1 was very strong, but you did make call out the poor conversion in e-propulsion. I think you called it unacceptable or something.
Yeah.
You know, how should we think about the actions that you might take there to kind of-
Yeah
Get back to the profit conversion levels you need?
Yeah, just like you mentioned, so in the quarter, we had about a 30% decremental in that segment, excluding Eldor, and that's just not acceptable from our seats. So we're looking at a number of cost actions that we can take, and the goal here is to not just support the short-term trajectory of the business, improve our cost structure there, but also set it up for success over the long term. A big portion of our growth is gonna be that segment, and we wanna make sure as that scales over time, we're converting in the mid- to high teens on all-in basis. So we're looking at multiple levers, and there'll be more to come shortly.
We pull it all together in Q1, I think you were something, was it 8% over - or yeah, I mean, 8% over market for Q1, very strong start. The guide for the year is just 3%-6%. So any - why should we think about growth slowing a - after the Q1 pace? Anything unusual in Q1 we should be thinking about that?
Yeah. So when you think about the 7.5% growth over market in the first quarter, the main driver was foundational. So we saw about 4% growth year- over- year, and our market assumption was a flat to down 1% market, so that was the primary driver of that outgrowth. As we exited Q1, we didn't see the same level of foundational orders in Q2, Q3, and Q4. We don't really wanna lean out and assume that was gonna happen, so we didn't, we didn't model that in Q2, Q3, and Q4. Obviously, if those orders come in like they did in the first quarter, then that provides a nice tailwind for us, but we didn't assume that as we exited the first quarter.
Okay. Maybe if you talk about, I touched on my comments at the beginning, too, your China exposure, how much is local, what the trajectory is there, and maybe any notable customers that-
Yeah.
To highlight.
So I'll take that one. So when you think about our China mix and the customer base there, overall China revenue, it's about 75% local. And that's a big shift from where we were at the end of last decade. In 2016, that number was 40%. If you actually drill down into the e-product side of that business, it's actually 95% local OEMs. And it's some of the larger names that you know there, it's BYD, Great Wall, Li Auto, XPeng, and others that we've announced. So it's a pretty diverse business base, and you really see the pull from those customers there for our technology solutions.
May I add one thing? That strategy in China is important for us. First, because it generates revenue in China. Second, because when the Chinese export cars, they have a tendency to export powertrain components with our content to make sure that nothing reaches outside of mainland China with potential IP infringement. Two, when the Chinese come and localize outside of China, it's already happening in Hungary, in Italy, in Spain, in Mexico, we are in a good position being their suppliers of IDMs, inverters, motors, and also other combustion businesses in China to be their partner of choice when they localize in the Western world. So that's why we were very early in China. We have scale in China. 95% of our e-products is with those big names, and that is something that I'm very happy with.
You mentioned BYD. Have you disclosed what product it is yet, or no?
We'd love to, but no.
Okay. I wasn't sure if I missed an update. I mean, how should we think about any of the major puts and takes for the margin guidance? I mean, I know there's a $440 million headwind drag. Any other major factors, commodity, eR&D, recoveries, labor, any of those things noteworthy to kind of call out, or is it just a straight growth conversion?
Yeah, commodity, labor, we don't see as a major headline for us this year, so not a big factor. You mentioned eR&D. So we're, we're assuming a $40 million-$50 million increase in eR&D to continue to support our growth. But importantly, when we talk about conversion this year, it's on a all-in basis. So that 13%-16% all-in conversion assumes that $40 million-$50 million eR&D spend. When you think about our, our guidance in the years past, it's been excluding the eR&D step-up. So it's really important for the... And I, I think it's the right time because of what Fred mentioned earlier. We have scale on e-products, we have scale on the foundational portfolio, and we're gonna get back to the BorgWarner basics.
And how should we think about capital allocation? Obviously, buybacks seem to be a popular theme. I mean, how should we think of the cadence there? And it sounded like you're pausing a little bit on M&A. I mean, how should we think about, you know, the opportunities there that you might be thinking about—
Yeah, sure.
In the long term?
