Borgwarner Inc at UBS Global Industrials & Transportation Conference Transcript

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

Question: Joseph Spak - UBS - Analyst : Craig, we were just sort of chatting. Right before we started. You're coming up on almost a year of being in your new CFO role. I'm not going to ask you to rate your performance, but I guess just as a company, like how would you view performance over what has really been a quite challenging year in the industry. And what were some things you think BorgWarner has done well and execute against. And what are some areas where there can still be some potential room for improvement.

Question: Joseph Spak - UBS - Analyst : Yes. I guess that was super helpful. As we sort of think about the guidance that you sort of just laid out here, and we have reset in the year, maybe at least three production weeks, maybe even last week given some of the shutdowns -- and we've obviously seen some news. There's been some production announcements sort of here and there as there typically is. Is there anything that sort of has really caught you off guard that relative to sort of how you saw the rest of the year playing out.

Question: Joseph Spak - UBS - Analyst : Completely recognizing that you're not going to sort of drop '25 guidance on the -- here, although by all the -- but just at a high level, and understanding that BorgWarner's goal is to sort of grow faster than the market. I mean how do you see the market playing out? Because -- and maybe even if you could provide some commentary by region, there's been a lot of -- a lot going on across the three major sort of theaters of the world, whether it's stimulus in China. whether it's some challenges in Europe and then obviously, election here in the US. And has that sort of changed at all over the past perhaps on like how do you begin to, I guess, set the backdrop for how you want to plan to execute on in.

Question: Joseph Spak - UBS - Analyst : As we think about the two sides of the business, right, the foundational, call it, ice related side and sort of the e-product side. again, there's a number of things happening as we sort of think about '25 and beyond, starting with higher CO2 regulations in Europe, but also in the US maybe a further REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 1:50PM, BWA.N - Borgwarner Inc at UBS Global Industrials & Transportation Conference sort of push out of growth. So how how are you -- well, I guess, not so much how are you planning for it? What are your conversations with your customers about how they are sort of going about some of these challenges.

Question: Joseph Spak - UBS - Analyst : If they do -- I mean, it seems like they're going to have to sort of at least start to try to because it doesn't seem like things are changing in the near term. So if they incrementally push the EV portfolio and at the same time, make fewer ICs to sort of get that mix in the right spot. Is that still that you think a fairly neutral outcome for BorgWarner given that portfolio resiliency .

Question: Joseph Spak - UBS - Analyst : You had mentioned on the third quarter call that there were a bunch of product launches in the quarter and more coming in the fourth quarter. Is that the same stuff you were just talking about in terms of sort of the launches for '25? Or is that sort of separate from beginning to ramp up here in the back half of the year.

Question: Joseph Spak - UBS - Analyst : I guess if we take a step back and just sort of again, think about -- you sort of talked about out, Craig, in the beginning about outgrowing the market, and you've done that, right? What if we slice it a little bit differently and said, okay, well, here's the ice or sort of the foundational market? What's the outgrowth there. Here's the electric portfolio, e-products portfolio, here's the growth there. And like backing out the battery business, like how would you sort of -- what kind of range would you sort of put as sort of reasonable targets for each of those businesses.

Question: Joseph Spak - UBS - Analyst : So even ex the battery business into '25, there's hope for -- even if it didn't occur this year, there's hope for outgrowth ex battery on new products?

Question: Joseph Spak - UBS - Analyst : One of the things you've been able to do here, right, is -- and I'm going off memory, so don't -- I'm sure you'll correct me, but I feel like there was one year where you were increasing R&D for e-products about $100 million. And then I think there's another year that was order of magnitude similar, maybe even a little bit higher. Since that's sort of been pulled back, like if we -- like given -- I guess, how would -- what your level of R&D are we sort of back out, given sort of some of the pushouts you've seen 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. DECEMBER 04, 2024 / 1:50PM, BWA.N - Borgwarner Inc at UBS Global Industrials & Transportation Conference

Question: Joseph Spak - UBS - Analyst : Was that -- when you were increasing R&D, was that really driven by your customers? And -- or was that an internal effort to sort of try to develop product for your customers? Like how much was in launches that we have around the globe.

Question: Joseph Spak - UBS - Analyst : I'm assuming there has been conversations with those customers about failed volume commitments -- and I think even maybe you've alluded to some sort of recoveries for that? Or is do those conversations persist? And are they ongoing? And what's really -- what shape does that take because clearly, they didn't deliver on some promises, but they also sort of have the offer of new potential business. So how does that sort of manifest into sort of the BorgWarner financial.

