Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2024 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Relations. Mr. Nolan, you may begin your conference.

Thank you, Britney. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on our home page and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the Events section of our Investor Relations homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales. Our all-in incremental includes our planned investment in eR&D, any impact on net inflationary impacts and other cost items. Lastly, we refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. I'm very pleased to share our results for the first quarter of 2024 and provide an overall company update, starting on Slide 5. With approximately $3.6 billion in sales, we delivered close to 7% organic growth in the quarter despite a modest industry decline. We delivered strong incremental performance in the quarter on an all-in basis, which allowed us to achieve a 9.4% margin. This Q1 performance provides a nice start to the year, and we believe it positions us well to deliver on our full year guidance. Additionally, we continue to take steps in the quarter to create longer value for our shareholders. We secured multiple new eProduct awards. These awards once again demonstrate our focus on taking the leading-edge technology, working closely with our customers to help support them as they transition towards electrification. And as I will discuss, we continued to expand our product offerings for electrified vehicles. We focused on the efficient deployment of our capital by repurchasing $100 million of stock during the first quarter, as Craig will highlight, we received an increased share repurchase authorization of $500 million from our Board of Directors. Now, let's look at some new eProduct awards on Slide 6. First, BorgWarner secured additional eMotor award with Xpeng. These awards include BorgWarner's 800 volts eMotor systems comprised of stator and rotor components, which are customized for use on 2 upcoming SUV models. Start of production is planned for 2025. BorgWarner's HVH220 eMotor offers high torque density, enhanced efficiency and superior durability. We are thrilled to extend our eMotor business with Xpeng and build upon on our strong partnership with them. Next, I would like to highlight a new product line for electrified vehicles, which is our electric Torque Vectoring Disconnect or eTVD. BorgWarner…

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our first quarter results. First, we reported close to 7% organic sales growth despite a modest decline in industry volume. Second, we had strong margin performance, which was driven by solid conversion on higher revenue as well as appropriately managing our costs. This led to a year-over-year incremental conversion of over 23% on an all-in basis. Now, let's turn to Slide 9 for a look at our year-over-year sales walk for Q1. Last year's Q1 sales from continuing operations was just under $3.4 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in sales of almost 1% or $32 million. Then you can see the increase in our organic sales which was up roughly 7% year-over-year driven by growth in China and in Europe. Finally, the acquisitions of Eldor and SSE added $11 million to sales year-over-year. The sum of all this was just under $3.6 billion of sales in Q1. Turning to Slide 10. You can see our earnings and cash flow performance for the quarter. Our first quarter adjusted operating income was $339 million, equating to a 9.4% margin. That compares to adjusted operating income from continuing operations of $305 million or a 9% margin from a year ago. On a comparable basis, excluding the impact of foreign exchange and M&A, adjusted operating income increased $54 million on $233 million of higher sales. That translates to an all-in incremental margin of roughly 23%, driven by our higher year-over-year sales and strong cost controls. The net impact of M&A was a $12 million drag on operating income year-over-year. Our adjusted EPS from continuing operations was up $0.22 compared to a year ago as a…

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

[Operator Instructions] Your first question comes from Colin Langan with Wells Fargo.

You started off very strong here, I think, something like 8% growth over market in Q1. Your margins seem to be in the midpoint of your full year guidance. But the guide for the year is -- has implied sort of growth over market, but actually moderate a bit and maybe at the midpoint, margins wouldn't change. Anything sort of onetime in nature we should be thinking about in Q1 that kind of boosted results? And then any reasons we should be thinking about things moderating a bit as we go through the rest of the year?

Thanks, Colin, for the question. Nothing unique in the quarter. It was just a really strong operational performance for our business units. They did an exceptional job. As you think about our full year guide, it implies a 13% to 16% incremental conversion, 13% on the low end, 16% on the high end. We feel really good about our first quarter performance, sets us up quite well for the remainder of the year. We're just focused on executing towards the near term, and we're going to keep doing that as we into the second quarter. It's just a really good operational performance for -- the company.

