We're very excited to discuss the company's outlook with you, welcoming brand new CEO, Joseph Fadool, CFO, Craig Aaron, and obviously head of investor relations at BorgWarner. Thanks so much for being with us.
Thank you.
Thank you.
Maybe just, you know, to kick things off, I believe you officially became CEO just earlier this week, is that right, but you have been part of the BorgWarner management team for a long time. In the last few years, BorgWarner has undergone a large strategic transformation, spinning off Phinia, focusing on growing electrification solutions, including joint acquisitions. With you taking over but also the outlook for EVs may be a little bit less certain than previously contemplated. What changes do you plan on making to the strategy, and what will stay the same?
Yeah, so first of all, I think it's important to note, if you go back over time, I joined the company about 15 years ago, but even if you go back 10 years, we've always been a strong combustion technology player. So things like turbochargers and EGR, timing systems, four-wheel drive, we're number one or number two in nearly every product on the combustion side. And about 10 years ago, we decided to start making investments in the EV side, starting with Remy International.
That brought us motor technology. And in the last six or seven years, as you mentioned, we've done a number of acquisitions to accelerate our transition toward EVs. So as we sit here today, we're in a very strong position, arguably having one of the strongest portfolios in the powertrain side with the foundational business and also the growing EV business.
Now, our strategy is to really outgrow all of our end markets, and we do that through leveraging the core competence across the entire portfolio. So I'm focused on leveraging that growth, also building on this strong portfolio that we have. We wanna build on it organically. We also wanna build on it through inorganic means. And then finally, drive financial performance, which means growing margins and cash flow.
Is there room or appetite for BorgWarner to allocate capital differently than what has been the case over the last few years based on the shift you're seeing in the EV adoption?
Yeah, maybe I can start, and Craig can add in. You know, if you think about our priorities, our top priority is to invest organically. We've been very successful to take the core competence that we have, win business, deploy that capital, launch, and bring revenue into the company. M&A will continue to be a tool for the company.
As we mentioned, we've done a number of acquisitions over the last six or seven years, and as we sit right now, the turmoil in the market is actually quite an opportunity for BorgWarner. We've got a great balance sheet and strong financial discipline, so we wanna take the next few quarters to evaluate some potential targets, but lastly, we're not, we're not shying away from returning immediate capital to shareholders.
I think Craig would tell you we've deployed $3.4 billion back to shareholders over the last five years. So it's the use of all those tools, at the right time and moment that we feel is a strength.
Let's talk a little bit about tariffs. How do you think about the impact of tariffs and trade dynamics, not just for BorgWarner, but for the broader industry? How are you managing it?
Yeah, I'll take that one. So when you think about how tariffs impact BorgWarner world generally, we produce in the same region that our customers produce. When you look at 2024, the impact of material imported into the U.S. for BorgWarner was about $875 million. When you break that down, about 50% of it was imported from Mexico, 10% from Canada, 5% from China. Obviously, a lot of news swirling, different tweets happening from our president.
I think we need to kinda just watch that. And ultimately, if there's an impact to BorgWarner, we're gonna have to share that, share it with our customers and suppliers. We're actually very, we had a lot of success with inflation when that impacted the company, working with our customers and suppliers. And we're gonna utilize the same playbook.
And then just as a follow-up, how should we think about your exposure to potential steel and aluminum tariffs?
Yeah. As we sit here today, minimal impact, you know, but again, we're gonna have to take a look at the specifics there, but we don't think it's a material impact to the company at this point.
That includes if steel and aluminum prices were to go up as a result of it, or are you saying just in terms of direct impact?
Direct impact.
Your 2025 guidance assumes outgrowth across all of your end markets, which is also generally the message of the company, but particularly also in EV driveline where you're expecting growth to accelerate after a bit of a, you know, slower trajectory in 2024. What will drive the EV growth acceleration this year? Can you share any specifics on some of the launches that would be part of that?
Sure. If you think about the broader context, we do plan to outgrow our markets, you know, 2%-3%. And we've been outgrowing in that range for the last few years. Specifically to the east side, it is true. On the passenger car business, we plan to see growth and potentially outgrowth. You know, if you look toward the specific launches, we've got over 30 launches on the east side between last year and this year. And those launches, as they ramp up, we expect them to generate the growth.
