Good morning. My name is Wyatt, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2025 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Wyatt. Good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, both on the home page on our Investor Relations home page. 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 IR page 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 performance is defined as the organic change in our adjusted operating income divided by the organic change in sales. Lastly, we will 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 have 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 Joe.

Thank you, Pat, and good morning, everyone. I'm pleased to share our results for the first quarter of 2025 and provide an overall company update, starting on Slide 5. I wish to begin by thanking our employees, our customers and suppliers for all of their trust and efforts. With just over $3.5 billion, our organic sales were relatively flat despite a decline in market production. Our sales outgrowth in the quarter was strong at 3.7%, which was primarily driven by a 47% increase in light vehicle eProduct sales. This growth was well ahead of the 25% increase in global hybrid and BEV production in the quarter, which we believe further validates our product leadership position and leading-edge technology that our customers demand to solve the world's mobility needs. We continue to secure multiple new product awards for both foundational and eProducts across our portfolio. I'm pleased to announce a wide array of new business awards that I expect will support our focus on long-term profitable growth. Our adjusted operating margin performance was strong in the first quarter, coming in at 10%. This strong underlying operational performance was once again driven by eProducts growth and our focus on cost controls across our business. Next, we made two important portfolio decisions in the quarter, that will drive focus and competitiveness of our product portfolio. It's important that we continuously review our portfolio to ensure we stay focused on products that we can scale and achieve BorgWarner's 15% ROIC threshold. With that in mind, we made the difficult decision to exit our charging business. Ultimately, we did not see this business creating shareholder value within our planning horizon. Additionally, we began capacity consolidation actions within our North American battery systems business during the quarter. This was done to adjust our cost structure to…

Thank you, Joe, 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 just over $3.5 billion in sales, which was relatively flat versus prior year, excluding FX and M&A. Market production in the quarter was down approximately 3.6%. So we saw sales outgrowth in the quarter of approximately 3.7%. This was driven by strong light vehicle eProduct growth across all major regions of the world and foundational growth outside of China. Second, we had strong adjusted operating margin performance in the quarter at 10.0%. This performance was achieved despite $6 million or a 20 basis tariff headwind in the quarter. This also represents the fourth quarter in a row with a margin at or above 10%, which I believe demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter, with our results improving by over $270 million or 89% year-over-year. Now let's turn to Slide 9 for a look at our year-over-year sales walk for the first quarter. Last year's Q1 sales were just under $3.6 billion. You can see that the weakening U.S. dollar drove a year-over-year decrease in sales of $85 million. Then you can see a slight increase in organic sales, which was 3.7% above market production. This outgrowth was due to a 47% increase in light vehicle eProduct growth across all major regions as well as foundational growth in Europe, North America and the rest of the world. The sum of all this was just over $3.5 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 $352 million, equating to a strong 10.0% adjusted…

Thank you, Craig. Wyatt, ready to open up for questions.

Thank you. [Operator Instructions] And our first question will come from John Murphy with Bank of America. Please go ahead.

Good morning, guys. I'm going to try to steer clear of tariffs and get to the core business. If we think about Slide 6. Joe, I mean, you have some great extensions here and some great wins. I'm just curious as you look at those business extensions on foundational products, what that ultimately means for the need to, maybe reinvest a bit as those programs get extended in tooling and other PP&E, and what that could mean for returns and margins. But then also as we think about these eProduct awards, which sound like they're pretty good wins here, some pretty big products, what are the kind of the return characteristics you're expecting there? And one of the big things that's happening right now is there's concern around rare earths. So as we think about eMotors and other eProduct, is there any kind of risk that we should think about there or solutions that you found?

