All right. Good morning, everybody. Thank you so much for joining us for this session with BorgWarner as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner. I'm the lead U.S. autos and auto technology analyst here at Deutsche Bank. BorgWarner is a leading supplier of engineered systems and components, primarily for powertrain applications. The company is executing on its Charging Forward strategy and, just a year ago, conducted a spinoff of PHINIA. Today, BorgWarner is looking to drive eProducts growth and profitability and also maximize the value of its foundational combustion engine business, and I'm extremely pleased to be joined this morning by the entire A-Team: Fred Lissalde, who's President and CEO; Craig Aaron, who's EVP and CFO; and Pat Nolan, who is the Vice President of Investor Relations and an ex-colleague at Deutsche Bank. Thank you so much.
The format for this session will be a short presentation by Fred to kick things off and then followed by a fireside chat around some of my questions. So with that, Fred and the team, thank you so much for being with us, and over to you.
Thank you. Thank you, Emmanuel, for the opportunity. And good morning, everyone. Just in a couple of slides, I just wanted to ground ourselves on who's BorgWarner and what we do and where we are in the journey of Charging Forward. Our vision of a clean, energy-efficient world hasn't changed for many years. We're in the business of moving vehicles as efficiently as possible, whether it's fuel efficiency or electron efficiency. We're here to drive sustainable mobility solutions. As Emmanuel alluded to, we are in the strategy of executing Charging Forward, which I would say is Charging Forward 2.0. The first pillar is to grow our eProducts. We guided for about $2.65 billion of eProducts this year. The second pillar is to do that profitably. And we've shown over the past quarters that we can convert on that eProduct additional sales.
The third pillar, which is a very important pillar, 80% of our revenue is made of foundational, i.e., combustion products, is to maximize the value of those products for our shareholders. Let's have a little look at the product portfolio, the way we've laid it out. Originally, BorgWarner is a combustion powertrain company driving for fuel efficiency, downsized engines with the different products that you see on that page where we are number one and number two in the world. Over the past few years, we created what we call the eProducts that are relevant for battery-electric vehicles that are very important for what I would call electron efficiency so that we can extend the range or reduce the size of the battery. And those two products, the ticks on the blue and the ticks on the green, are going one-to-one on hybrids.
If you look at the eProducts on the right-hand side, an inverter for hybrid is the same. A motor for hybrid is the same as for a BEV. So for us, we've put the company in a position that wherever the additional revenue comes from, first, we have product answers to support our customers, and we're in a position to convert mid-to-high teens on any additional sales, whether it comes from combustion, hybrid, or BEV. And that's pretty much the goals that we're implementing for 2024. For me, the overall umbrella is we're back to the BorgWarner basics, which is we outgrow our market. Despite the volatility of BEV and hybrid, we outgrow those markets: combustion, hybrid, and BEV. We're driving incremental mid-to-high teens on those incremental sales, and we generate strong operating cash flow. And I'm sure we'll come back to that.
That's just what I wanted to say as an opening to your question, Emmanuel.
Thank you so much. So let's dive into it. Let's start maybe with global industry conditions. How are things playing out so far? You announced plans to restructure and spend about $130 to $150 million over the next four years or so to achieve savings of $80 to $90 million by 2027. What do some of these restructuring plans look like, and where are you now on those efforts?
Sure. So that $130 to $150 million restructuring program that we announced in 2023, that's focused on the foundational side of the portfolio. So we're taking actions accordingly over the next several years as that revenue declines. We're expecting it to decline around $800 million-ish by the time we get to 2027. By the time we get out there, it's important that we remove costs from that portfolio to make sure that we're decrementing in the mid-teens. That's what that restructuring program is focused on. As you mentioned, about $80 million of savings as we look out to 2027, about $60 million as we look out to 2025. And it's a little bit more weighted towards 2025. So we're on our journey, a number of actions across all of our business units, and we're on plan. That's how I would think about the restructuring program.
Any savings this year from it?
Yeah. So we said $10 to $20 in 2023, around $60 million in 2025, and we're on that journey. It's a little bit more weighted to 2025.