On our math, and definitely correct us if we're wrong, it looks like you're potentially expecting something like 30% growth in the EV driveline product this year. I don't know, is that true? How do we reconcile it with the write-downs and restructuring actions that you're also taking at the same time in that part of the business?
Yes, I'll take that one. When you look at S&P, the 30%, we see S&P increasing on the e-side of the portfolio, meaning hybrid plus battery electric vehicles in the mid-teens. We expect to outgrow that on our Power Drive business. How are we doing that? It's what Joe just spoke about. It's those 30-plus launches that are primarily in that business unit segment that are just that is driving the growth this year. Those are launches we did in 2024 and 2025.
We didn't provide a guide for e-products this year 'cause our focus is really on outgrowing our markets, both on the foundational side and the e-product side. With that said, we did realign our business unit segments back in July. We have two really focused foundational BUs, two very focused e-product BUs, and we wanna see outgrowth on both sides of the portfolio.
As we release our financial information, our 10-Qs, you'll be able to get clarity on both sides of those businesses and both sides of those portfolios. You'll see us be successful, I think, on both the foundational and e-product side of the business.
Coming back to the drivers, can you give us any color on the launches, either regionally or the technologies that will drive that? Where, how do we acquire comfort from the outside on what is essentially a fairly meaningful acceleration?
Yeah. Unfortunately, we can't give you customer-level disclosures of particular platforms. I'd love to, as the IR guy. Unfortunately, we're a little restricted. But I can tell you that those launches this year, particularly on the e-product side, are heavily weighted towards China and Europe, less so North America as North America's lagging a bit in the electrification side. But it's basically China and Europe where those launches are really spread across.
These are typically on BEVs, hybrids, a combination of both?
It's a mix. I mean, when you think about hybrids for work, they tend to play on the higher end of the hybrid, so higher voltage. So think about high-voltage hybrids and full depth.
Generally, your point is those have already launched in 2024, and this is essentially the ramp-up in volume this year, or?
It's both launches in 2024 and upcoming launches in 2025. You know, typically a launch curve takes, you know, so anywhere from six to 18 months to grow into its program volume.
Turning to the foundational side, you know, historically, BorgWarner's products have outgrown the market by, you know, sometimes mid-single digits. Last year, ICE and hybrid industry volumes were down 2%, but your foundational revenues declined, actually more, like around maybe 3%. What drove the underperformance last year, and what are the key drivers of, going back to outgrowth in this segment, this year and going forward?
Yeah, I'll take that one just from a numbers perspective. When you look at the hybrid plus combustion market last year, it was down about 2.5%. Remember in our business, the number that you quoted, there's a mix in there. There's also some differences in regional exposure. So if you look at our business, how it performed last year, the foundational business was actually down less than 2% versus that market that was down 2.5%.
So we outgrew modestly in that business, and we've been outgrowing in that low single digits in that business. But taking a step back, remember a lot of the hybrid growth last year was on some of these lower-voltage hybrids that have already been established in the market. So that business outperforming that market, we feel pretty good about it.
And when you take a step back and you compare that business versus what combustion-only volumes did last year, combustion-only volumes were down almost 9% for the industry last year. So in that context, when you strip out FX, that business being only down 2%, we feel pretty good about that result. And we fully expect it to outgrow as we go forward, as Joe said.
And I wanna mention, or reiterate something Craig mentioned. Last July, when we reorganized into the four distinct business units, there were a couple of objectives we had. The primary objective is we are focused on outgrowing all of our product lines. Okay? That's a little bit different tone. I think it shows our agility toward, you know, each parts of the portfolio, the foundational and the E-side.
So I'm clearly focused on outgrowing, leveraging all the core competence we have. We see excellent organic and inorganic opportunities, and of course, we've been executing well. So when it reaches the top line, 2024 is a great example. We had a great year of execution by our teams. We expanded margins, we expanded cash flow, but the main focus is driving outgrowth across the portfolio.
The equivalent of your midpoint on 20% apply to 2025 on the foundational side. What would be sort of like the underlying industry decline assumption? And then what would you expect BorgWarner to outperform it by?
I think I'll follow up with the specifics online. The one thing I would just caution you is obviously we have a $400 million FX headwind.
Yeah.