Question: Joseph Spak - UBS - Analyst : Yes. So we touched a little bit on some of the changing landscape and while I sort of want to focus on two topics that have really come up in North America and the US, I guess, sort of post the election. One is sort of like just the EV outlook here for the US? And if you're able to sort of provide any -- or are you able to provide any sort of like high level views of how you see either what your own or BorgWarner are used over that progressing are or even more valuable, I guess, would be the types of conversations that you've been having with customers in the wake of slower uptake. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 1:50PM, BWA.N - Borgwarner Inc at UBS Global Industrials & Transportation Conference

Question: Joseph Spak - UBS - Analyst : Are they customer conversations on advanced hybrids, plug-in hybrids, range extended type vehicles? And maybe just for the benefit of the audience, can remind everyone sort of what parts of the BorgWarner portfolio from each side of the business sort of really gets on that type of vehicle?

Question: Joseph Spak - UBS - Analyst : On the plug in as well. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 1:50PM, BWA.N - Borgwarner Inc at UBS Global Industrials & Transportation Conference

Question: Joseph Spak - UBS - Analyst : Is the -- I mean, I guess, like you said, it's still sort of early, but -- so is the pace of inquiries increasing? Like what type of urgency is there, I guess, from your customer or customers -- and have you -- has that actually steadily increased throughout the year irrespective of the election?

Question: Joseph Spak - UBS - Analyst : The -- do you think there's -- historically, some of the customers, especially in North America, take some time from RFQ to sort of actually getting the product and -- do you see any -- given that the sort of it's seemingly leverages existing power plants, et cetera, right, like you could take maybe an existing engine and sort of add it to some sort of hybrid. Is there the potential for those programs to move faster? Or you think it's status quo?

Question: Joseph Spak - UBS - Analyst : The other thing on coming out of the election on investors' minds, obviously, is trade and tariffs. And I know you've got a footprint in the US and sort of Mexico. I don't want to say this is a BorgWarner issue. I think it's sort of an industry issue, especially when you look at sort of where final assembly capacity is look at and really even beyond you, a lot of other sort of supply content come from us. But just remind us of sort of your footprint and what could potentially happen if it was a place and if you're even able to offer a view or do you think anything will happen there?

Question: Joseph Spak - UBS - Analyst : Just I mean, understanding that, but like -- and understand so ultimately end up into sort of one larger negotiation with your customers. But just if for argument's sake, the tariff was put in tomorrow, right, and the product was shipped across the border, who is actually bearing the cost of that right now? Is that clear? Or is it not clear?

Question: Joseph Spak - UBS - Analyst : Okay. And it's written. And there's contracts that go both ways, it sounds like Correct. Okay. And what -- is there any components from any European facilities that end up in vehicles made in the US?

Question: Joseph Spak - UBS - Analyst : Okay. Okay. Let's sort of turn our attention to China a little bit. You talked about 90% of your e-products revenues with domestic players. So obviously, some good traction there, especially when we've seen how some of the foreign players have fared there. What's -- like can you just sort of go over the competitive dynamics and why does someone choose a BorgWarner versus a domestic supplier, especially since it does seem like there's -- not -- it's not sort of necessarily forceful, but doesn't seem like there's a push from -- within China to sort of use more of a domestic supply chain.

Question: Joseph Spak - UBS - Analyst : And on the foundational side within China, if you run sort of the numbers like a little bit more weighted towards still, I think, more sort of domestic than formed, but a little bit more foreign exposure there as well. how do you're sort of managing your footprint there as maybe some of those customers might be in structural decline? And then on the domestic side, maybe this is difficult for you to exactly know. But it does seem, which you alluded to earlier that, that's at least been buoyed by some of the export device vehicles from China to, whether it's other parts of Southeast Asia or South America. So is that a trend you expect to continue? And if they -- if they were customers begin to localize, is that something you would you look to follow them into it?

Question: Joseph Spak - UBS - Analyst : Maybe just one other thing that's sort of been on investors' minds in terms of when we sort of look at when the phone rings or when you look at the inboxes, it seems to be there's greater concern now about some of the Chinese suppliers moving into Europe or maybe moving into North America, which I don't think we've seen a ton in North America, but correct me if I'm wrong in Europe, maybe Europe seen a little bit. But that's a sort of very broad service supplier statement. What have you seen from a BorgWarner competitive perspective? And do you see that all as a sort of a credible threat for the Chinese to become larger players on a global scale?

