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    Borgwarner Inc (BWA)

    CEO Change
    Board Change

    Business Description

    BorgWarner Inc. is a global leader in providing clean and efficient technology solutions for combustion, hybrid, and electric vehicles. The company primarily manufactures and sells products to original equipment manufacturers (OEMs) of light vehicles, including passenger cars, SUVs, vans, and light trucks, as well as to OEMs of commercial vehicles and off-highway vehicles such as agricultural and construction machinery . BorgWarner's business is organized into three main segments: Air Management, Drivetrain & Battery Systems, and ePropulsion . In 2023, the company's foundational products, which include all products used in internal combustion engines and hybrid powertrains, accounted for a significant portion of its total revenue, while its eProducts segment, used in electric vehicles and hybrid powertrains, represented approximately 14% of the total revenue . The company's strategy, known as "Charging Forward," aims to grow its eProducts segment significantly by 2027 .

    1. Air Management - Improves fuel economy, reduces emissions, and enhances performance with products such as turbochargers, emissions systems, and thermal systems.
    2. Drivetrain & Battery Systems - Includes battery modules, control modules, and torque-management products.
    3. ePropulsion - Provides technologies for electric and hybrid vehicles, including power electronics and rotating electric machines.

    Q3 2024 Summary

    Initial Price$32.49July 1, 2024
    Final Price$35.49October 1, 2024
    Price Change$3.00
    % Change+9.23%

    What went well

    • BorgWarner continues to outgrow market production by approximately 270 basis points year-to-date, demonstrating the resiliency of their technology-focused portfolio.
    • The company is implementing structural cost reductions targeting $100 million savings by 2026, enhancing margins and profitability.
    • BorgWarner's combustion portfolio is fully compatible with hybrid powertrains, and their eProducts are applicable to both hybrids and battery electric vehicles, positioning them well for the transition to electrification.

    What went wrong

    • BorgWarner has lowered its growth over market (GOM) assumption for 2024 from 350-450 basis points to 200-300 basis points, indicating reduced expectations for sales growth.
    • The recent $24 million benefit from volume-related PDS customer recoveries is a one-time item and will not be repeated, suggesting that recent margin improvements may not be sustainable.
    • The company is experiencing significant declines in light vehicle production (LVP) in key markets, with expectations of a 5% to 5.5% year-over-year decrease in North America and Europe, which could negatively affect future revenues.

    Q&A Summary

    1. Margin Outlook
      Q: Can you exceed the 10% margin target sooner?
      A: Management is focusing on delivering around 9.6% margin at the midpoint of their 2024 guidance , and are not speculating on exceeding the 10% long-term margin target before 2027.

    2. Margin Drivers
      Q: What's behind the strong Q3 margin performance?
      A: The strong performance was due to benefits from the PDS restructuring announced in July , focus on cost controls, and a $24 million one-time customer recovery, which will not repeat in future quarters.

    3. Battery & Charging Business
      Q: How is the battery business performing, and what about margins?
      A: The battery and charging segment saw an incremental growth of about 36% in the quarter, with strong sales especially in Europe. As the business scales, management expects to reach breakeven and increment margins in the mid-teens.

    4. Capital Allocation
      Q: Will cash generation continue to be returned to shareholders?
      A: Management is pleased with allocating cash to shareholders this year, with a line of sight to $525 million at the midpoint of guidance , effectively applied through buybacks and dividends. They will provide insights on 2025 capital allocation in February.

    5. Growth Over Market
      Q: Why is growth over market guidance reduced?
      A: The growth over market has been adjusted to 200 to 300 basis points due to a $200 million reduction in the eProduct portfolio and $100 million in the foundational business. Year-to-date growth over market stands at 270 basis points.

    6. Customer Recoveries
      Q: Are more OEM recoveries possible due to program cancellations?
      A: Management views the recent $24 million customer recovery as exceptional , and while each case is specific, they focus on flexibility and managing the business as situations develop.

    7. Cost Actions
      Q: How much cost is left to take out from restructuring?
      A: Structural changes from the PDS restructuring are expected to deliver $20 million to $30 million this year , annualizing to $40 million to $60 million next year, with a target of $100 million by 2026. The goal is to grow income in the mid-teens.

    8. Hybrid Pipeline
      Q: What's the outlook for the hybrid product pipeline?
      A: BorgWarner's combustion portfolio is fully fungible into hybrid powertrains. Their eProducts like inverters and motors are similar for hybrids and BEVs, positioning them to serve customers globally and outgrow the market.