When you think about that business, I don't wanna give you a projection for foundational revenue for next year because I haven't given an e-products revenue guide.
Right.
But the objective is for those businesses ex FX to outperform their end markets.
Got it. And then some suppliers have been flagging a slowdown in order intake as OEMs reassess their powertrain and geographic strategies. What are you seeing from your customers? Are you really seeing this, you know, slowdown where automakers are saying, "Hey, look, we gotta really figure out which products do we need, which ones we don't?" And now there's a little bit of a lull in this attribution of new business. So that's not something you're flagging.
Yeah, I would say we've seen, and let's speak outside of China, a slowdown in some of the ERFQs. Some of the OEMs are delaying their new programs and just extending the current programs that they've launched. On the other side, we've seen a small uptick in foundational opportunities. Those aren't always in the form of an RFQ. It may just be higher volumes 'cause they wanna sell more of their existing vehicles.
It might be an extension of a program we're already on. So there is some, I would say, more turmoil in the customer cycle plans than we typically see. In addition to that, I think hybrids. We are discussing with customers the path toward more of these advanced hybrids. We haven't seen, I would say, a major uptick in RFQs yet, but we expect that to come shortly after.
Focusing on China for a minute, about 75% of your China sales are to local OEMs, I think you've disclosed. And most of that is in plug-in and electric vehicle. But your Asia sales were down slightly last year, even though local NEV volumes are, you know, 30%. How do we reconcile that? And what's your China outlook for this year?
Yeah, so maybe Pat, you wanna handle the number piece.
Yeah.
I can talk more broadly. It is true. China's a big part of our BorgWarner revenues. Just to give you some context, it's 20% of our total makeup. And in the business that we have in China, 75% is with the locals. And we would even say 50% of our global e-business is in China. So you can see we've got a substantial business there.
The reason for that is we've been there for a long time. So we've got a lot of staying power between customer intimacy, but also they want competitive technology. So BorgWarner is a very attractive partner for them. We have been for a long time. You know, long-term, why are we still betting strongly on the China OEMs? First of all, the speed that they require, we can match their speed.
If we don't talk about it a lot, but our decentralized operating model gives a lot of autonomy to our China team, so that is what our customers expect, and we feel as we win in China, we're gonna be a strong partner for them outside of China.
From a market perspective, we're expecting that market to be basically flat this year, maybe down modestly, which was against a pretty good result last year. The Chinese OEMs saw nice growth in exports last year. They're now the largest export market around the globe, which is benefiting parts of our business too. So, as Joe said, it's a market that's very important to us, and we're gonna continue to focus on it.
Any color on the math around last year's Asia performance where, you know, your Asia sales were down, you know, slightly, and but local NEV volumes were obviously up, you know, quite a bit.
Yeah. So you gotta parse out different parts of the business. 'Cause remember, even within our power drive systems business, there is part of the business that is foundational related. About a quarter of that business is foundational ECUs. And that business, particularly in Asia, saw some headwinds last year, plus they had some headwinds of a specific e-program reaching its end of life. The business is starting to lap both of those headwinds. So we would expect to see that gap close as we move forward from China. But it's really just a timing-related issue.
Now, in China, you're competing with some, in some cases with, you know, low-cost suppliers, in some cases with local OEMs, in-house capability even. Can you describe for us, or how do you see the competitive landscape? Where does BorgWarner fit in?
Yeah, so as we were just discussing, you know, we've been doing business in China for a very long time. We built a very successful foundational business with them. So our customer intimacy, I would say, is quite high in China. What do the Chinese OEMs look for in a supplier? So if you wanted to boil it down to three things, you know, the first is competitive technology.
They still want technology, but they want it to be competitive. The second is they want a supplier that knows how to work with them. How do they launch products? What are their quality expectations? How do they go to market? The third is they want someone that can move quickly. So many of you have heard, you know, the Chinese OEMs. They move at twice the speed or sometimes more than some of the Western OEMs.
What we hear from our customers, they like our decentralized model. Our teams can match their pace to get products into the market quickly. And we have to continue to work on that. You know, China's a very dynamic market. New models are coming out all the time. But we feel we've got a winning formula there that's gonna prove out over time.