Okay. That sounds good. Slide 8 was pretty helpful. Maybe if you could talk a little about your plug-in -- PHEV opportunity. The content there, how much of your sales today are there? And have you seen any change yet, I guess, quite early on interest in that given the EPA rules seem to be more favorable towards PHEV?

Colin, that the PHEV is one architecture where we have our foundational products coming in and also most of our eProducts coming in. I don't think we have given the granularity of our per -- plug-in hybrid content. But on the hybrid overall, full hybrid, plug-in hybrid and range-extended EV, about 40% of our light vehicle eProduct, which is guided at the midpoint at $1.9 billion this year is going into those advanced hybrids.

Got it. And have you seen any interest in PHEV improve? Or is it still just too early?

So globally, the interest of PHEV has always been there. In the U.S., I would say that it's a little bit early to see request for quotes from some of the American OEMs. But outside of the U.S., plug-in hybrids and advanced hybrids are an important part of new energy vehicles and we have our fair share of those.

Your next question comes from John Murphy with Bank of America.

I just wanted to follow up on that question that Colin asked on hybrids. Is there any increase in schedules that you're seeing for hybrids at the moment? I know you said -- you mentioned 40% of the eProducts is -- the $1.9 billion is on the hybrid side, and you're not seeing any new activity necessarily, but is there any step-up in schedules for hybrids at the moment that you're seeing that might provide some upside there?

Yes. In China and in Europe, we see upticks in hybrids. Actually, if you look at the share of growth of new energy vehicle in China, actually, hybrids are growing faster than BEV over the past few months. So -- and we're part of those. So the answer to your question is, on a global basis, yes. And in North America, it's too early to say.

Okay. And then a second question. There's a -- I mean you debate whether it's stalling, whether it's short term, whether it's long term on EVs. But the reality is some of your customers, particularly in China and Europe are heading in that direction, maybe less so in the U.S. than we may have thought. I'm just curious, as you think about your investment, whether it be on the R&D side or the capital invested side, do you have the ability to pull back and maybe spend at a slightly more measured pace, or is it just because there's such a push in China and Europe that you can't pull back and there's nothing you can really -- you do here other than service your clients as best you can and try to cut costs to keep it down as much as possible. And maybe you could comment on really what you might think about doing on the R&D side and then also sort of on the CapEx or capacity add side?

Yes. We are managing our costs holistically in line with the current sales outlook. As Craig and I mentioned in our prepared remarks, we are setting up the company to convert mid- to high teens, no matter where the incremental revenue comes from. What I would say is try not to box BorgWarner into BorgWarner is a BEV player or a hybrid player or combustion player. We are focused on efficient powertrain. And we are now having scale in all those architectures in order to convert mid- to high teens no matter what.

And on the capacity side, is there any way to potentially be a little bit more capital efficient? Or is that possible? And I would certainly box you into a powertrain tech company across the board. That's where I'd box you, Fred. Didn't mean to put you in one direction or the other.

I think from a facility standpoint, we're flexible for some of the products that I alluded to in the prepared remarks. We have the same engineering, the same -- sometimes the same production equipment, sometimes actually the same product. Let me give you an example. We've talked about the past few years of dual inverters for hybrids. And we've talked about inverters for BEVs. All those are the same animals. They might not look exactly the same from a space and form perspective, but all the inside of the guts of those things are similar. So it's difficult to answer without a specific program. But overall, we're quite flexible across all different elements that both go in BEVs and hybrids.

Your next question comes from Dan Levy with Barclays.

Maybe in the quarter, you could just break out what was the split of revenue between eProducts and foundational? And then foundational, I assume, is still putting up pretty solid growth of the market. Maybe you could just talk about some of the dynamics driving that, please?

Yes. So Dan, the breakout of eProducts and foundational in the quarter was about $500 million, a little over $500 million eProducts. The rest was foundational. And I'm sorry, your other question just was growth in the quarter?

Yes. Within the growth over market, do you have a sense of what the growth of the market was for foundational and what regions or products were driving that?

Yes. So I would say overall, the growth was both in China and in Europe. And that includes both the growth that you saw on the foundational side of the business as well as the eProduct side of the business.