    9. Bidding Activity Slowdown
      Q: Is there a slowdown in program bidding due to EV disruptions?
      A: There is a slowdown in new quoting activities for electrified powertrains in the Western world as OEMs focus on launching existing programs. This creates opportunities in combustion products through program extensions and prolongations.

    10. LVP Assumptions
      Q: What's your view on light vehicle production declines?
      A: Management expects the market to be down 3% to 3.5% year-over-year , with North America and Europe down 5% to 5.5%, and a slight increase in China. They continue to manage costs effectively in response.

    11. Foundational Products & Hybrids
      Q: How does hybrid demand affect foundational segments?
      A: Advanced hybrid powertrains will drive growth in both foundational segments, including engine components like turbos and drivetrain systems, as they carry components from both areas.

    12. Competitive Advantages in Battery Business
      Q: What are BorgWarner's competitive advantages in the commercial vehicle battery business?
      A: BorgWarner focuses on commercial vehicles, offering production in both NMC and LFP chemistries , with capacity in the U.S. and Europe. They handle software, cybersecurity, assembly, and testing of the battery pack, distinguishing themselves as one of the few independent suppliers in the Western world.

    13. Operating Leverage in Battery Business
      Q: How is the operating leverage in the battery business?
      A: The business grew significantly in the quarter, converting at a high level of about $0.35 on the dollar. Management aims to continue incrementing margins in the mid-teens as they scale.

    14. Program Capital Investment
      Q: How much capital is needed for combustion program extensions?
      A: Capital investment varies; some program extensions may require minimal capital, while others may need more. Extensions, prolongations, and hybrids carrying over combustion engines are driving outgrowth in the combustion market.

    15. Impact of Elections on Bookings
      Q: Will U.S. election results affect OEM award activity?
      A: Management did not speculate on this, stating they are ready to support customers wherever they want to go.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Frédéric B. LissaldePresident and Chief Executive Officer (retiring effective February 6, 2025)August 2018Frédéric B. Lissalde has served as the President and CEO of BorgWarner Inc. since August 2018. He joined the company in 1999 and has held various leadership roles. He has been a board member of Autoliv, Inc. since December 2020 .
    Kevin A. NowlanExecutive Vice President, Chief Financial Officer (until March 1, 2024)April 2019Kevin A. Nowlan has served as the Executive Vice President and CFO of BorgWarner Inc. since April 2019. He previously worked at Meritor, Inc. and GMAC .
    Craig D. AaronExecutive Vice President, Chief Financial OfficerMarch 1, 2024Craig D. Aaron has been with BorgWarner for nearly 18 years. He served as Vice President and Controller starting in 2022 and will become Executive Vice President and CFO on March 1, 2024 .
    Tonit M. CalawayExecutive Vice President, Chief Administrative Officer, General Counsel and SecretaryOctober 2020Tonit M. Calaway has been serving in her current roles since October 2020. She joined BorgWarner in 2016 and previously worked at Harley-Davidson, Inc. .
    Tania WingfieldExecutive Vice President, Chief Human Resources Officer2022Tania Wingfield assumed her current position in 2022. She has held various roles within BorgWarner since 2017 .
    Stefan DemmerleVice President and President and General Manager, PowerDrive SystemsSeptember 2012Stefan Demmerle has been serving in his current roles since September 2012. He previously worked at Continental .
    Joseph F. FadoolExecutive Vice President and Chief Operating Officer; President and CEO (effective February 6, 2025)July 2024Joseph F. Fadool has been with BorgWarner since 2010. He currently serves as Executive Vice President and COO and will become President and CEO effective February 6, 2025 .
    Paul A. FarrellExecutive Vice President and Chief Strategy Officer2020Paul A. Farrell has held his current position since 2020. He previously worked at Delphi Technologies PLC .
    Isabelle McKenzieVice President and President and General Manager, Morse Systems2023Isabelle McKenzie assumed her current role in 2023. She has held various positions within BorgWarner since 2014 .
    Volker WengVice President and President and General Manager, Drivetrain & Battery Systems2019Volker Weng has held his current position since 2019. He has been with BorgWarner in various roles since 2017 .
    Amy B. KulikowskiVice President and Chief Accounting OfficerMarch 1, 2024Amy B. Kulikowski serves as the Vice President and Chief Accounting Officer at BorgWarner Inc. She has been in this role since at least March 1, 2024 .

    Questions to Ask Management

    1. In the battery and charging segment, you achieved a 36% sales increase and are near breakeven margins. With capacity now aligned to demand in North America and Europe, what specific strategies will you implement to drive margin improvement to mid to high teens over time?