Is the pricing environment different in China? I mean, certainly yes for OEMs, but, in terms of the technologies you supply because of the level of competition, is it, is there an expectation of also just steeper price downs than your average business?
I mean, it's very competitive in China. There's no surprise there. You know, we're constantly looking for ways to remove waste, reduce costs. One of the advantages that we have in China, and others may too, is due to the shorter times to go to market. You know, you're spending less on engineering money, less on investment.
The Chinese are also very open to reuse and maybe taking what you have today, tweaking it for their application. Why is that? So back to the speed topic. So, you know, if we can reuse our capital and tooling and leverage our suppliers, that all goes toward lower-cost products.
Shifting to the commercial batteries business, your commercial vehicle battery business was up, I think, 35%, last year. What's the midterm or longer-term growth potential for this business? And how do you think about the margin opportunity?
Yeah, so it is true. Last year, we saw excellent growth in batteries, over 30%, and our teams, I have to say, they executed that growth very well. They're performing at a very high level. This year, we see flattish from a unit perspective year over year, to work through a little bit of the backlogs. We'll also have a little bit of a headwind on pricing.
That's mainly due to cell pricing coming down, so although that impacts us short-term, long-term, we feel good about lower cell pricing 'cause it makes these vehicles more affordable, and the market will likely embrace them more quickly. We really like this battery business. You know, if you think about how far we've been able to take it, despite being flat this year, we're a little bit ahead of where we thought we would be when we bought AKASOL.
We're the second largest independent player in commercial vehicle. We've got a couple of very, I would call them superstar customers that we've had in our portfolio for nearly 30 years through the foundation side, so we're very bullish on the market, and just to give you maybe a proof point of where we think the market's headed, Europe, who has some of the most stringent carbon requirements, by 2030, 90% of their bus fleets need to be BEV, so we're in a perfect position, I think, to capitalize on that trend.
Can you talk a little bit about the competitive landscape in there? What is, what are some of the moats that, that BorgWarner has?
So, similar to some of our other businesses, a few of the moats, one is this customer intimacy. We've been working with these particular customers for a long period of time. We know their expectations for launch. Some additional things specific to the batteries, you know, if you think about a battery pack, it's a complete system.
So they need somebody who can integrate the system both on a hardware and software side, which we have a lot of competence in. Another area is thermal management. So batteries like to operate at the temperature of a human being, no warmer, no cooler, and if you can do that and manage the thermal piece of it, you know, you're gonna get better range, faster charging, better longevity of the battery.
So with our thermal competence, which we have in the company, I think puts us in a strong position to deliver really high-quality battery packs.
With the industry shifting back to hybrids, is it fair to assume that BorgWarner benefits from off-the-shelf solutions? How does that impact margins?
Yeah, so if you think about a hybrid, specifically an advanced hybrid, like a plug-in or a range extender, it pulls from both sides of our portfolio. So, you know, we're number one or number two on the foundation side. We've got a scaling business on the e-side, and the multiple per vehicle, you know, the content per vehicle is a few multiples higher than just pure combustion. So, it does put us in a great position.
The products are really not that different. You know, maybe the inverter is a little bit smaller, but the guts of the inverter are more or less the same. A motor, maybe it doesn't have to be the same size as it is in a BEV, but you're using the same Rotor, maybe it's a little bit shortened housing, same winding technology, same magnets.
So, for all intents and purposes, from our view, it's more of an adjustment of a particular product than an all-new product. So we feel we're in a good position to win with those advanced hybrids.
You've announced restructuring on both the foundational, ICE side of the business, but also the EV side, essentially to keep contribution margins in the mid-teens. Can you walk us through the specific areas you're taking out cost?
Yeah, so first, really proud of the team. The team around the globe has taken a lot of actions to take costs out of our business, both on the foundational side and the e-product side of the portfolio. If you take a step back, the last restructuring we announced was in the summer last year, related to our power drive systems business.
We saw about $25 million of savings recognized in 2024, and we expect $20-30 million as we move into 2025. That's implied in our guide. And when you think about our growth this year, a lot of it's gonna be on the power drive systems business. And we expect that business to increment in the mid-teens, really leveraging the cost savings coming out of the restructuring actions that we've taken.
So what sort of costs are we talking about in terms of what you're taking out?
Both personnel cost and footprint-related cost.
