Why don't we kick off the next session with BorgWarner. Today, we have the CEO, Joe Fadool, and the CFO, Craig Aaron as well as Pat Nolan, the Head of IR. Most of you probably know BorgWarner is obviously an auto powertrain leader, both in ICE and EV. It has been actually our top pick for quite a while now. Mostly on my view of them proving out the EV story and the ePowertrain story. However, recently, pretty well known now is you've made a pretty smart pivot into data centers, which is, I think, a pretty, very compelling diversification opportunity. It's generated quite a bit of excitement. It's obviously reflected in the stock year to date. It'll probably be most of the focus of my questions today.
Maybe just more maintenance-y, any color on, I know you guys don't pre-announce, but how is the quarter trending? We've seen S&P has cut numbers a bit. Does that present a risk to you guys? Any thoughts there in terms of the quarter and the outlook?
Yeah, sure. I can take that one. When you look at our full-year guide from an industry production perspective, we said flat to down 3%. S&P is coming in right around 2%, so we're right in the middle of the guide. We did reconfirm our February guidance in April. Sales coming in right around $14.15 billion at the midpoint. When you look at Q1 came in at $3.53 billion. You annualize that, you get pretty close to the midpoint of our guide. We feel good about how we executed in Q1. Margins up 50 basis points. Revenue, again, coming in at three and a half billion. We feel like we're right on track to deliver our guide. Yeah, we're pretty pleased with the way the year's played out so far.
Okay. Obviously a lot of excitement on the new products and data centers. You announced a win on the turbine generators on the Q4 call. Last call you highlighted storage and the microgrid inverters. Can you talk a bit about how long have you been developing this product? Sounds like it was several years. How much overlap is there with your current auto tech in these products?
Sure. Thanks for having us, Colin. If we first start with the problem we're trying to solve, it's all around power availability. That's the problem. These three products, all addressing that issue. Starting with the power generation or turbine generator, we've been working on this with our partner, Endeavour, over three and a half years. If you consider all the technologies inside, for decades. When you look at the inside of this, it's turbocharging, it's high-speed rotating machines, power electronics, software and controls. We bring quite a bit of knowhow and IP to the table here. We're pretty pleased with this partnership we've had with Endeavour. When you think about the battery storage business, this is a business. We actually started talking about this topic of non-automotive for a couple of years now, since 2023.
This is the window that we see the opportunity to move into the space more concretely. We have been working to leverage the open capacity we have. We all know the CV market, which we positioned this business for, has been much softer than we all anticipated. These systems are designed for very high reliability and tough use cases on a commercial vehicle. It makes them very suitable for stationary power. When we look at the microgrid, which is a little bit newer product to market, the basis of that is the convergence of 800 volts in data centers with automotive technology, which already operates at 800 volts. That's the piece or the window that really gives us a chance to move into this space fairly quick.
If you look at why are people moving to 800 volts, it's really driven by the NVIDIA chipsets on the next generation, which require the higher power, higher power density. We're a market leader in inverters and have been shipping 800-volt systems for years. For us, that gives us a right to win. When you cut across all three of these products, power generation, storage, and conversion, the one big common theme is the automotive scale and competitiveness. When I talk about automotive scale, you're talking about high volume with very high quality requirements, very competitive space in automotive, and that cuts across all three of these, which allows us to accelerate the disruption.
Can you talk about, starting with the first, the turbine generator. What is the Endeavour relationship? What kind of products is that exclusive to? What can you do in that area beyond that partnership?
With Endeavour, as I mentioned, we've been working with them for over three and a half years. The way you want to think about it is they're the front end of the relationship. The customer-facing piece, their principals have been in the data center space for 25 years or more. They see the world similar to us, more efficient, lower emissions. Very easy to work with them. We're providing the guts of the system. We're designing and developing more or less the content of the turbine generator. This is where we're able to leverage all of our internal knowledge. The combination of the two of us makes complete sense. We want to be laser-focused going to market. They provide that customer relationship with many of the customers, like the hyperscalers.