Got it. Now, let's talk about your eProducts growth and margin outlook and the Charging Forward plan. You have a target to grow eProduct revenue to $2.5 to $2.8 billion this year. It seems like a good portion of that is from China. Can you talk about the growth drivers in that market? What is your customer mix in China? How are you positioned to win market share?
So at the midpoint, exactly what you said, $2.65 billion of eProducts. At the midpoint, about $750 million of battery packs for commercial vehicles. We're one of the only pretty much independent suppliers of battery packs for commercial vehicles in the Western world. So that leaves you $1.9 billion of light vehicle eProducts. About half of it, 45% exactly, is China and a little bit of Hyundai. In that market in China, 95% of our customers are Chinese, especially the big names like the BYDs, the Changan, the Great Wall, Geely, Chery, you name it. So that's 45%. 15% of that $1.9 billion, the eProducts light vehicle, is North America, and the rest is Europe. So it represents really where the music is played. We're bigger in China because that's where the music is played, right? And the music is played by the Chinese.
So 95% of our business is with the Chinese. And the last sliver is North America because it's going to take a little bit more time for North America to get ready on electrification of powertrain.
Can you talk about the, I guess, same ideas in terms of Europe and North America market share dynamics? How are you positioned to win there?
From an eProducts standpoint?
eProduct.
Yeah. So if you look at the growth of eProducts going to $6 billion inverters in 2027, should the volume pan out that way, we're going to be top one or two in inverter business, top two or three in the motor business. When the customers choose to outsource EDMs, we're certainly one of the suppliers they go to because we're making inverters, we're making motors, and we've made transmissions for about 120 years, so we kind of know how to do it. So we're positioning ourselves similarly over time to be number one, two, or three in the eProducts. Battery packs is a good example. Number one in the Western world on battery packs for commercial vehicles with NMC. We signed an agreement with BYD for LFP technologies, which only reinforces our position on battery packs. That's what we are positioning the company for.
Now, if I look a little bit beyond this year and you've had these eProduct revenue targets for 2025, $4.5 to $5 billion, what is the risk of delayed EV launches to this target? I think you had stated that all of your 2025 eProduct sales are booked, and the vast majority of the 2027 targets, which is, I think, $10 billion, is also booked. Given that you're still a few years out from 2027, how much conservatism are you baking in on that target? So I guess, well, long question. I've been trying to figure out the 2025 and 2027 targets, to what extent these are at risk or not from what's going on on the EV side.
It's very difficult to forecast. Everybody's scratching their heads on how to forecast EV. And so that's why we've stopped trying to forecast. We're focusing on what we can control and what can we control. We can control positioning the portfolio to win, booking, and winning the programs that we want to win, and that is happening. Now, with the volume pan out, the way the customers want it to pan out, we don't know. And the second thing that we can do is position the company to convert on those additional sales. And that's what we're doing, both on the E side and on the combustion side. So that's what we can control. That's what we're focusing on. And we'll tell you more about 2025, closer to 2025.
Let's talk about your battery systems business. You have capacity expansion this year in your Seneca factory in the U.S. as well as in Germany. How's the production ramp going?
Good. The production ramp's going good. So we had about 2 GWh of capacity in 2023. By the end of this year, we're going to have 6 GWh, so times three in pretty much 18 months. Seneca is a great story of transitioning a combustion footprint into first a CV plant , which has battery packs and also transfer cases. It works very, very well. That example is multiplied all across the globe, not only for battery packs, but putting eProducts and transitioning our current locations from C to H to E. That works very well. I would say that we certainly have product leadership in this area. We're one of the only ones left independent. With the combination of NMC, nickel-based, and LFP, lithium-based, with the alliance with BYD, I think we're well positioned.
We're guiding at the midpoint for $750 million of battery pack revenue, which is way higher than what we underwrote when we acquired Akasol a few years ago, and so we're very happy with where we are from a battery pack standpoint, and again, focusing on the conversion on those additional revenues.
Let's move to the margins in eProducts. Using the ePropulsion segment as a proxy, we saw a dip in Q1 margin. How should we think about near-term trajectory on this and exiting this year?