    2. Your growth over market assumption for 2024 has been lowered from 350-450 basis points to 200-300 basis points, with approximately $200 million drop in growth, half from the eProduct portfolio. What are the primary challenges causing this reduction, and how do you plan to mitigate them to regain higher growth levels?

    3. You have initiated restructuring in the PDS segment with $20-30 million in cost reductions this year and a target of $100 million by 2026. Can you elaborate on the specific structural changes being made and how they will contribute to your goal of incrementing income in the mid-teens?

    4. Considering potential regulatory changes, especially with the upcoming U.S. elections affecting CO₂ requirements, how is BorgWarner preparing to adapt its product offerings and strategy to meet varying customer demands for combustion, hybrid, and electric powertrains?

    5. With $525 million of cash generation being returned to shareholders this year through buybacks and dividends, how do you plan to balance shareholder returns with necessary investments in capital expenditures and R&D to support your electrification and growth initiatives in the coming years?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateNovember 2023 April 2024
    End Date/DurationDecember 31, 2027 December 31, 2027
    Total additional amount$544 million $767 million
    Remaining authorization amount$0 $463 million
    DetailsReplaced by April 2024 program Allows repurchase based on market conditions and capital position

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Sales: $14.0 billion to $14.2 billion.
      2. Organic Sales Change: Flat to down 1.5% year-over-year.
      3. Margin: 9.8% to 10.0%.
      4. Adjusted EPS: $4.15 to $4.30 per diluted share.
      5. Free Cash Flow: $475 million to $575 million.
      6. Foreign Currency Impact: $20 million sales headwind.
      7. Market Production Assumption: Down 3% to 3.5% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Full Year Margin Outlook: 9.6% to 9.8%.
      2. Full Year Adjusted EPS: $3.95 to $4.15 per diluted share.
      3. Full Year Sales: $14.1 billion to $14.4 billion.
      4. Free Cash Flow: $475 million to $575 million.
      5. Share Repurchases: $300 million.
      6. Organic Growth: 0.5% to 2.5% year-over-year.
      7. Market Production Outperformance: 350 to 450 basis points.
      8. Restructuring Cost Savings: $20 million to $30 million in 2024.
      9. End Market Assumption: Down 2% to 3% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Sales Guidance: $14.4 billion to $14.9 billion.
      2. Foreign Currency Impact: $100 million sales headwind.
      3. Organic Growth: 2% to 5% year-over-year.
      4. Eldor and SSC Acquisitions: $30 million to 2024 sales.
      5. eProducts Revenue: $2.5 billion to $2.8 billion.
      6. Operating Margin: 9.2% to 9.6%.
      7. Earnings Per Share (EPS): $3.80 to $4.15 per diluted share.
      8. Free Cash Flow: $475 million to $575 million.
      9. Incremental Margin: Mid- to high teens .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue: $14.4 billion to $14.9 billion.
      2. eProduct Sales: $2.5 billion to $2.8 billion.
      3. Eldor Acquisition Impact: $40 million to 2024 revenue.
      4. Adjusted Operating Margin: 9.2% to 9.6%.
      5. Adjusted EPS: $3.65 to $4 per diluted share.
      6. Free Cash Flow: $475 million to $575 million.
      7. Market Outlook: Flat to down 2.5%.
      8. eProduct Sales Growth: 25% to 40%.
      9. Battery Systems Sales Growth: $250 million to $350 million.
      10. Incremental Margin: Mid-teens .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Robert Bosch GmbH, a major non-OEM competitor .
    • Denso Corporation, a major non-OEM competitor .
    • Garrett Motion, a major non-OEM competitor .
    • Hitachi, Ltd., a major non-OEM competitor .
    • Magna Powertrain (an operating unit of Magna International Inc.), a major non-OEM competitor .
    • Valeo, a major non-OEM competitor .
    • Schaeffler Group, a major non-OEM competitor .
    • Vitesco Technologies, a major non-OEM competitor .
    • Certain start-ups in electrification, also considered competitors .

    Latest news

    Recent developments and announcements about BWA.

    Corporate Leadership

      CEO Change

      ·
      Nov 7, 2024, 12:00 AM

      Frederic B. Lissalde, the President and CEO of BorgWarner Inc., will retire effective at the close of business on February 6, 2025. Joseph F. Fadool, currently the Executive Vice President and Chief Operating Officer, has been appointed to succeed him as President and CEO .

      Board Change

      ·
      Nov 7, 2024, 12:00 AM

      Frederic B. Lissalde will retire as President and CEO of BorgWarner Inc. and resign from the Board of Directors effective February 6, 2025. Joseph F. Fadool will succeed him as President and CEO and join the Board on the same date .