You've probably heard us on our calls, we've had visits at our Asheville location from some of the hyperscalers. That never would've happened without Endeavour. They're the ones that have those relationships. Each of us bring pretty strong contributions to the relationship, and we couldn't be more excited about it. Now, with regard to the other two products. The battery storage, we can serve Endeavour, but we can serve the rest of the industrial and data center market independently. Same with microgrid inverters. We can sell them to Endeavour for their use case, or we can sell to other players. We're not in an exclusive relationship like we are with the turbine generator, just to contrast the three product lines.
With the turbine generator, though, is it a certain size generator and only data centers? Can you do any of that on your own, or everything in that space is through the partnership at-
Not everything. What we have an agreement on is what we call a 350 kilowatt system. That's the one we're going to market first with, quite frankly, has a lot of interest and demand. That's where we're putting all of our efforts. We've developed smaller systems in the past. We have 100 kilowatt system that we've worked with a different startup on for a sort of waste-to-energy conversion. We've been playing in this space for, I would say, 12 to 15 years in some form or another. The exclusive relationship is with the 350 kilowatt system.
Okay. You're bringing 2 GW of capacity. Is that just a whole bunch of those systems together or no?
Right. If you want to imagine, and this is in our investor deck, these 350 kilowatt systems, you can also put them in a single enclosure for a 1 MW system. Okay. That is likely the first application, but may not be the only. As you need more capacity, you add more of these generator systems in place. One of the things we probably don't talk about enough is the flexibility of that. When a hyperscaler designs and develops an AI farm, let's call it, they don't start with maximum capacity. Even here today, some are building 2 GW to 5 GW data centers, but they don't start there. They start at maybe a 0.5 GW, and then over time they add on.
That makes our system completely flexible for them, so they don't have to build a complete turbine power system that meets the whole needs at once. They can do it incrementally as they bring more capacity on.
Can you maybe talk about the competitive landscape? Who are the main competitors? In terms of size, cost, and efficiency, how does your product compare?
There's really two use cases. One is primary power, and the main competitor there are turbine companies, when you think of Siemens, GE Vernova.
Yeah
Mitsubishi. The advantages our system has to theirs is going to be lower emissions. It's designed for Tier 4 emission levels, a little bit less noise. I would say the big advantage right now is if you were to order a large turbine right now, you probably won't see it till 2030.
Yeah.
Let alone find an EPC that's going to build it for you. For us, we're installing that capacity. We know how to scale quickly, and we're going to make a decision later this year, do we add additional capacity given the demand and the backlog? The other use case is backup generation. Backup generation usually is with diesel gensets, a little bit natural gas. These are guys like Cummins and Caterpillar, well-known players. How do we compare to them? Significantly lower emissions, which is becoming more and more talked about today for our system. The total operating costs are also much lower. Diesel fuel, pretty expensive compared to natural gas. Even, let's just say this power to compute starts to subside and you don't have such demand, which has really given us the window to play right now.
Let's say that gets back to more normal situation, we still have a very competitive product through the reasons I mentioned. We think this business is very sustainable over time.
Your initial launch in 2027, that's primary or is it backup?
We believe it's going to be primary. I'm not sure we announced it yet. When we started this journey three and a half years ago, 80% of the applications were going to be backup and 20% primary. With the acceleration of generative AI and companies like Anthropic and others, we think it's going to be just the opposite.
Yeah.
80% primary. I think we're in a really strong position.
Those are more lucrative, I believe, right?
I'm sorry?
Primary is usually more lucrative.
Yeah, we haven't delineated.
higher profits
between the two of them. For us, they're both great business cases. Let's just say if you're solving the primary need, you're in a lot stronger position because the utilities can't get there fast enough.
Yeah.
Once you're there, you're building your brand and your knowledge of the site much more than you are as a backup, so we're going to learn a lot more in that primary position. Yeah, we're happy to serve both markets, but yeah, it's more likely the primary is going to be larger.
If we look at the BESS battery storage, honestly, that was a pretty smart pivot. Any color on where did this tech come from? This was part of AKASOL, I believe, that was already in the capability set and any color on the capacity that you have to pivot over to storage-
The opportunity there.
Yes, we purchased AKASOL three, four years ago, and the primary purpose was to serve this CV space and the e-bus space. We installed quite a bit of capacity to serve that space. Unfortunately, those trucks and buses are more expensive than their equivalent diesel. The market hasn't developed like we all expected. Given that, though, the technology is very fitting to these industrial and data center applications. It's more, how do we design the form factor different? We're cell agnostic, so we're not stuck to one cell type or chemistry. Of course, we're leveraging the open capacity. The name of the game right now is, if you can provide generators, if you can provide stationary storage, people are moving you way up the list. Okay?