And the outgrowth within foundational was -- any sense on where that was?

You can see a lot of it in the drivetrain side of our business.

Great. Okay, and then a second question on margins. And I know you've noted that you're aiming for mid- to high teens incrementals across the business. But maybe if you could just give us a sense of within some of the foundational product, is it possible that we actually are seeing higher incremental margin simply because there's less R&D that you've incurred, less application engineering, more that you are leveraging, getting a sense whether there is some split in that contribution margin between eProduct versus foundational.

I would say that we are balancing all those costs in order to get to the mid- to high teens. And we're taking that business holistically and taking cost actions so that all product lines are being able over time to deliver those incrementals.

Next question comes from Noah Kaye with Oppenheimer.

Craig, after the dividend and the repurchases you've done year-to-date, kind of leads me around $250 million, $300 million in deployable free cash flow based off of the guide for the year. And I think we would certainly say that shares are trading below intrinsic value. So how are you thinking about the pace of buybacks for the rest of the year? Is this going to be more ratable? Or are you remaining opportunistic?

Yes. Thanks for the question, Noah. So I just want to take a step back. We repurchased $277 million of the company's shares over the last 2 quarters. So $177 million in the fourth quarter of last year. $100 million in the first quarter of this year. Obviously, pleased with our Board of Directors, we got that additional authorization, takes our total authorization up to -- a little over $760 million. We're going to continue to repurchase opportunistically, just like we did in Q4 and just like we did in Q1. I'd say as we think about capital allocation, we take a holistic approach to it. So we look at liquidity, we look at leverage, we look at is there any short-term funding for M&A that's needed. Obviously, as you mentioned, we have a dividend that's a fixed obligation. We don't want to turn that on and turn that off. And we look at stock buybacks as a lever as well. So I think as we move forward, continue to think about it, that we'll do it opportunistically. That's how should think about it.

Okay. Helpful. And then good to get the housekeeping on eProduct sales in the first quarter. Just can you give us some guideposts, even getting to the midpoint of guide for the year around how you're thinking about the cadence of ramp? I know you have some capacity coming online for battery. But is this a fairly ratable ramp? Is it really heavily weighted to 3Q or 4Q, any particular quarter? Can you just help us think through how the ramp should proceed over the course of the year?

Yes. Noah, so in Q1, our eProducts revenue went up 25%, and this is in line with our full year outlook of 25% to 40% for the year. And you're right, in the next quarter, in our ePropulsion segment, we're launching numerous programs with VW Group, with Daimler, HMC, BYD and others. We're ramping up our battery pack capacity in Seneca and later in the year in Europe, we're launching in other areas of eProducts. So you're right, it's going to increase over the next quarters.

Your next question comes from Joe Spak with UBS.

Fred, I know you sort of already touched on plug-ins a little bit in the Q&A. In your comments, you also sort of talked about turbos and other sort of core BorgWarner technology that can help with what's seemingly an increasingly choppy powertrain transition. But presumably, your customers would need to do at least some engineering, and it's going to take time to sort of have a greater adoption. So what are -- what's the conversations like with customers on some of the traditional sort of core foundational products? And how quickly can we really see potentially greater levels of adoption there?

And Joe, I guess you were thinking about North America here in your question, aren't you?

Yes, yes, yes.

Okay. Yes, because in the rest of the world, as I alluded to before, it's happening, right? I think we have all the building blocks to support our customers here in North America as they also want to have those advanced hybrids. I feel that it's still a little bit early to get into the specific cities or which products they need from BorgWarner. We are in the early phases of discussions about architecture. So I think it's going to take a little bit more time.

Okay. And Craig, obviously, great job sort of managing to the incrementals. You talked about continuing to manage to that. And I think in the past, you talked about on the foundational side, right, if things continue to go down, you'd look to restructuring or some pricing actions. But I'm curious on the other side, just given not what's a still mid- to long-term sort of trajectory towards electrification, but certainly, a lot of volatility on the programs within that. Is there an opportunity -- not this year because it's probably locked, but is there an opportunity as you think about eR&D for next year to maybe push some of that? Or is there even a pricing opportunity on some of the eProducts stuff if the volumes don't hit certain thresholds?