And any specific focus in terms of geography?
A lot of the costs being in North America and Europe because of some of the turbulence in production related to battery electric vehicles. But it's a combination of things. It's not just one or two actions we're looking at. Multiple actions, both people-focused and footprint-focused.
Have you sized the spend for this and the payback?
Yep. So we said $75 million of costs. We expect, again, we realized $25 million of savings last year. We expect that to increase between 40 and 60 million cumulatively as we go out to 2025 and ultimately 100 million savings as we go out to 2026.
And then shifting to capital allocation, the 2025 free cash flow outlook, you know, benefits from some pullback in CapEx spending. Can you talk to us about what the right level is for the business?
Sure. So when you look at capital expenditures, let's go back a couple of years. CapEx as a percentage of sales was right around 5.5%. We had a lot of investment going in for all of these launches occurring across the globe. As we ended this year, CapEx came in at about 4.8% of sales. When you look at our guide this year, we're around that same level. I think that's the right level of CapEx for our business.
So we're really focused on utilizing our capital. Joe mentioned this, both on the foundational side, let's make sure we utilize that capital, make sure we're running it efficiently on the E side of the business. If we have some excess capacity that's available, let's use that before we put new capital to work. So that's what our business units are really focused on. That's what we're focused on.
The new level is very much the right level?
I think so. Yeah, right in that, high fours, low fives, that's where we wanna be as a company.
Now you're at about two times gross leverage, with 2 billion in cash, another $2 billion on the revolver, and you're expecting $700 million of free cash flow this year. How should investors think about your priorities for this cash?
Sure. So like you mentioned, we have $2 billion of cash on our balance sheet at the end of the year. It's important to note that 350 million of that, we have a bond coming due right around the corner in March. So we gotta hold cash to settle that at maturity. As we look into this year, Joe mentioned, hey, we see a lot of interesting opportunities, organic opportunities, inorganic opportunities that we wanna assess, some high-quality options we wanna look at.
But we will certainly look at buybacks as an opportunity. If you go back a few years, Joe already mentioned this, you know, $3.4 billion of capital returned to shareholders since 2020, a billion dollars of that being buybacks. We just did 400 million last year. It's certainly a lever that we'll pull. We wanna take a couple of quarters to assess.
Ultimately, we wanna make sure that with this cash, we're creating shareholder value, whether that's through inorganic opportunities, organic opportunities, or buybacks. That's our focus.
There clearly seems to be some appetite for, or potential, I guess, for inorganic growth. Can you talk to us about the types of opportunities you're looking at?
So we won't get into specifics, but if you think about maybe how we are valuing particular assets, so first, it needs to make some strong industrial logic. So BorgWarner has a great portfolio. We have a lot of competence. And we're always looking how do we build on that competence? So that's the number one priority is, does it make industrial and technical sense?
The second thing is we've tightened up, I would say, our aperture a little bit on how quickly we want these assets to become accretive. So that's an area of focus. I would say the third is, especially given all the turmoil, having a keen eye on how we value those assets. I think those are the three ingredients that are gonna make us successful. And as Craig mentioned, we wanna take a few quarters to evaluate, hey, what are some opportunities?
Given all this turmoil, a company like BorgWarner with a very strong financial balance sheet and a great product portfolio, we expect there to be some high-quality assets out there.
In terms of types of powertrain, is there any specific areas where you're focused for potential acquisitions?
You know, what I would say is we're constantly looking at how do we continuously build on the competence we have. There's lots of opportunities across the entire portfolio. I think we're seeing the world is unfolding differently depending on what part of the world you sit in. I think this speaks to the strength of our portfolio.
We're in such a better place than many of our competitors. Even where we were just five years ago, we're ready to serve, whether they want more combustion products, hybrids, or BEVs. Maybe one additional point, it's not specific to your question, but our decentralized operating model, we think, is also a differentiator for us.
You combine the portfolio, our ability to move fast, and according to what our customers demand in a particular region, and our financial discipline to us, that's gonna be a great, great recipe for success.
So you're not limiting yourself to the e-product side. You could also potentially view yourself as a consolidator on the foundational side as well?