They're willing to take more risk on a player like BorgWarner, which is unknown in the industrial space, but we're well-known in the auto space. That existing capacity, we haven't released a number on it, but let's say it's able to serve the next couple of years, what we expect the demand to be. If we see that demand's going to be even higher, we're happy to put more capital in, more investment in. I would say we're able to leverage that pretty fast and be in production by next year.
Okay. Because I thought in the past, you've capacitized to $1 billion, you closed one of the facilities.
Yeah, we did announce, we capacitized a six-gigawatt total storage.
Okay
between the three facilities, Darmstadt, Seneca, and Hazel Park. We've since closed Hazel Park. We have, in total capacity, we have less than six now, but we haven't really given those numbers yet.
When we think about transitioning from the EV, the bus-type packs to storage, or they're pretty much the same technology, just one's sitting flat and one's up and down.
Yeah, I would say it's similar technology. There's not a lot of new invention going on. We're pushing these down the same production line. We're using the same end-of-line testers. We had to make some small investments to adapt to the new form factor. There's some software changes needed for stationary power.
Yeah.
In all essence, they're a very similar product.
Where are you looking to compete? I think there's some big players that are doing more grid-type applications. I assume you don't have that kind of capacity or plans. What gives you sort of an edge in the areas that you're looking to compete?
Right. Some of the big announcements from Ford or LG are more in the segment of those very large container storages, which support the grid directly. We're not playing in that space. We're more in the custom-tailored solutions, for particular use cases. Think about smaller form factors that are designed specifically for an application. Again, speed to market is important here. I think in Ford's announcement, they're not going to start shipping till 2028. The need is now for some of those customers. We're able to fulfill that.
Any sense of how quickly you actually already have showed it to some customers on the storage side, or?
Yeah. We're actively quoting battery systems. We're doing everything needed to support a 2027 production launch. Not that far away. I would say it's likely we're going to be successful.
I thought the one, when I was talking to Pat last week, the microgrid inverter, can you talk about the competitive landscape there and any way to frame the sort of revenue opportunity from these systems? I guess it's sort of interesting that with the 800-volt shift, the current product set, the current players in that space don't have the, or aren't currently supplying. Is that the big window for you to kind of get into this field?
That is the window. As a technology company, you're always looking for the right time to jump into a market because there's incumbents that are very strong. We have a lot of respect for the current players. The shift to 800 volts is the moment. Why is that? First of all, these 800-volt systems are not just higher voltage, they're higher power in general. We've been serving that market in automotive for quite some time. We're a top three player in inverters. We understand the requirements there. We design and develop and produce our own power modules, which is the guts of the system. We do that in Singapore. For us, this is the moment to move, and we're getting very good feedback from the four customers we have samples with.
I would say we would expect the next step would be to make sure this is UL certified, and that we can support production again in 2027. We feel we got a very good right to win in this space.
How should we frame the revenue opportunity there? Because I think a car inverter is like $600, $700 per car or something like that. I don't know. Maybe I'm way off.
Yeah. Thank God they're not at that pricing.
I'm just asking the scale
We haven't quantified. Automotive is a different space. You're talking about one or two inverters per car, highly competitive, and we're very successful in that space. We haven't released any numbers for industrial, but if you think about the backdrop of data centers, they're growing in the mid-teens every year for the next 10-20 years. I mean, it'd be hard to believe we wouldn't see a significantly different landscape, especially using 800-volt technology and higher in the future. Pretty sizable TAM. Also outside of data centers, power conversion plays a big role anytime you're trying to adjust power from AC to DC or up and down the voltage level.
Like in a data center, you're generating power at, let's say 480, you need to move it up to 800, maybe even 1500 DC. Then when you step it into the building, you got to step it down again to serve the individual racks. There's tons of opportunity for inverters throughout that entire data center. That inverter technology is applicable to other industrial applications as well. If you think about oil and gas or power security, power gen applications, they all need inverters that operate at this higher voltage.