Joe, you may have seen that our ePropulsion segment is running at about 30% incremental a year, and we're not satisfied with that. So we'll take some steps to improve the margin performance. And again, we have a strategy to adjust costs to wherever the market is going. And we are doing that wherever it is necessary, and this is what we're looking at right now.

One follow-up on the decrementals, I guess, in -- well, I guess the battery stuff is not in eProducts. So never mind...

Your next question comes from Douglas Dutton with Evercore ISI.

Just a quick one here and then one follow-up. Can you maybe tell us the percentage of your orders from those Chinese domestics? And how that compares to the percentage of anticipated recognized revenue from that same group for 2024?

You're talking about eProducts?

Correct, yes.

So on eProducts for 2024, about 45% of the $1.9 billion in light vehicle is for China. Within that, 95% is for the Chinese OEMs.

Okay. Great. And then just on a more granular note, can you maybe quantify the exposure you have to some of those newer growers in China, the BYDs, Xpengs, Xiaomis of the world?

I unfortunately can't disclose some of those names, and I can't disclose which product we have with those names in particular. So not that I would love to do it, but I just can't.

Your next question comes from Alex Potter with Piper Sandler.

Great. So first, maybe following on that question from China. I'm interested in, I guess, hearing your opinion regarding the degree to which China, that market can serve as maybe foreshadowing or a harbinger of the way the rest of the world will evolve. Obviously, China has been moving much more quickly toward electrification. There's a lot of dynamism regarding the architectures that those new companies are pursuing. Do you think that China represents the way the rest of the world will eventually evolve? Or do you see those markets sort of trending in different directions with China doing its own thing and the rest of the world doing their own thing?

In China, under the umbrella of new energy vehicle, you will see that hybrids, essentially the advanced hybrids are having about 40% shares in China. And actually growing faster within that segment or growing the fastest within that segment. That is also our ratio of eProducts versus -- eProducts within hybrids and BEVs. For us, I wouldn't say that it doesn't matter, but it kind of doesn't matter. We have the right product portfolio to support customers around the globe. And we don't -- we're not attached to any regional specificities. We are resilient to any propulsion scenarios, fuel combustion, hybrids or BEVs. So I'm not -- I don't have a crystal ball. I won't -- I can't tell you if China is a good proxy for the rest of the world. But we believe that you will see a variety of electrified propulsion architecture, and we're ready to support those on a global basis at Borg.

Okay. Yes. Good. Very clear. Maybe the other question, more of a near-term tactical question, on another call this morning, one of your peers noted particularly over the last couple of weeks or several weeks in the month of April, some real volatility and generally downward adjustments to production schedules at the OEMs. Have you seen anything similar to that? I know that your overall market projections haven't changed versus last quarter, but anything you'd be willing to say regarding near term or back-half production schedules would be helpful.

Yes. I don't have the granularity of what happened over the past 2 weeks, but overall for the full year, our view of the market is already below companies like IHS. So -- but we will adjust to whatever comes to us.

Your next question comes from James Picariello with BNP Paribas.

Just back to the eProduct, based on the first quarter's performance and the visibility into the year. Can you just speak to AKASOL's Battery Systems revenue? I believe this business guidance, called for $700 million to $800 million in revenue. Just curious if there are any moving pieces tied to this within the eProduct range? And can you clarify what portion of this year's eProducts sales attributes to hybrid?

So this year's guidance, $2.65 billion for eProducts at the midpoint, out of which $750 million are battery packs for commercial vehicle. So $1.9 billion is for light vehicle, 40% of which is for hybrids on a global basis. Regarding your first question on battery packs, there is nothing particular in Q1. The ramp up is to plan. And what we see in Seneca and the preparation of increasing capacity in Europe is also in line with our expectations.