Sure. So. Good morning, John. So I'll speak to the extensions first. I think this highlights really the strength and the stickiness of our portfolio. We're excited when we get an extension, so you can expect continued strong margins, and similar profiles to what we have today. With regard to some of the newer wins I mentioned, this is fantastic, especially, because they're related to hybrids. We're starting to get more clarity from the OEMs, as they finalize some of their cycle plan changes. And I think the first quarter wins, really gives me confidence that we've got great products and our customers are demanding them, and they're fitting into this hybrid space, which we've all been waiting to see some of the growth there. And then finally with regard to rare earth. So we do have products that consume rare earth elements, and specifically magnets. So as with any constrained component area. We have teams in place to manage through that. There is a license you can submit with a 45-day lead time to the China government on that, and we're hopeful to get approval on those. And in the meantime, we continue to look for other options to make sure we can continue with supply.

Okay. And if I could just sneak in one, follow-up on the portfolio actions. It seems like these are really great returns. I mean, is there anything else that is in the portfolio, or you're just constantly reviewing this, Joe, as you kind of stepped into this new role in leading the company and making some tough decisions that maybe weren't made in the past, or the market is shifting, that battery exit of, $10 million cash cost and then $20 million benefit operating income next year, is quite phenomenal, right. I'm just curious if there's anything else like that out there?

Yes, so you're right. I mean, we have taken a critical eye to the portfolio, and I think that's, important for us to do, to be decisive around areas of the portfolio that we don't see us building, the scale we expect or reaching our 15% ROIC target. So that's exactly what happened with regard to charging, and also the battery consolidation, the battery consolidation of capacity in North America. We really got there due to this lower volume we expect in North America than when we started the year. So we think it's going to position us well for the long-term, improve our competitiveness, as well as bring some short-term returns due to the cost reduction. So we still feel technologically and from a competitive standpoint really good about that business. But as usual, we want to take decisive actions when we see some of the market dynamics that we see today.

Very helpful. Thank you guys.

And the next question will come from Colin Langan with Wells Fargo. Please go ahead.

Oh, great. Thanks for taking my questions. On the slide, you indicate China growth over market was modest positive, which is a pretty good start, because that's been a point of investor concern. I thought the comps actually start to get better next quarter. So how should we think about this trending through the rest of the year? Is this sort of the start of things turning in that market?

Yes Colin, I'm not going to comment on the rest of the year. Obviously a lot of moving pieces right now, but as we look at Q1, we feel really good about our growth in general, or outgrowth in general, and especially our China business. Again, just a couple of numbers for you. We outgrew the industry by about 3.7% overall. And where did that come from? A lot of it was on the light vehicle side of our portfolio. Light vehicle key product growth, 47% we've been talking about for some time, really watch PDS. PDS grew quite significantly in the quarter, about 30% year-over-year. But when you look at the light vehicle eProduct portion of the portfolio, they grew by over 60% year-over-year. And the good news, is we saw that across all regions of the world, North America, Europe, China. So we're really seeing a nice pull from that business. So that's the comments I would have on your question.

And maybe to add a little bit of color to that, I just returned from China at the Shanghai Auto show, and it just confirms to me in that market there's still a lot of demand for our competitive technology. Our speed that we're operating in that market really sets us apart from our competition. Just one example, we launched with a leading Chinese customer, a dual inverter, second half of last year, and we launched that in 10 months. Now they're asking for us a capacity uplift. In fact, they want to double the capacity, and they're asking for it to be installed in June. So, the speed of that market combined with the success we're having, we're really optimistic about the growth potential there.

That's great color. And then just normally you guys take a very conservative approach. If I look at the slides, I think the midpoint of the light vehicle market outlook is down too. I think that's just in line with S&P, which I think for the last couple of years you've been haircutting. What gives you confidence that that's right? Or is it just that you kind of broaden the range on the downside, to kind of help frame things, because of the uncertainty?

Yes. So just to recap, where were we in our February guide? We assumed overall light vehicle production down 1% to 3%. We're now expanding that to 2% to 4%. The question is why? It's really North America. When we think about North American production, that's where we're a little concerned. We were assuming down 3% to 4% in February and now we're assuming 7% to 12%. So that was really the shift that, that you see in those figures.

