Borgwarner Inc Q3 2024 Earnings Call Transcript

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

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : Great. Thanks for taking my questions, and congrats on a good quarter in a pretty tough market. I wanted to ask, if we go back to the Investor Day in June of last year, you actually talked about a 10% margin in 2027. Now I think at the high end of your guidance, you could be there this year, which is pretty impressive since the world has actually been a bit worse over the last 1.5 years. How should we think about margins from here? Is there anything kind of that might prevent you from getting above that 10%? It sounds like you expect to convert EV or ICE at the same contribution, so that would imply if we have growth, if we could kind of beat that '27 target already?

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : Yup.

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : I guess, just to follow-up on the long-term 10% target -- you're pretty close there. Anything that we should be thinking about as we think about '25, '26 that would sort of prevent getting above that target? Because it seems like you're pretty awful close.

Question: Colin Langan - Wells Fargo Securities, LLC - Analyst : Got it. All right. Thanks for taking my questions.

Question: Dan Levy - Barclays - Analyst : Hi. Good morning. Thank you. I wanted to just double-click on the margin in 3Q. Based on the revenue decline at a 20% decremental, that would've been, call it, a $37 million EBIT hit. But instead, you were plus 15% on the year over year. So that's a $50 million plus swing. It's even more if you're adjusting for Eldor. So maybe you can just decompose that. I know you mentioned there was the $24 million benefit for ePropulsion, but there's still another gap. And then maybe on the $24 million, how much of that is sort of recurring -- sort of the ongoing restructuring benefit versus maybe a one-time benefit?

Question: Dan Levy - Barclays - Analyst : And what's the ongoing restructuring benefit? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 1:30PM, BWA.N - Q3 2024 Borgwarner Inc Earnings Call

Question: Dan Levy - Barclays - Analyst : Okay, got it. Thank you. Second, I appreciate with the new segment structure, we can now better see the battery business. If you could maybe just double click on the growth there. How much of that is just strong demand versus getting new supply online? I think a lot of it is new supply. What type of growth profile we can expect for this business? And then interesting to see that it's near breakeven. Should we just assume that this is going to increment that your mid- to high teens, and you're working your way up as you continue to grow? Just a way to think about sort of the margin profile of that business over time.

Question: Dan Levy - Barclays - Analyst : And the supply versus demand dynamics, how much of this is just sort of new supply heading?

Question: Dan Levy - Barclays - Analyst : Okay, thank you.

Question: Joe Spak - UBS - Analyst : Thank you. I guess, maybe just to sort of follow on Dan's question there with some of the new segmentation. Like, we have seen pretty steady improvement in the margins in battery and charging. And I know -- I think your capacity is sort of fully built out by the end of this year, and you're going to sort of fill that up. So is getting to positive margins just sort of the remaining -- filling up that sort of remaining capacity, or are there other actions in that segment? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 1:30PM, BWA.N - Q3 2024 Borgwarner Inc Earnings Call

Question: Joe Spak - UBS - Analyst : And the build-out is effectively done this quarter?

Question: Joe Spak - UBS - Analyst : Right. And then just -- Craig, you sort of stressed, I think, a couple of times, right, all the cash generation was redeployed to shareholders this year between the buyback and the dividend. I appreciate we're sort of not talking about '25 yet. But I mean, is that a sort of similar paradigm that we should expect going forward here over the coming years?

Question: Joe Spak - UBS - Analyst : All right. Thank you.

Question: Adam Jonas - Morgan Stanley & Co. LLC - Analyst : Thanks, everybody. Joe just asked my question on the free cash flow paradigm and how much of that's returned. So just one left for me. I know you're saying the $24 million of recoveries is one-time, won't be repeated. But it does seem like the narrative from your customers is pushed out, written off, canceled, at the margin, EV programs. And some of them are quite sizable, including from the likes of Ford and some others. We suspect that will continue. So I didn't know if that was -- again, not calling out in a specific quarter or the occurrence of one-time items. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 1:30PM, BWA.N - Q3 2024 Borgwarner Inc Earnings Call But am I right that if I'm looking ahead 12 months, there is a possibility for more recoveries from OEMs, given what has been announced and what you're seeing in your discussion so far of cancellations of eProduct and EV-related products that you spent money on and may not be made at anywhere near the volumes which you expected or at all? Thanks.

Question: Adam Jonas - Morgan Stanley & Co. LLC - Analyst : Thanks, Fred.