Sure. So when we finished our first quarter, the decremental conversion in that segment was about 30%, excluding Eldor. And we're not happy with that performance. We mentioned that on the call. So we're looking at various cost measures to get that short-term performance in line. That's kind of our first goal. But just as importantly is we need to set up this business for long-term success. You've heard us multiple times talk about conversion on an all-in basis. We need to make sure that we get that cost structure right so as that business grows, because it's a significant portion of our growth going forward, that we're going to convert on an all-in basis in the mid-teens. And that's really our focus this year and into the future.
So despite the first quarter start, you're still targeting this on a full-year basis?
Yeah. When you think about Pat mentioned it, when you think about our growth this year, over 100% of our growth is on eProducts, and we're going to convert in the mid-teens. That's 100% focused.
Are you still targeting 7% adjusted operating margin in 2027? And do any of the recent developments with EV change the way you think about these outlooks for 2027?
Keep in mind, when we put out that target, this is at the time there's improvement in the trajectory of margin growth. This is going to come down to that trajectory. And as Fred kind of outlined, that growth will largely come down to that customer volume. We can't control that. But what we can control and what we're really focused on is as that business grows, that growth rate is, and it has that mid-teens conversion. And that's slightly different than what we said before because now we're saying we are going to control cost efforts. It's going to increment in the mid-teens with some arbitrary target.
couple of questions on capital allocation, and that should leave some time for any questions in the room as well. So on capital allocation, a part of the strategy in growing eProducts business had been through M&A. Is this still a priority in the current EV slowdown, which obviously is in some geographies? If so, what are you looking to expand on, perhaps in scale or product portfolio? Is there anything on the near-term horizon?
Do you understand with capital allocation?
Sure. As it relates to M&A, since that's your question, M&A is still an important part of Charging Forward. And when we think about what are our priorities for M&A, it first starts with industrial logic. Does the asset have industrial logic? Does it have product leadership? The second aspect that we're looking at is what's the short-term impact of that acquisition on our earnings? The third is what's the long-term trajectory? And we're going to have to run a lot of different scenarios with EV adoption because it's very uncertain. We need to make sure that we pay the right value for that asset. So it's really focused on those three areas when we're looking at assets right now in this program.
In terms of focus on, so I understand the strategy, but is it more EV or less EV than it would have been before?
On M&A?
Yeah.
I think if you need to think about M&A for BorgWarner, it has to be EV. And it has to be technology that enhances efficiency on the e-powertrain standpoint, that has strong industrial logic, and that has also a strong financial profile.
You repurchased $100 million of shares in the first quarter, as in close to $200 million in the fourth quarter. Are you accelerating your allocation to share buybacks? And if so, how much of the $500 to $600 million of free cash flow guided for this year could be used towards it?
Yeah. Fair question. So again, let's take a step back. And you mentioned that Q4 of last year, we repurchased $177 million worth of the company stock. In the first quarter, another $100 million. And we got approval from our board in the first quarter for another $500 million of authorization. So our total repurchase program is up to a little over $760 million. So just big step back. As we think about capital allocation, it really comes down to priorities. Our first priority is liquidity. Make sure that we have the right liquidity to navigate a very negative downturn. The second is leverage. We target gross leverage around two times. After that, we're going to hold cash for any M&A activity. And we have a fixed dividend. That's a fixed obligation for us. So we're going to pay that in any type of environment.
And when you think about share repurchases, we're going to continue to repurchase opportunistically. That's how to think about it. I'd say we were really happy with our repurchases both in the fourth quarter of last year and the first quarter of this year. So that's how we think about it.
Great. Let's open it up for questions in the room. If you have a question, just raise your hand, and we share the mic. Christoph?
Good morning. Christoph Laskawi of Deutsche Bank as well. I have a question on the competition in eProducts or systems, essentially. We see that volumes are far below the budget, especially in Europe, for example, and competitors in Europe struggling to fill their industrial capacity. Is this leading in basically the RFQs that you see to more fierce competition, which makes it more difficult on price? Or is it actually that you're seeing a couple of competitors dropping out so that your environment is improving from a bit of a slowdown and the OEMs partnering with the bigger players like you are?