That's very helpful. Thanks. Thanks for taking my questions.

Thank you, Colin.

Next question will come from James Picariello with BNP Paribas. Please go ahead.

Good morning, everybody. Yes, I actually was going - to hit on North America light vehicle production. You're down 7% to 12%. I think that's quite conservative for the second half, and a great sign with respect to the implications of your guidance framework. Just curious if you're seeing anything in build schedules this quarter, or launch intentions for the second half that, informs this view for North America? Thanks.

Yes, so maybe starting with the first quarter, production very strong or what we expected. Second quarter orders also look good. There's nothing really in the midterm order bank where we see that there's going to be a major reduction here. But I think we all are anticipating, some changes in the market as these tariffs take hold, and due to the overall macro uncertainty. So, I think our guide is appropriate and as things change, we're going to adjust quickly as we normally do.

Understood. And then Craig, just to clarify, FX is an incremental headwind in terms of the guidance revision. I just want to clarify that. And then to also confirm, your tariff recoveries are embedded in your core sales range. Is that correct? Thank you.

Sure. Yes, so from an FX standpoint, FX is a tailwind to our prior guidance. So it's about a $250 million tailwind. It's really coming from the euro and the Chinese renminbi, so against the U.S. dollar. So that's how to think about it from an FX standpoint. We have included tariff related recoveries into our guide. We've effectively assumed, and we're expecting 100% recovery from our customers, as we get to the lower end of the guideline. We did provide some discount, and that's really related to timing. A good example of that is in the second quarter, where we will have an impact from tariffs, but we're going to be working through the recovery process with our customers, and there may be a timing component there.

Appreciate it, thanks.

Thank you.

Your next question will come from Joseph Spak with UBS. Please go ahead.

Thanks everyone. Maybe just sticking with tariffs for a second. So you're basically saying something over $200 million of impact for this year. It actually seems a little bit high relative, to some disclosure you gave in the past, which is $865 million of annual imports into the U.S., but like 60% of that was Mexico, Canada. I know you've got some from Europe, and a little bit from China that obviously has a very high tariff rate, but it still seems like a pretty high number. So can you just help us understand how you're getting to that level for three quarters of?

Sure, yes. I can bring you some color there. So maybe first of all it's important to know our updated guidance includes everything, we know about tariffs. So whether it's IPA tariff, 232 auto parts, reciprocal tariffs, or these retaliatory tariffs, everything we know is in the guide. We've already started mitigation plans and customer recovery where short-term mitigation is not possible. From our view this is a manageable item overall. So compared to six weeks ago, there's a lot more clarity out there, and I believe from a tariff impact that's more manageable. My bigger concern is on the production outlook, but I'm confident in our teams will manage through that just as they always have. To your point around, it's a little bit larger than maybe you expected. Just as a reminder, 55% to 60% of our COGS is material. So compared to some of our peers, where maybe labor is higher content, that's our material portion of sales. 100% in this market of our Canadian imports are USMCA compliant and 70% of Mexico, so that gives you a little more color, about the size of it. And I would say the IPA portion of this is really only a quarter of the total amount. So, for us it's really important to take a global view, identify mitigating actions and customer recovery. And I'm really confident in our team and their ability to manage through this.

Just maybe a quick follow-up. I just want to make sure I understand you're saying that the imports you mentioned on the compliance, that's sort of more direct, but then because you're buying some components, the cost of those components is going higher, because your sub suppliers are facing tariff headwinds, so they're passing it on for you to pass on, is that what you mean?

That's correct. We have both direct, we call them direct impacts where we're producing, let's say in Mexico and we're striving to get to USMCA requirements. And then we have other ones that are more indirect, and that's where we purchase components that are being tariffed inbound. And that could be tariffed inbound in this part of the world, or it could be somewhere else in the world. And I'm sure Pat's happy to walk you through that in detail.