Question: John Murphy - BofA Global Research - Analyst : Good morning, guys. Fred, I just wanted to ask, on slide 6, when you look at something like the transfer case extension, how much new capital needs to go into investing in sort of that next-gen product? Is it minimal? And as we see these extensions on the ICE side, could the profits and returns be significantly -- or margins and returns could be significantly better than they have been historically or even just a bit better?

Question: John Murphy - BofA Global Research - Analyst : Okay, that's helpful. And then just a second question. A lot of other suppliers are kind of alluding to the bidding process or the program bidding process being pushed out quite dramatically. But once again, on slide 6, you're showing some pretty good wins. I just wonder if you could characterize your quoting activity right now and if you think it's very different than history or disrupted by EVs. I mean, what's your current take on that? And is there anything that's really shifted maybe in absolute terms or maybe just timing terms? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 1:30PM, BWA.N - Q3 2024 Borgwarner Inc Earnings Call

Question: John Murphy - BofA Global Research - Analyst : But would it be fair to say that does not have a significant impact on your mid- to long-term growth over market prospects?

Question: John Murphy - BofA Global Research - Analyst : Thank you very much.

Question: Luke Junk - Robert W. Baird & Co., Inc. - Analyst : Good morning. First question, Fred, just hoping you could, building on the last response there, just comment on your hybrid pipeline, specifically. And we'd just be interested if you're seeing any evolution more on a bigger picture standpoint, I guess, relative to the regulatory backdrop and how you solve for that, both in Europe and US from a powertrain standpoint, and the role hybrids is going to play in that. Thank you.

Question: Luke Junk - Robert W. Baird & Co., Inc. - Analyst : And then for my follow-up, Craig, just wondering if we could get some flavor for incremental cost controls productivity. Just help us understand some of the areas that you're leaning into and what might carry over into 2025 for the back half of this year.

Question: Luke Junk - Robert W. Baird & Co., Inc. - Analyst : Understood. Thank you.

Question: James Picariello - BNP Paribas Exane - Analyst : Hi, guys. Just on the LVP assumption for this year, you're signaling down 2% to 2.5%. Like there are other suppliers out there that are calling for down 4% now, right, which implies the fourth-quarter precipitous down something close to 10%. Just curious on your thoughts there and the visibility in your own build schedules, in your own customer mix, on that point. Yeah, that's my first question.

Question: James Picariello - BNP Paribas Exane - Analyst : Okay. Yeah, I was referring to just the light vehicle component. But yeah, we're still splitting hairs, I suppose. My follow-up is just, as we think about your foundational product suite and the potential for hybrids to run much stronger in demand. Between your turbos and thermal segment versus the drivetrain and more systems, how do you view hybrid demand between those two segments, again, on the foundational side? Is one positioned than the other if there's some kind of ranking that you could share? Thanks.

Question: Mark Delaney - Goldman Sachs - Analyst : Yes, good morning. Thanks for taking my questions. First, I believe you are now assuming growth over market of 200 to 300 basis points. And I think it had been 350 to 450, I assume, for 2024 previously. So maybe you can help us better understand what's changing in the growth of our market outlook for this year.

Question: Mark Delaney - Goldman Sachs - Analyst : Okay, that's helpful. My other question was just following up on John's question around the pace of bookings and understanding the Western OEM bookings activity has slowed. I'm curious if you think post-US election results, if there's the potential for award activity from Western OEMs to accelerate once they have a better sense on the likely path of CO2 requirements in the coming years. Thanks.

Question: Mark Delaney - Goldman Sachs - Analyst : Understood. Thank you.

Question: Emmanuel Rosner - Wolfe Research - Analyst : Great. Thank you so much. I was hoping you can help us put a finer point on the cost actions and how to think about them. How should we think about the amount of structural cost reduction that you're taking out this year? How do they annualize -- like, into next year, like, how much of it is left over from more recent actions? And generally speaking, the programs you've announced or you have in place, how much cost is left to take out?

Question: Emmanuel Rosner - Wolfe Research - Analyst : Thank you for the color. And then I was hoping to hone in a little bit more again on the commercial vehicle battery business. Can you maybe talk to us about BorgWarner's competitive advantages in that business and then also the operating leverage on this business, specifically? Obviously, very strong incrementals that we just saw. Then I think your earlier comments spoke about no reason why you shouldn't stay in the mid-teens. That's, obviously, quite a big difference between 40% and the mid-teens. So maybe the longer-term question is, okay, what are BorgWarner's competitive advantages? But maybe shorter term is, how do you think about the operating leverage, please?

Question: Emmanuel Rosner - Wolfe Research - Analyst : Thank you.