We're not limiting our outgrowth opportunities in any part of our portfolio. So we wanna outgrow on both the foundational and the e-side. We're gonna focus on organic and inorganic opportunities. So, you know, I think for us, we wanna open up the aperture a little bit to what's possible, and then action it accordingly over the next few quarters, next one to two years.
Great. That's a great color. We have a few minutes to open up if there's any question in the room.
Maybe I'll repeat it for the rest of the room. So the question is on commercial vehicle, do we think hydrogen is a viable option as a part of our roadmap? So, you know, we're working with customers who are investing in hydrogen. The way we view hydrogen is there may be a role for it, especially when you think about long-haul trucks.
You really don't wanna carry a ton of batteries around on some of those use cases. So they're looking at hydrogen as a way to, you know, reduce the carbon footprint, but be able to reuse a lot of what they have in terms of diesel technology. So the way we've positioned our portfolio, that will benefit us by extending some of our combustion assets.
We're making sure they're compatible with the hydrogen, you know, economy if that comes to fruition. We're not investing, I would say, specifically into a hydrogen-only technology 'cause we do think it'll be a little bit more of a niche market than a broad-scale part of the market.
Getting slowed down. ERFQ's getting slowed down. Are they being canceled? Do you get a new schedule when they're slowed down? How do you think about how permanent that process is?
So maybe just to clarify, we're mainly speaking outside of China, in the Western markets. So, you know, you'll see a variety of things. You'll see the demand be lower than what they had projected. You know, I think we're dealing with a little bit of that. Sometimes you see a pure cancellation. Ford made some announcements, I think, which didn't really affect us.
That was more some of the work they were doing, and then you also see product plans pushed out a little bit. So instead of freshening a vehicle in 2026, maybe they do it one or two years later. So it's a combination of these things. I think the OEMs are also looking at, you know, what is the best way to invest in their business, and so they're using all the levers they can.
It's important to note, you know, with our portfolio, we iterated this a few times. We're in a position where if they're delaying some of the e-programs, we're seeing the pickup on the F side. And remember, on the F side, we are number one or number two in nearly everything we do. So our customer diversity is very high. Our regional diversity is very high. So more times than not, you know, we see an opportunity there if they delay some of that e-product.
Thanks a lot. I had a quick question on turbos as we think about the Western world focusing more on hybrids, plug-in hybrids, EREVs. How does that affect the turbo business? I understand that some of these engines can still have turbos as the size of the content smaller than what the legacy ICE car it might be replacing, or how do you view kind of the foundational business in that context?
Yeah. So, we don't see a definitive pattern yet. There's a number of ways to architect a hybrid vehicle. Many with turbos, some without. You know, the Japanese are known not to have as many turbos. They have much more naturally aspirated engines. But I would even say, you know, they're looking at the application of smaller turbos on hybrids. So I wouldn't say there's a definitive trend yet. I think we could have a variety of hybrid architectures.
You know, at the end of the day, they're focused on reducing emissions and improving fuel economy. So our portfolio, you know, 85% of it is focused on doing just that. So, you know, they're gonna look toward technologies like turbo and EGR timing systems to help support their objective.
Just one final one from me strategically. So it's been pretty striking over the last few weeks how many suppliers are trying some pretty bold strategic moves. We've seen some companies announcing that they will split themselves. Some are selling non-core assets. Others are merging with each other.
It seems like there's a tremendous amount of pressure to unlock some shareholder value, including exploring strategic options that were not necessarily pursued before. When you look at BorgWarner's portfolio, are you happy with the various pieces that you have? Obviously, you spoke about the inorganic opportunities to grow them, but does everything fit within the portfolio now?
I mean, I think if you look on the whole, we're very pleased with the portfolio, and again, compared to just six, seven years ago, our portfolio is arguably one of the strongest in the powertrain space. We're constantly evaluating, you know, our products and how we can advance them, how we can build scale, how we can grow our margin profile, but I would say overall, we're very pleased with the portfolio, and we wanna keep building on the momentum as we have.
We see lots of opportunities, both organically, like we spoke about, to outgrow those markets, and also on the inorganic side. We think, as you mentioned, there's a lot of turmoil in the OE and tier one space, and we think we're in a great position to maybe identify some high-quality assets out of that.
Awesome. Joe, Craig, and Pat, thank you so much for joining us and for your insights today.
Thank you.
Thank you.
Our pleasure.