So taking a step back, you know, we repurchased $177 million of the company's stock in the fourth quarter of last year, $100 million in the first quarter. When we think about capital allocation, really think about it in priorities. So our first priority is liquidity. Make sure that we have enough liquidity to sustain the company in a very negative environment. Think about 2008, 2009. And we have a target for liquidity of about 20% of sales. Then we look at leverage. Leverage, we wanna be right around 2x on a gross basis. Then we have a dividend. We view that as a fixed obligation. We're not gonna turn it on and turn it off. We have a really strong balance sheet. We're gonna pay that in any type of environment.
And then we would hold cash if we have an acquisition that's on the horizon. And then we look at stock buybacks, and we've been very opportunistic about our purchases. I'd say I was happy with the repurchases that we made in the fourth quarter and the first quarter. One other comment on repurchases, we had $267 million from the board that was approved. In the first quarter, we got approval from our board for another $500 million. So we have $767 million of authorization. And again, we'll look to make those repurchases opportunistically.
Can you talk a little bit about the growth opportunity in your core ICE business? I mean, obviously, that, I think, the S&P forecast, I think it tends to be falling 4% or 5% or something like that a year. Maybe, maybe not so much after some of the cuts... How should we think about your growth relative to that market? How much over that ICE decline can you manage?
Yeah, so we think about it this way. When we think about what our foundational business, what the addressable market is, we think about it in the context of, you got to look at ICE vehicles, but you also have to look at hybrid vehicles, because they're all going to have all those efficient technologies. So if you look at that market this year, our foundational forecast for our revenue is that we're going to be flat to down a couple of %. That's about a 400-500 basis points outperformance, versus what we think that combined ICE plus hybrid market's gonna do this year. And that kind of makes sense. That's the historic outgrowth that you've seen in that business, and that's what we'd expect to do going forward.
Because the key is, there's going to be a lot of volatility in the various volumes, whether or not it's combustion growing, hybrid growing, or BEV growing over the next several years. We want to make sure we're outgrowing all their respective end markets, because then it doesn't really matter what the mix ultimately turns out to be. We all ultimately outperform the market.
But what's driving the outperformance? Are you gaining share? Is it just added, like, turbo penetration rates in North America, stuff like that's keeping you above that declining ICE market?
Mostly the penetration side. So I mean, North America turbo is a good example. That's going to be growing over the next several years. Today, it's 44% of the market versus almost 70% in China, over 90% in Europe, and we expect that 44% to go to the mid- to high 50s by 2027. And there's other examples, whether or not you're looking at EGR, variable cam timing, a lot of those different technologies.
How about one of the concerns investors have is, you have very strong market share in your ICE products today. How should they think about your potential share on the e-powertrain, e-product area? Do you think you could get similar share there? Or just sort of line of sight to getting there?
So in motors, we think that we are within the top three drive motors makers in the world. For inverters, it's fair to say that I think we are, we are in the top two. And depending on the different, high voltage coolant heaters, we're certainly in the top, in the top two, depending on the competition intensity, that top one or two might not translate to a market share that we enjoy in combustion, because, for example, for motors, it's still pretty fragmented. But we're starting strong from a global position of, let's say, you know, top one, two, three in all the products that we do in, on the e-product side.
Got it. How about, you touched a little bit on M&A. What kind of EV assets might you look to acquire? Eldor is more on the onboard charger, DC-DC converter.
Yeah.
Same area, you didn't mention it, but that's fairly fragmented, I think, from the-
Very fragmented. Eldor was the acquisition of two engineering centers, right? We have all our engineers tied up launching inverters, and we wanted- we want to go into onboard chargers and DC-DC converters. We've announced a few wins already, but it was important for us to have boots on the ground in Europe. When we think about M&A, we think about technology and efficiency of our product. We think about industrial logic, and more and more, we think about the short-term impact to our cash and P&L. Do you want to talk a little bit about that?
Yeah. So like you said, we'll look at the short-term impact on our earnings profile. We're really proud of our margin profile. We want to make sure we can maintain that over time. And then we're gonna look at a bunch of different NEV adoption scenarios, because ultimately, we work on a discounted cash flow model. We need to look at a bunch of different scenarios to make sure we're paying a fair value for the asset. So it's really those three things: industrial logic, what's the impact on our near-term earnings profile, and let's make sure we pay a fair value for the asset that we're getting.