Two things. First, the competition intensity from an eProduct standpoint. And the devil is in the detail, right, on the different product segments. If you take an inverter as a proxy, right, we're competing with a big Tier 1 electronic suppliers. So the competition intensity is not more important than what we see in the combustion side. The same people doing engine control units or transmission control units. Two, as far as we're concerned, one portion of your answer is very simple. We're never going to quote anything below 50% return on invested capital. And we're not going to chase businesses. So the discipline that we have in quoting whatever business is the 15% return on invested capital, and we're not going to chase anyone.
Thank you, and a follow-up just on how you approach and taking on the order and the base assumptions that you put in for volumes for the programs that you are winning. Talking to other suppliers, they have changed after the EV slowdown in Q3 last year. Essentially, the haircut they apply to the volumes the OEM communicates with them, as they've seen quite a lot of programs being below those targets. Did you introduce any change as well, or have you been quite conservative before in approaching that anyway so there's no need for you to change?
Yeah. We apply cuts to what OEMs tell us at the time of quoting, at the time of capital allocation requests too. And we have been around long enough to know that the cuts that OEM 1 is telling us can be different than the cuts on what OEM 5 is telling us. But again, you can't control that. So what we can control is flexible manufacturing, having motors that go for customer 1, 2, 3, 4 on the same production line. And that's the case. Having inverters that use the same guts through modular design and modular production techniques so that we limit the risk of being attached to one customer and one program. And we are on eProducts as well as on all our businesses naturally hedged across the three continents, pretty much 30-30-30 or a third, a third, a third.
We have no customers that use more than 10% or 11% of our revenue. Two customers are close to 10%. And we also are pretty much agnostic to where the electrification goes. Electrification accelerates our growth no matter what. Our content opportunity per vehicle on advanced hybrid is the same as the one on BEV. So that's how we think about those things. It's important to have scale and not to be attached to customer A and program B.
It's important to have a volume clause in our quotes. So if that volume doesn't materialize, it means we need to come back to the table and either get a price increase moving forward or recovery of the capital. So that's really important that with all this volatility that we have protection, and some of that is the volume clause as well as the flexible manufacturing. Thank you.
Thank you. Good to see you guys again, Jim Marin with Capital. Just a quick follow-up on that question. Your lead time on contract wins, when we think about the new Chinese players, they seem to be doing things on much faster scale. Maybe Mercedes is at three or four years, and BYD is at 18 months. Just making those numbers up. But directionally, so when you think about the contracts that you're winning today and the price productivity sharing that's built into those contracts, is it stable? Kind of expectations, 2% to 3% productivity sharing, price downs, old terminology, or is it getting a little bit tougher or better? What's built into your two, three-year assumptions in terms of your margin targets, in terms of the pricing dynamics of sharing productivity with your customers? You already commented on the competitive landscape and the importance of scale.
So how is that changing at the margin?
So first, on lead times, you're absolutely right. China is about half of the rest of the world. And the reason is that they have the culture to use what exists. And that's one of the reasons why we're very relevant in China because we've been there for a long, long time. Even 10 years ago, we were already producing EDM motors and transmission for the Chinese market. And so the more scale you have, the more product portfolio you have ready to go, for which we own most of the toolings, which helps our spreading our portfolio faster, is absolutely important. And the speed to market from China is very, very impressive. So that's the reason. Two, pricing dynamics, pricing intensity, cost reduction on the eProducts, we don't see any changes from what we've seen in combustion back in the days.
It's the same competitive dynamics, same pressure, same way of quoting. Maybe some of the time we tend to get paid for ED&D, which is not the case on the combustion side, and that works well. Volume clause , very important and what you need to also think about is on the other side of the ledger, on the combustion side, the longer the combustion tail is, the smaller the AIFs are or the price reductions are because they are running out, so you're getting eProducts with some price reduction, which are contractual, but at the end of the day, on combustion, the price reduction on the contractual anymore, right? So this is the pricing dynamic that we see on both sides of the ledger, E and F, right?
Awesome. I think we're out of time, so.
Thank you very much.
Thank you so much for being here. Thanks, everyone. If you have questions.