I can't wait. Second question is just cash balance, expected free cash flow for the year. Clearly you guys are in a really good position here. I'm just wondering how you're thinking about deploying some of that cash, and what you admit is a little bit of a uncertain environment, at least for the back half. And I guess the other part of that is, are you reconsidering any timing of buybacks given the multiples near five-year lows?

Yes, thanks for the question. So agree. We have a nice strong balance sheet at the end of the quarter, and we're still expecting to generate about $700 million in free cash flow at the midpoint of our guide. Q1, great execution, 89% increase in free cash flow, better by $280 million year-over-year, so, great Q1. We take a step back. What's our goal with our cash and the strength of our balance sheet? Our focus is creating additional shareholder value and it's going to come in multiple areas. It's going to either come from inorganic investment dividends or buybacks like you saw last year. We continue to look at buybacks as a lever to create shareholder value. In fact, we repurchased $400 million last year. We're going to continue to look at, look at it opportunistically as we work through Q2 and the balance of the year.

Appreciate it.

Thank you.

Your next question will come from Dan Levy with Barclays. Please go ahead.

Great. Good morning. Thanks for taking the questions. Wanted to start first with a question on some of the M&A deals of the past, and so recognize that charging, you've come to the conclusion that it's just -- it's not a profitable business. But maybe we can go back to some of the other deals you've done. AKASOL Central, the market's different, we appreciate that. And you've done some restructuring. But are these deals still driving the initial benefits that you expected? And so charging was a bit of a situation -- a different situation. Wondering how you're viewing maybe what other actions you may need to take to the portfolio?

Yes. So, first of all, we won't comment on any particular acquisition that we've done in. We're continuously reviewing the portfolio to see areas we can strengthen it. In the case of charging, our overall assumptions change for that business, starting with the market outlook. And then second, our inability to build scale in a timely period where we could reach our 15% return on invested capital targets. So, we're going to take the same discipline that we're reviewing our portfolio with into future M&A. I think it's important that, when things change that we give it a critical eye and we take decisions as appropriate.

Okay. Thank you. And then similar as a follow-up, wanted to ask about the margins in power drive and battery, recognizing there's been obviously some lumpiness in the volumes. You're taking actions here on the portfolio side. You do have some restructuring. But maybe you could just refresh us on the path for both of those to reach breakeven? What other actions there are? And maybe just anything that's going to impact the direction margins here?

Yes, Dan, maybe I'll just comment on the first quarter. So when you look at power drive systems, really strong growth in the quarter, up 30% year-over-year. I mentioned earlier, light vehicle eProduct growth, up over 60% year-over-year across every major region of the world, North America, Europe and China. How did they convert on that growth? About $0.15 on the dollar. That's a nice strong conversion. Gives Joe and I a lot of confidence that we have that cost structure right. We fully expect that business to grow and we expect it to increment in the mid-teens. When you look at our battery business, down about 15% year-over-year, not because of units, but because of battery cell prices coming down, which we spoke about -- we spoke about throughout the first quarter, they did decrement at about $0.26 on the dollar. That's higher than we'd like. And that's why we took some of the actions to restructure North America that Joe spoke about.

Okay. Thank you.

Thank you.

Our next question will come from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, good morning. Thank you very much for taking my questions. The company has products that are applicable for all powertrains, as you mentioned, and illustrated well by the various awards you announced this week. When you take all that into consideration, can you speak to your thoughts about the ability to drive revenue growth over a market in the medium to longer term with both foundational and eProducts? Especially, as you mentioned, OEMs are starting to settle on their updated plans for combustion hybrid vehicles. Or do you see the top line going forward as more driven by eProducts?

Sure, I can answer that. So, when we think about our portfolio where we're number one or number two on the foundational side and we're growing and building scale on the east side, beautiful part about hybrids. Beautiful part about hybrids, it pulls from both sides of the portfolio and the content per vehicle opportunity for us is quite high, so, many of these products from our portfolio show up on these hybrids. From our first quarter announcements, you can see we're winning solid businesses on these advanced hybrids. So, our focus is to drive outgrowth over and above our end markets. And it's through leveraging our portfolio and our core competence and then as we do that, drive enhanced financial performance to expand margins and generate strong cash flow.