That's helpful. And then just as we think about foundational profitability versus eProduct the rest of the year, and I think this touches on Colin's question regarding margin cadence given that the first quarter was squarely in line with your full year range. As your eProducts revenue improves sequentially through the remainder of the year, is it safe to assume that the margin loss rate also improves? And so my question, if that's true. My question is, why would the foundational profitability degrade through the year if the full year guidance range is the right number, if that makes sense?

Yes. I think the way we're looking at it is we're focused on executing at the mid- to high teens on an all-in basis, wherever that growth may come from. So I think that's how you should think about it. We're really pleased with our 23% all in, in the first quarter. We think it sets us up quite well to execute for the full year. So that's how we're looking at it. We're really focused on incrementing on an all-in basis regardless of where the revenue growth comes from.

Your next thing comes from Luke Junk with Baird.

First, looking at the segments. Just hoping you can maybe unpack the top line strength that you saw year-over-year in Drivetrain and Battery Systems? This quarter sounded like that was foundation related in large part, maybe just sustainability of that strength in the margin, they've stepped up nicely sequentially, especially as well. I don't know if there's anything specific to point to.

Yes. I would say it was just overall good performance from a margin perspective. Again, 23% all-in, great performance by our business units. When you think about growth, it's really China and Europe both on the foundational side of the business and on the battery side of the business, particularly in that DBS segment. But we also had nice growth overall just in general, both in China and in Europe. But again, you can see most of it in the DBS segment. That's where I would point you to.

Got it. And then for my follow-up, maybe a bigger picture question, Fred. And just thinking about eProduct net engineering requirements going forward, both as you think about on a gross basis and ePropulsion margins going forward here now you can improve those margins. But I'm also wondering, just given some increases in uncertainty in the West, if you can push for more engineering recoveries as you book business or building structures to pay for more of that engineering?

Yes. I mean we're looking at all this from an engineering recovery. We're also looking at adjusting costs, especially in those segments for which growth is not happening as fast as we thought in order to improve the margin performance. So in those eProducts segments, we fully expect this business to grow going forward. And with those upcoming cost actions to get to mid- to high-teens incremental when it ramps.

We have time for one final question, and that question comes from Mark Delaney with Goldman Sachs.

I think that a part of BorgWarner's customer value proposition for eProducts has been that utilizing BorgWarner's power electronics products can be a more efficient way for OEMs to do business. I'm curious if you think that played a role in some of the wins you were able to announce today. And given the challenges that a lot of the OEMs are dealing with in BEVs and a lot of the price competition, might that be an opportunity for your bookings to outperform some of the broader market trends if some of these customers do need to find ways to be more efficient?

You're absolutely right. Power electronics is a key strength of the company. Borg has always been focused on efficient systems and efficient mobility. And power electronics is the new frontier of efficiency in BEV and -- or hybrids, fighting against those switching losses and fighting against those mechanical losses, downstream the inverter. So the answer to your question is absolutely yes. We're focused on that and at the system level, at the electronics level, at the power module level. And that's our DNA. That's what we do best.

And on eProducts, the company reiterated the $2.5 billion to $2.8 billion eProducts revenue outlook for this year. Of course, we've seen a lot of volatility in light vehicle BEV plans. And so as we've seen that, I'm hoping to better understand, do you think that the 2025 outlook that you've previously communicated in eProducts of $4.5 billion to $5 billion. Is that something you still see as achievable? And as you think about the revenue ramp and what -- maybe for 2025, maybe you could also touch on how you're thinking about eProducts profitability not only this year but into 2025?

So you're right. It will absolutely depend upon customer volume, and that will ultimately decide what 2025 will be. We are, as we mentioned, focused on what we can control, which is securing new businesses in eProducts for BEV and hybrids, focusing on strengthening our portfolio for it to remain in a great position and managing our costs in order to overall deliver mid- to high-teens incremental on an all-in basis. That's our focus, and we'll give you more color on '25 closer to '25.

Thank you all for your great questions today. If you have any follow-ups, you can follow with me or my team. With that, Britney, you can go ahead and conclude today's call.

That does conclude the BorgWarner 2024 first quarter results conference call. You may now disconnect.