Borgwarner Inc at Barclays Industrial Select Conference Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Dan Levy - Barclays Bank - Analyst : <_ALACRA_META_ABSTRACT>Joe Fadool, the company's newly minted CEO, although a long-time veteran, CFO; and then Pat Nolan, who leads the IR as well. So we're going to go through a series of fireside chat questions. And we've reserved time at the end for any questions if anyone has. So maybe I'll kick off, Joe. Maybe just big picture. You're new to the CEO role, but you're a 15 year veteran of BorgWarner. What are the priorities or the agenda as CEO? How is that similar to your predecessor? How may the agenda differ a little bit? Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. So I've been with the company 15 years, and BorgWarner, as you know, is renowned for our foundational products, whether it's turbochargers or four wheel drive systems, EGR and timing drive systems where we're number one or number two in each of those markets. About 10 years ago, we started, I would say, the journey more into electrification. We purchased Remy International, which brought us some great motor technology. And over the last four or five years, we've done a number of acquisitions to really accelerate our portfolio into the space of inverters, motors, drive modules, onboard chargers. So when I step back today, one could argue we have maybe one of the strongest powertrain portfolios out there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2025 / 1:40PM, BWA.N - Borgwarner Inc at Barclays Industrial Select Conference So I'm really pleased with the portfolio. It's very resilient. And in today's market where there is a lot of turmoil. And I would say where the regions are growing at different rates of hybrids and BEVs, we're in a great position to capitalize on that, whether it's in the combustion side or whether it's in the E side. So my focus is to really drive our growth across the entire portfolio, and we're going to do that by leveraging our core competence. The second is really to build on the strong portfolio we have and achieve that growth both organically and inorganically. And then finally, drive financial performance across the company, and we'll do that by expanding margins and strong cash flow.

Question: Dan Levy - Barclays Bank - Analyst : Okay. Another point on your growth in the context of maybe some of the broader macro conditions that we're seeing. Maybe you could just talk about if there is any volatility that's embedded in that growth outlook? And specifically, I would just refer to, I think we know in Europe, the big thing that's happening this year is the onset of stricter CO2 regulations, has the opportunity to potentially drive a lot of EV business or could create volatility. So how much has that been factored into the outlook? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2025 / 1:40PM, BWA.N - Borgwarner Inc at Barclays Industrial Select Conference Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. So if you think about Europe, there's what they call the strategic dialogue right now and whether they're going to continue with the fines that have been regulated in 2025 or not, there's arguments on both sides. Some countries are pushing for the fines to be fully enforced. We believe, based on the information we have, probably the fines will come in a little bit softer. Our focus is really on helping these OEMs meet the regulatory requirements. So whether that's emissions, lower emissions or better fuel economy on the combustion side or of more affordable EVs. And of course, all these OEMs are working on the affordability side for the EV. So we feel, regardless of what happens, again, we've got a very resilient portfolio. We expect to thrive independent of what happens on those fines.

Question: Dan Levy - Barclays Bank - Analyst : And key products within that segment. I know there's a broad range. But in the past, I think we've always looked at sort of signature products to us, I would assume it's inverters, right? You've talked about a lot of really large inverter wins. How is it by the product? Is inverter still the dominant product here?

Question: Dan Levy - Barclays Bank - Analyst : Okay. Another element of the E-product, Power Drive, I would say, dialogue debate was the question of vertical integration. There was a point in the past where everyone thought automakers were going to do everything themselves and then what BorgWarner be left with? I think we've seen clearly automakers changing course a bit. So where are we on this vertical -- the threat of vertical integration from automakers? Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. So vertical integration is something we get less and less questions about just to kind of put it in context, although there is vertical integration by some of the OEMs across the portfolio, the content per vehicle, opportunity for us is 4 times or 5 times higher than it is on combustion, which, from our view, this well overcomes this risk of in-sourcing. We don't see material changes one way or another. Why do OEMs come to BorgWarner? It's really for two reasons. It's we can develop and bring them technology at an affordable price. And the second is really what I started to mention earlier, our customer diversity allows us to bring scale that they otherwise may not be able to bring on their own and many of us know scale is very important when you talk about electronics and semiconductors and power modules, it's what really helps you develop that new technology and get it into market.

Question: Dan Levy - Barclays Bank - Analyst : Okay. I'll get to foundational just one second before we do that battery. Maybe we can talk about some of the dynamics in battery. You've guided revenue to be down this year. Volumes flat. There's some dynamics on cell pricing. Maybe you can talk about the underlying dynamics in that commercial vehicle battery business? And when might growth eventually resume here? Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. So last year, we did see excellent growth, 30% or better, and we executed well on that growth. So I'm really proud of our team. This year, from a unit perspective, we're going to be flattish I would say we'll have a little bit of a headwind on the revenue side because cell pricing is coming down. So I'm really bullish on the battery business. If you think about the targets we set for ourselves when we bought AKASOL, we're slightly ahead of those targets today. We're also continuing to invest in established partnerships. Last year, we established a strategic partnership with FinDreams, which is a subsidiary of BYD to deliver LFP technology outside of China. So LFP is a very affordable cell base, it's 30% less expensive than NMC packs, which we're producing today. So we feel we're in a very good position. We're the second largest independent battery pack maker in the world. And maybe one additional proof point on batteries. A lot of these commercial vehicle batteries go into trucks and buses. And if you look at Europe, the bus market, 90% of the buses need to be electrified by 2030. So that's right around the corner. So for us, we see the market pull, we see the regulatory requirements there. So we expect good things out of that EV bus market, especially.