In terms of sizing, are you looking for a handful of wins here? Because it sounds like they'd be very large in terms of revenue for just one individual win, because a massive data center versus a car.
Yeah. I wouldn't put a number on it. I would say we don't enter any market lightly.
We want to make sure we have a right to win in the space. Based on our assessment, we continue to invest R&D into this area, and we're prepared to capacitize for that microgrid inverter that we've been talking a little bit about recently. I think we walk before we run. We want to make sure we get it right out of the gate, and that's why it's important to have samples with customers. We'll get important feedback from them, then we can fine-tune the application and make sure we go to market with something that's really different and of value to those customers.
Can you talk about the financial profile? I think you've talked about mid-teens type margins or converting at mid-teens, but business is not really existing today, so is it at a mid-teen EBIT margin overall, are we thinking about?
Yeah.
When we've publicly discussed the power generation opportunity, we've shared $300 million in revenue in 2027, and we would expect that to convert in the mid-teens, consistent with our auto expectations. We're, of course, expecting some inefficiencies in that mid-teens conversion because it's our first year of launch. We're just ramping up. We're not at full capacity. That's the expectation in the first year, and that's what would mean success for us as we look at power generation. As we get into battery and power conversion, the same discipline applies in our auto business. Hey, we're looking for 15% ROIC or higher, and I think Joe and I feel pretty bullish that we'll meet or exceed that threshold as we look at those other opportunities.
What about R&D and CapEx in these areas?
It seems so far it's extremely CapEx light, but how are you thinking about- Yeah those headwinds going forward?
What I think is really impressive about our business, and I'll use power generation as a great example. We've been working on it for three years. That's what Joe mentioned, but when you look at TTT that's been doing all of this work, they've exceeded or expanded or at least maintained their margin while still investing in this technology. That's incredible work by that team. We have the same expectations as we jump into battery and we jump into power conversion. We still think we can meet our mid-teens incremental conversion while still investing in these new technologies. That's how I think you should think about it from a margin perspective. As we jump into the capital side, we did a phenomenal job last year really managing capital.
We had a lot of e-product capital in play. We needed to make sure that we utilized that capital throughout the world, and that's why CapEx as a percentage of sales was only at 3%. As we step into this year, our guidance assumes about 4.5%, which is more in line with our historical range. As we move forward, Joe and I think, hey, that 4.5%-5% of sales range is likely where we're going to stay as we expand into these new opportunities. We see that as a very achievable level of CapEx as we move forward, support all of this growth that we expect to see in the near future.
How much, if you were to add more capacity- How should people frame that in terms of the CapEx needed?
Yeah.
When we think about power generation and this expansion, we publicly disclosed, it costs us about $70 million to stand up this greenfield site in North Carolina. That's probably a good baseline, as we move forward. Again, I think as you think about, as this revenue comes into our P&L and we're going to continue to expand, that 4.5%-5% of sales range is probably a good modeling assumption as we move forward. That's the best way I think people should think about it. I think what's important to note, in the automotive space, efficiency of capital is super important, of course.
Yeah. It's no different in this industrial space, but the demand is so high we'd be happy to invest more capital. Absolutely because the ROIC is super attractive, so people shouldn't think about us constrained too much on the capital side.
If the demand's there for the products, we're going to invest because it's very attractive for us.
Don't forget, we're generating $1 billion of free cash flow. We have plenty of opportunity to invest if the business case makes sense. Completely agree with Joe.
Got it. Maybe going back to the core business, you didn't change guidance last quarter. S&P has gotten a little bit worse. Raw mats are a bit worse. Any puts and takes that kept things held in line?
Yeah. It was really what I mentioned earlier. S&P's coming in about 2% down for the year. It's right within our range, flat to down 3%. Market production's right in our assumptions for the guide. Q1, Q2 seem to be holding up pretty well from a revenue perspective.
Really happy with how the team performed in the first quarter, 10.5% margin, up 50 basis points. It's a continuation of the great performance that we've seen over the last couple of years. As Joe and I sit here, I think we feel really good about our guide, and we're just going to continue to focus on Q2 and execute. We feel good about where we're going for 2026.
Got it. Actually, going back a second, when would you decide to put more CapEx in place?
Do you need the orders in hand for the turbine generator opportunity, or would you do it just anticipating those orders? How are you thinking about that, though?