Thanks for that. My second question was on the China business. You reported some nice growth in China. You spoke about the positive feedback you had at the Shanghai Auto Show. But that said, can you talk about any incremental risk or challenges to the China business going forward when you consider the geopolitical and tariff environment, including potential for more pressure from local suppliers, insourcing, or maybe any tariff costs specifically within China that you're going to need to manage and perhaps price for? Thanks.

Yes. So to date, we continue to see positive trends in the Chinese business. As you mentioned, we modestly outperformed the market during the first quarter. This is mainly supported by the eProduct growth. It is a competitive market. But I always like to come back to why do customers want to work with BorgWarner? And I heard this a lot when I was at the Shanghai Auto Show. First, it's just our ability to bring competitive technology to the market. The second is we got great customer intimacy. We've been in China over 30 years and we've had terrific, strong relationships, especially with the domestic OEMs, who really command more than 70% of that market today. And we're slightly overweight with the domestics. I think the third is, really our speed to market. I gave the one example. So although it is a very competitive market, it's a very attractive market. We see the transition toward hybrids and new energy vehicles, and that's exciting for us, because we really get to exercise our new portfolio and we still feel quite optimistic about China.

And just specifically on tariffs in China, I think you have an in-region, 4-region approach in general. But are there any exports into China that are facing higher tariff costs you need to pass on?

Yes, I think the largest one that probably most people speak about is semiconductors. So we are working on mitigation actions for semiconductors and there may be one or two other commodities. But as I stated earlier in the call, for me this is a very manageable issue for us. So I'm confident our teams will continue to find mitigating actions.

Okay, thank you.

Our next question will come from Emmanuel Rosner with Wolfe Research. Please go ahead.

Great. Thank you so much. I was hoping to follow up actually on the tariff cost of north of $200 million. And I'm not sure I fully understand where they come from. Any way you can give us some color or maybe bucket it in terms of what really goes into these tariff costs? Because as was mentioned earlier in the call, I think you cross the U.S. border with maybe like $900 million of parts. So $200 plus million of that would seem to be like 25% of the total, but yet you have high USMCA compliance. So maybe if there's a way to bucket what goes into that $200 million? And also how much of those recoveries have already been negotiated with customers versus even the negotiations that still need to happen?

Yes. So when we look at our overall exposure, like we've been discussing, it's about 1.6% of sales across the organization. And when you break it into its pieces, about 50% is IEPA related and auto parts 232 related. The remaining 50% is China retaliatory reciprocal related. So that gives you some detail. Again, Pat can take you through even more details after the call. From a negotiation standpoint, what's our goal? First is to quantify it, which we have. Second, we're looking to mitigate. And third, we're working through the recovery mechanisms with our customers.

Right. So where are we in this process?

So if we talk specifically about USMCA, we're striving to first achieve USMCA compliance. If you look at Mexico, we're at about 70% and climbing for the non-compliant part, actually, we've recovered or we've got line of sight on about 50% of that from customers. So well underway, our teams are stood up. We've dusted off, what we call the inflation playbook. And we're very versed in how to negotiate with customers on these recoveries.

Great. And then a follow up on eProducts. I think your prior guidance embedded strong growth in eProduct components business. Maybe $0.5 billion or more driven by these new launches. Can you update us on, I mean, you give some color on how those launches are going and obviously Q1 progress was strong. What's embedded in the updated guidance from an eProduct point of view?

Yes, so we're not providing any detail on the guidance with regard to eProducts. Nevertheless, what we've shared is the number, the large number of launches we have on the eProducts side, over 20 of them ongoing. And as those products launch, we believe that's going to continue to create a tailwind for us on eProduct growth. So we haven't seen, substantial delays on these launches. We continue to monitor it closely with customers, but from where we sit today, we feel quite good about the first quarter, and the future prospects of eProduct growth.