Are there any questions from the audience? I'm going to throw it out there quick in case. How about, you know, I mean, where do you stand on... We were just talking about onboard chargers, DC-DC converters. It wasn't really clear. Is, is that an area you look to consolidate more, or you're just gonna see how that market shakes out, or to look to grow organically?
I don't think that we want to make comments on particular product specifics. It has to bring, as you mentioned, industrial logic, product efficiency, and we want to be disciplined on the way we look at the financials of those targets. When you take a step back, when you look at the acquisition that was done post and including Delphi, none of those companies were for sale. So it's a very thorough analysis on where we want to be, what product differentiation we want to create. Can we do it organically? Do we have the capacity to do it organically, or do we have to go inorganically?
If we go inorganically, we go through a long list to the short list of companies, and then I'm just picking up the phone and call the person. That's how, that's how we do it.
You mentioned... How do you think some of these EV markets, you know, play out over time? You said your number, I think, two. You think you're the top two in inverters. Do you think there'll be a dozen inverter players, or we're gonna end up going down to just, you know, five or, or three, or?
The key inverter players are the key high volume Tier One electronics player in powertrain. So, people that do engine control units, people that do transmission control units, are the people that you see in power electronics, in inverters, in onboard chargers, DC/DC converters, et cetera. If you take a step back from charging to moving the wheel, you're converting power many, many different times. From AC to DC with a charger, from DC to DC with an onboard charger, from DC to DC on an auxiliary, from DC to AC to control the motor. Those power conversion devices carry the same guts: computers, capacitors, silicon, and silicon carbide, power modules, and software.
And, you see the same players that the ones you're seeing in high volume electronics in low voltage, I would say, in the car industry. So no, if your question is, are you seeing a lot of newcomers? The answer is no. Five years ago, you would ask me the question, I would have paused it a bit. Now, my answer is clearly, we're not losing against someone that we don't know.
Okay. What about insourcing risk, particularly, like, on the e-motor side? That seems like a lot of automakers talk about bringing stuff like that in-house.
Yeah. So if you think about e-motors, I think we are about 60% outsourced, 40% insourced in the world. The real question that you should ask when a car maker tells you that they are insourcing the motors is, what do they insource? 'Cause some of the times, we sell the stator and the rotor to the car makers, who's putting it together in the transmission case. If that is what they call insourcing, I'm very good with that. So because stator and rotor might be already 60% of the bill of material, right? So, the devil is in the detail in that I'm insourcing things, right? What do you actually insource?
We talked a little bit about turbos. How about the rest of the internal combustion engine products? Do you see smaller players exiting other areas of the market, or is it just gonna be a slow burn? I imagine if you don't have scale today, I mean, it must be like a ticking timeline for some of them, if the market is eroding and requires R&D investment.
It's gonna take time, but if you are the head of purchasing in one global auto player, and if you have four turbo suppliers in your portfolio or three EGR suppliers, do you need that going forward? Most probably not. And probably, you're gonna focus on companies that have financial strength committed to those products, and we have both. Also, companies where you can manage the different volume volatility between combustion, hybrid, and BEVs, right? Because cutting a relationship and recreating another relationship in another business segments are very expensive things to do. So we think that we are in a position where we can be the partner of choice for customers who wanna use BorgWarner when it comes to efficient mobility, being with engine downsizing, BEV, or the combination of both being hybrids. Now, you're gonna hear a lot about hybrids.
I even heard people saying a stop-start is a hybrid. I wouldn't go that far. So you, you have hybrid powertrains that are propelling the car for about 300 yards, and hybrid powertrains that you see in China, I was in China again last week, who propelling car in an electric mode for about 100 miles. Those are very different animal... Very different animals. The first one doesn't really move the needle from a greenhouse gas emission requirement. The latter actually moves the needle quite a bit. And so when you think about BorgWarner, you need to think about, the higher the e-range is, the more content we have.
Okay. You mentioned up to four suppliers. I mean, I think yesterday, someone mentioned some companies were actually considering going sole source on internal combustion engine stuff. That maybe has shifted. Is that- where do you... Do you see companies maybe for the last gen engine? It seems silly to have four different suppliers. I mean, are they consolidating down to just one or two?
I think the-
Or so.
I think all that takes time, right? It is logical that this happens-