Yeah. What we've said is, second part of this year, we'll likely make a decision on whether we put more capacity in. The criteria we're using for certain demand is part of it, but not only. If you think about bringing a new product to market, we want to make sure the quality's right the first time through on the manufacturing side, our supplier readiness. We're evaluating all those things. Hey, we want to come out strong and make sure the BorgWarner brand really shows well in our first big industrial play. Those are the criteria. Also, we're looking at where would we put that investment? Would we put that in Hendersonville, or would we put it in Europe? We see demand on the data center side in Europe. Or would we put it in Southeast Asia?
That's also part of the decision, so that we can balance the capacity and serve the customers in their market.
Got it. Okay. Appreciate it. Switching back, but going back to the core guidance. One pushback I have gotten has been with too much year to date, but Q1 organic growth was a bit weak.
Even if you take out batteries, it was down three. What drove that weaker growth, and how should we think about it playing through the rest of the year? You've historically been very solid grower over market.
Yeah. If you look at Q1 and you remove battery, we're basically right in line with market, which is right in line with our full-year guide. That's one data point. When you break it down by region, North America, we saw some strength. It was really coming from our DMS business, from some transfer case growth in that market. On the European side, we did have a thermal program ending, so that was a bit of a headwind for us. In China, it was really timing of an e-product program. Those were the puts and takes, but I wouldn't over-index on any one quarter. When I take a big step back, $3.53 billion in revenue in the first quarter. You annualize that, we're right around $14.15 billion, which is the middle of our guide. It seems like we're right on track.
That's, I think, the best way to look at it.
How should we think about, you mentioned, we're talking organic growth. I think you've highlighted this year as a tougher year going into this year. 2027 still on track to be a strong recovery with some launches coming. Is that the right way to think about it, that growth picks up on the core auto business next year?
When you think about where have we been the last couple of years, we've been moving in this flat to 1% growth over market. It's because we've had this EV overhang for the last several years. Obviously, there were a lot of expectations that EVs were going to grow, and we want our fair share of business. Those programs either didn't launch or they launched at much lower volumes. One of the things that Joe and I were really focused on as we took these roles was we're not happy with the outgrowth profile of our business, and we want to change it. Joe set a tone of we want all of our business units to grow, find your growth opportunities.
That's led to a lot of energy in our company being released and 40+ wins that we've announced over the last five quarters. As we look into 2027, 2028, 2029, we expect to see some of those programs into our P&L, and we see it as a step function. We should see outgrowth in our auto business in 2027, further outgrowth in 2028, and further outgrowth in 2029. We're really excited to get to a place where we're seeing outgrowth and increasing revenue in our P&L, because it's amazing what our company has done to expand margins and the earnings power of the company, despite revenue being relatively flat. I think we're really excited to see what our company can do when we see that top line growing again in 2027, 2028, 2029. It's going to be a really powerful story for us.
Got it. Any questions out there? Figure a quick check in. All right. Raise your hand if you have any. I'll try to get to you before we end. Oh, yeah. Go ahead. Sorry.
Just had one more question on that backup power, where you talked about natural gas having an advantage on the cost side. Is there an issue with, I guess, comment on your diesel coming up faster with the cycle time perspective if there is some kind of outage? Does that really matter for customers, or is it small business?
It matters to a certain extent. Our system comes up in about 45 seconds, which is a main requirement. Diesel gensets come up a little bit faster than that. We feel that where we're positioned with that 45 seconds is adequate for what the hyperscalers are asking for. Remember, they often have battery storage on site, too. The trio effect here is primary power, backup power, and battery storage to help smooth out transients and also interruptions to primary power.
Yeah.
Can I just follow up on the more recent comments made on the auto business returning to growth in 2027, 2028, 2029 acceleration there. Just what's driving that? Is that program specific launches or
Anything else from Joe?
As we had mentioned on the calls, the change we made to leverage the entire business for growth, not just electrification, resulted in the business units really working on and winning new business. We've been trying to share many of those awards the last 18 months. If you look in those awards, some of them are conquest businesses. This whole idea of the strong get stronger in these, especially the foundational businesses, we're starting to see it now in the wins. Those wins take two to three years to bring to production. This year we're still living with this EV slowdown in the Western world, but we'll start to see those programs launch next year, and then pick up volumes in 2028. That's our thesis there.