Question: Dan Levy - Barclays Bank - Analyst : And as far as the core sort of product, again, you have a wide range of foundational product. Are you seeing your moats there wide, meaning turbos, I think historically, you had, call it, like 25%, 30% share. Is that becoming a more dominant position for you? Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. I think the best way to view that is, since we are number one or two you're going to see some of the weaker players, we believe, not able to invest in technology. If you think about it from an OEM standpoint, the reason they're going to EVs is for lower emissions and improve the overall economy of energy. If instead, they're going to shift back to hybrids, which by the way, pull from both sides of our portfolio, or pure combustion, they will often need better technology to meet the emission requirements. So you need to keep investing. So we think we're in a great position because we can continue to invest in those businesses as necessary. But also maintain scale in that business. So we expect the moat will stay or even widen.

Question: Dan Levy - Barclays Bank - Analyst : Okay. Great. Okay. Double-clicking on what you've mentioned before, Power Drive in China. You're heavily overweight on the domestic OEMs. Maybe you could just give us a little more color on customers or what products? And when do we start to see that position with the domestic OEMs who have been growing really well start to lead to more of a positive revenue inflection on your China business.

Question: Dan Levy - Barclays Bank - Analyst : And the margins on the China business, how should we look at that relative to the rest of the world?

Question: Dan Levy - Barclays Bank - Analyst : Okay. Let's talk about margins. And I want to just take a look back at 2024 first. Very interesting margin performance because you had revenue down slightly, but your earnings was up, [call it $50 million or $100 million] revenue decline, margins up 50 basis points. So can you just unpack what we saw on the strong margin performance despite the revenue decline? And how does some of this carry over into 2025 as well?

Question: Dan Levy - Barclays Bank - Analyst : And in 2024, we saw that margin performance really outstated in -- overstated in the foundational segments. So Turbo, thermal, drivetrain. Can you explain what's going on in those segments that's making that margin dynamic more pronounced? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2025 / 1:40PM, BWA.N - Borgwarner Inc at Barclays Industrial Select Conference

Question: Dan Levy - Barclays Bank - Analyst : Okay. Can we talk about the restructuring? Because you've done, I would say, a couple of layers of restructuring. There's been restructuring in Power Drive to get those margins to be on track. You've also taken restructuring in the foundational side. I think we know Europe is structurally overcapacity. This is the case for everyone. To what extent do you think that there's further action that's required? And do you think that your E-product footprint matches the maybe, let's call it, the new EV outlook that we're seeing as opposed to the more euphoric outlook that we saw from a couple of years ago.

Question: Dan Levy - Barclays Bank - Analyst : Okay. One last one on margins before. And then I do want to hit on a couple of the ARS questions and we'll wrap with one last one. Maybe you can talk about how you're looking at R&D on an absolute basis, but also how is the resource allocation between foundational and E-product how might that be shifting given we've seen some uptake curves on EV changing? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2025 / 1:40PM, BWA.N - Borgwarner Inc at Barclays Industrial Select Conference

Question: Dan Levy - Barclays Bank - Analyst : Great. Let's pull up the ARS questions. And I want to start with, if we could go to -- let's -- okay, fine. Do you currently own the stock? We'll do a couple of these lightning round. I hope you own the stock.

Question: Dan Levy - Barclays Bank - Analyst : Everyone here on the stage own some -- stock.

Question: Dan Levy - Barclays Bank - Analyst : Okay. Okay. Good. Second question, general bias towards the stock right now. And I think that part of this is we need to -- you can start the clock. In the context of the broader supplier universe, I would say there's broader macro pressures that all of you are managing. So I think this is maybe. Okay, positive. Through cycle EPS growth, if you go to question number three. And I think this has always been BorgWarner in the past has been you can start the clock. Growth, but I think you're hitting on both levers on the margins and the growth, I assume that, that's still the focus for you. Okay. Okay. If we can go to question number four, please. And question number four capital allocation. Okay. Well, while it's getting pulled up, maybe we can just -- a question on [capital allocation]. Maybe share buybacks versus M&A. Your multiple is compressed. That is the case for all suppliers. How are you thinking about that M&A versus share buyback calculus right now? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 19, 2025 / 1:40PM, BWA.N - Borgwarner Inc at Barclays Industrial Select Conference Joseph Fadool - Borgwarner Inc - Vice President, President and General Manager of BorgWarner Emissions, Thermal and Turbo Systems Yes. So if we think about the overall allocation of capital over the last couple of years, we've used share buyback, I would say, quite well, especially in 2024 where we bought back $400 million of shares. And actually, since 2020, about $1 billion of shares. So we're very assertive on that side, using that as a tool I would say with regard to M&A, this is a tool we've always used and we will continue to use it. If you look at the industry turmoil right now, it's actually a very unique opportunity to evaluate potential targets. But when we do that, we're very thoughtful. So there's three things that really are important when we look at M&A. The first is -- is there a strong industrial logic to it? Does it leverage our core competence as a company? The second is really around how quickly can we make it accretive. We had to do some very challenging and, I would say, strong bets on to the E side in the last few years, sometimes taking assets that weren't always accretive quickly. Going forward, we see that these assets need to be accretive sooner than later. And the last is valuation. We don't want to overpay. And with also this turmoil in the industry, we need to run through a number of different scenarios to make sure we can achieve that. So those are the three things we're looking at. But we're going to use both share buyback and M&A as a way to drive overall shareholder growth.