Question: Joseph Spak - UBS - Analyst : Have you seen any of that yet in Europe or North America?

Question: Joseph Spak - UBS - Analyst : Can we just -- like can we -- I know you've done some restructuring, you sort of mentioned that, but how would you sort of assess your overall footprint? And I guess I'm specifically focused on Europe and China. Because in Europe, right, you could see sort of production is still 20% below prior peak, things have structurally changed and that as we moved from a net export market to an import market. You might have additional challenges on some of the European vehicles into the US or other markets if tariffs come into play. And a lot of those customers are struggling. So One, is there -- do you think there needs to be further work done with your footprint to stay ahead of what of challenges to see in Europe. And then in China, I guess I'm just curious, as you've sort of seen the shift between domestic and foreign, are you just sort of shifting the allocation within your facilities? Or is there an opportunity or maybe for some consolidation or other work to be done? -- on the footprint side.

Question: Joseph Spak - UBS - Analyst : Yes. I guess the question was, is it -- were some of these actions taken sort of more in response to some of the challenges or looking ahead to sort of so you don't get burned by some of the challenges? It's always proactive, meaning we know we need to continue to focus and getting cost out of our business to stay competitive to win business and then to deliver that incremental income.

Question: Joseph Spak - UBS - Analyst : And presumably, the comment you made in Europe is similar for China that it's not plants dedicated to customers. So even if there's shifts within the customers, you can sort of reallocate capacity then. Why don't we just pause to see if there's anything in the audience. Is that a question -- all right. The battery business, I think you're targeting about $700 million in sales this year. It sounds like the capacity build-out that you've done is sort of mostly complete. So are -- do you sort of hit full sort of run rate ramp in -- at some point in the fourth quarter? And is that sort of a good jumping off point to think about 25% for that business?

Question: Joseph Spak - UBS - Analyst : Right. And so I know that sort of that business provides a mix of trucks and buses. Is there any -- like Presumably, it's the Europe plant is for Europe than North America lines for Europe. Is it more buses verse trucks in North America and a different sort of mix in Europe? Or is it pretty similar across both.

Question: Joseph Spak - UBS - Analyst : And from a competitive standpoint in that business, how do we sort of see the landscape for commercial vehicle battery packs.

Question: Joseph Spak - UBS - Analyst : And can you just remind us on the Fin Dream sort of portion kicks in?

Question: Joseph Spak - UBS - Analyst : And how are the lines in the facility set up flexible enough to sort of accommodate either -- or would there be a need to be a specific portion of the plant set up to accommodate the LFP cells?

Question: Joseph Spak - UBS - Analyst : But is there room left in those plans to accommodate LFP or not?

Question: Joseph Spak - UBS - Analyst : I guess, maybe to sort of close here, you've resegmented the business into four segments. We've got two which sort of lean more are foundational to which lean more products now. I guess it's not too different from sort of how you sort of thought about the business before, maybe just a little bit more neatly aligned. But given that this is sort of still relatively new for investors, maybe just at a -- at a high level, we could sort of take a quick tour through those segments and sort of what are the growth and/or profit drivers for each of those segments, not in the very specific. I'm not talking about '25 just over sort of the midterm here.

Question: Joseph Spak - UBS - Analyst : Maybe just to close here, Aaron, you alluded to earlier the strong free cash generation and sort of the returning of all the cash. It doesn't seem to me like you need based on our conversation today, sort of a ton new incremental capital expenditure sort of -- or an increase, I guess, in sort of what you spend annually. . And then the market is going to do what the market is going to do, but you seem very focused on sort of converting in there. So to the extent you sort of are still able to sort of generate strong cash flow, like how do you sort of view the priorities for that cash going forward?

Question: Joseph Spak - UBS - Analyst : Maybe just on sort of the M&A and sort of the pipeline, I understand that there's nothing sort of immediate. But is it possible that either on the, A,

Question: Joseph Spak - UBS - Analyst : And I know we're coming up on time, but just to close that for sort of a. I guess what I'm wondering is if -- maybe it's too early to see this, but do you think there might be somewhat of a loosening or sort of maybe even sort of changing valuations on that product side in light of sort of potential push out or long needed EV adoption.