Maybe to add just a little bit more. I love the profile. It's across region, it's across customer, it's across technology. When you think about where the world was two or three years ago, it was really focused on electronic products. Now it's across all different technology, all different customers. That gives us a lot of confidence that we're going to see this growth accelerating in 2027, 2028, 2029.
Color on maybe China. It seems like you're very strong position globally in your technologies, but what is the competitive landscape in China, particularly on the ePowertrain, where there's just a lot of emerging suppliers, at least in other segments, that seem to be taking share. Are you seeing the emergence of pretty good competition out of the Chinese suppliers at this point?
There are a few new players in China, but we're competing extremely well. A number of those wins that we've announced over the last 18 months have been in China. Why are we winning there? First, we've been there a long time, over 30 years. We have very close relationships, and especially when we think about the leading six, they're the ones that are gaining the export market benefits. What do Chinese OEMs want? They want speed and they want competitive technology. We have both of those. We run shoulder to shoulder with them to get products into the market, usually in the 12 to 18-month timeframe after you kick off a program. That's half the time as a Western OEM. Speed, super important.
As we see those Chinese OEMs exporting more, over seven million vehicles last year; this year, it's likely going to be higher. We're on a lot of those product lines and a lot of those vehicles. We even get a little tailwind here and there, like in the four-wheel drive business, because the take rates are higher in Europe than in China. We feel real good about our position there. The next step is they're going to have to localize, and we're going to be the likely partner of choice if we're supporting them in China. We already have factories, people, knowledge. We understand the local laws. We can move fast because we've already got existing assets and folks that can stand up localization for them in those markets. That's our game plan for China.
It's working quite well, and I think being nimble as they adjust is also important.
How about overall e-products profitability? You've shown really good growth. Seems like the competitive landscape, seems like you're emerging as a leader. What needs to get that to profit levels overall and then sort of in line with the rest of the business?
If you go back a couple of years, we were investing heavily in that side of the business, and it made a lot of sense because the world was moving to electrification, and we were supporting a lot of programs that we had won. It was important as time went on, that we right-sized that business to the level of revenue that we were seeing. We went through a restructuring that started in 2024. One of the things that Joe and I were really watching last year, besides the growth, and we had phenomenal growth, 31% light vehicle e-product growth, was, are we converting that growth into income at the mid-teens? That's our expectation. That would give us confidence that we got that restructuring right. That's exactly what we saw last year. 31% growth and we converted in the mid-teens.
That's something that we need to continue to watch as we execute this year. We're expecting growth in light vehicle e-products around 10%, and we've got to make sure that we can continue to convert that growth into income. If we do that, we got our restructuring right. We also need to look at the regions. The regions are adapting electrification differently. You know that very well. We need to make sure that we're continuing to adapt our cost structure to what's happening in the various regions, and I see our business units doing that.
Maybe to wrap it up, there's so much focus on data centers. How are you now thinking about M&A, which historically has been a big focus of the company, doing smart deals. What are you looking at now? Are you looking more outside of auto or how should we think about what you're focused on in terms of M&A priorities and types of assets from here?
Yeah. First of all, we're really pleased with the portfolio and the move back toward growth and growth above market, and we're getting good traction there. When we think about M&A, we've really raised the hurdles around M&A. We're in a different situation than we were five or six years ago. We can be a little more selective. We've opened the aperture. We're not just looking at automotive, we're looking at non-automotive, including industrial and data center spaces. The criteria we use is straightforward. It needs to make industrial logic, leverage our core. The second is near-term accretion is important. Third, how we value it. We want to pay a fair price. We are very active looking at targets. We've passed on a number of deals that didn't meet one or more of those criteria.
I feel Craig and I and the team will be as disciplined around M&A as we're being around the rest of the business, and you can see the benefits that's yielding. If we can't action something, we then return much of that cash back to shareholders in buybacks, dividends. In fact, the last five quarters, we've returned 70% of it back to shareholders in that form. We're looking for balance and consistency in the capital allocation side.
Great. I guess we'll wrap it up there. Thank you very much for joining us.
All right. Thank you, Colin.
Thank you, Colin.
Thank you.