I can share with you our eProduct sales in the first quarter, which will be published later today. With our 10-Q, we were right around $640 million, and that was up from about $500 million in Q1 of last year.

Great. Thanks for the color.

Thank you.

Our next question will come from Luke Junk with Baird & Company. Please go ahead.

Good morning. Thanks for taking the question. Covered a lot so far today. So maybe just one question for me, hoping you could just speak to tariff recoveries relative to the business segments, maybe and if there's anything worth spiking out, as we think about modeling across the business. I'm thinking maybe foundational versus eProduct at a high level, and things that maybe first flush might not be obvious in terms of the battery footprint is in the U.S. But I'm assuming there's some components coming in from China there, and then maybe rare earth into PDS as well? Thank you.

Yes, I can speak to that. We're not going to break it out by segment. I think what's more important is first, we spent a lot of time clarifying the impact of tariffs. So compared to four or six weeks ago, we've got quite good clarity on it. Then it's all about mitigating actions. How can we achieve USMCA compliance? Are there other ways to mitigate some of the impacts? And then finally, beginning the customer recovery discussions, which we've already done. So we're well underway here. I think we're quite confident in managing through this topic, independent of which of the four businesses that's flowing through. With regard to the battery side, maybe you can clarify your question again.

Yes, just in terms of any components. I mean, the footprint for battery in U.S. in South Carolina. So not a Mexico or USMCA compliance question, but just in terms of components that might be coming out of China falling into battery?

Yes. So that business, like the others, will have some impact due to tariffs, but again, very same playbook, working to mitigate and then where we're unable to mitigate in the short-term. Discussing with customers our plans to recover, which by the way, we expect 100% from customers on the short-term mitigation.

What do you think about the battery business? It's really those cells that come from Korea. So that's the major impact for that business.

Got it. That's very helpful. Thank you, Craig.

We have time for one final question and that question comes from Edison Yu with Deutsche Bank. Please go ahead.

Hi, thanks so much. This is Winnie on for Edison. I was wondering if you can help us breakdown the outgrowth for this year of 240 to 400 bps. If there's a way to sort of break that down between foundational versus eProduct?

Yes, we don't provide that breakout. We're looking to outgrow on both sides of our portfolio, whether that's on the foundational side, or the eProduct side of the portfolio.

Okay. Got it. And then just on maybe M&A opportunity, how you're viewing the pipeline, the current macro environment, if acquisitions and bolt-ons, are still sort of the strategy for eProduct growth in the mid to longer term? Thank you.

Sure. We still remain active on reviewing our pipeline for M&A. So we especially think with all the turbulence in the market, it may create some compelling opportunities for us, and we're not limiting our scope on it. The way to think about it is, we've really opened up the aperture in acquisition targets, to leverage our core competence and where we can drive growth and shareholder value. But we've raised the bar in terms of criteria. So, to review those. First of all, any target needs to really have industrial logic. How does it leverage our core competence and drive growth. The second is, near term accretion. We want to select targets that are going to be accretive more near term in nature. And then lastly is valuation. We don't want to overpay and especially during, times like today where there's a lot of turmoil. We need to run a lot of different scenarios around these targets, to make sure that over the majority of scenarios, the valuation is consistent with our willingness to pay for the target. So with that said, we've used the first quarter to look through the pipeline. We've actually passed on a number of targets, because they didn't meet one of those three criteria. So we want to continue in a disciplined way with the M&A and as Craig had mentioned, we're in a strong cash position. And we're not afraid to use all the tools in the toolbox, including buybacks if necessary.

That's helpful. Thank you.

Thank you.

Thank you all for your questions today. If you have any follow-ups, feel free to reach out to me, or my team. With that Wyatt, you can go ahead and conclude today's call.

Thank you. This concludes the BorgWarner 2025 first quarter results conference call. You may now disconnect.