BorgWarner - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered an all-around beat: revenue $3.515B (flat organically; +3.7% outgrowth) and adjusted EPS $1.11, with adjusted operating margin at 10.0% despite a 20 bps tariff headwind.
• Management raised full-year sales guidance to $13.6–$14.2B, widened adjusted margin to 9.6–10.2% due to tariff recoveries diluting margin, and kept adjusted EPS at $4.00–$4.45 and FCF at $650–$750M.
• Portfolio actions are a catalyst: exiting charging (removes ~$30M annual losses; +$15M operating income vs prior guide) and consolidating North American battery systems capacity (target ~$20M annual savings by 2026).
• eProducts are accelerating: light-vehicle eProduct sales +47% YoY; total eProduct sales ~$640M vs ~$500M in Q1 2024, underpinning multi-quarter margin consistency at/above 10%.

What Went Well and What Went Wrong

What Went Well

• Strong execution and outgrowth: sales outgrew weighted industry production by ~3.7% with adjusted operating margin at 10.0% for the fourth consecutive quarter (despite tariffs).
• eProduct momentum: light-vehicle eProduct growth +47% YoY; total eProduct sales ~$640M versus ~$500M last year, with PDS converting growth at ~$0.15 on the dollar—a sign of improving cost structure.
• Strategic wins: hybrid eMotor (2028 launch), HVCH for PHEV platforms (2027), EGR program extensions through 2029, and two DCT awards in China, supporting mid- to long-term growth visibility.

Management quotes:

• “Our adjusted operating margin performance was strong… 10%. This also represents the fourth quarter in a row with a margin at or above 10%.” (Craig Aaron).
• “Sales performance once again outperformed industry production supported by a 47% increase in our light vehicle eProducts business.” (Joseph Fadool).
• “We expect this will… eliminate approximately $30 million of annualized operating losses.” (on exiting charging) (Joseph Fadool).

What Went Wrong

• Tariffs: ~$6M cost in Q1 (20 bps margin headwind); full-year exposure ~1.6% of sales with timing risk around recoveries in Q2, diluting margin guidance.
• Battery pricing and demand: battery business down ~15% YoY driven by cell price declines; decriment ~$0.26 on the dollar—hence North America restructuring to rightsize capacity.
• Macro softness in North America: LV production outlook revised down to -7% to -12%, driving broader reduction in full-year market assumptions (down 2% to 4%).

Transcript

Operator (participant)

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. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question during this time, simply press star one on your telephone. If you would like to withdraw your question, press star two. If you are using a speakerphone, please pick up the handset before asking your question. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Patrick Nolan (VP of Investor Relations)

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 homepage and on our Investor Relations homepage. 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 non-comparable items. When you hear us say adjusted, that means excluding non-comparable 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 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 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.

Joe Fadool (President and CEO)

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 five. 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 e-product 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 e-products 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 e-products 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 horizons. 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 current market dynamics and create a more competitive business. As I reflect back on my first 90 days as CEO, I couldn't be more excited about the future of BorgWarner. I continue to believe that we have the right product portfolio, leadership, and focus on operational performance to drive profitable growth and significant shareholder value for years to come. I'm very pleased with our first quarter results, the momentum behind our continued product awards, and the strength of our portfolio that we can continue to build upon. Now, let's look at some new product awards on slide six, which I continue to believe are a strong indicator of our future profitable growth. First, BorgWarner has secured a hybrid e-motor award with a major North American OEM.

Our 400-volt S-Wind e-motor will be used on a series of hybrid full-size trucks and SUVs, as well as a performance vehicle application. This business is expected to launch in 2028. We are so excited and looking forward to deepening our relationship with this OEM. Second, BorgWarner has secured a high-voltage coolant heater award in North America with a global OEM for their plug-in hybrid electric vehicle platforms. The award includes PHEV applications spanning mid-size pickup trucks, SUVs, and minivans. This business is expected to launch in 2027. Next, BorgWarner is extending four programs for exhaust gas recirculation components, including valves, coolers, and complete modules with a major North American OEM. BorgWarner's EGR systems are used on several of the automaker's passenger and light commercial vehicle platforms. Production of these components is expected to continue through the end of 2029.

Finally, BorgWarner has secured two dual-clutch transmission awards in China, including a seven-year extension with a German OEM in China and a new award with a prominent transmission manufacturer, with production expected to start at the end of 2025. We believe these awards further validate the strength of our product portfolio and the need for our technology across combustion, hybrid, and BEV platforms. Now, let's turn to slide seven and review our decision to exit our charging business. We actively assess our portfolio to position it to grow above industry production. As part of our ongoing assessment, we reached the difficult decision to exit our charging business based on our analysis of the current market and midterm financial outlook for this business. Unfortunately, the charging market is not growing as anticipated in both North America and Europe. The market also remains highly competitive and disaggregated.

This backdrop is causing challenges in achieving scale and our ROIC thresholds. As a result, we believe our charging business is unlikely to create shareholder value in the near to midterm. Therefore, we have made the difficult decision to cease global charging operations. To achieve this, we will shut down or sell five locations across three regions. These actions are expected to be completed during the second quarter of the year. We expect this will create a more focused portfolio and eliminate approximately $30 million of annualized operating losses. Compared to our previous 2025 guidance, the exit of our charging business is approximately a $30 million headwind to sales, but a $15 million increase to operating income. While the decision to exit charging was not easy, we believe that it will further strengthen our product portfolio and position BorgWarner to continue to grow profitably.

Now, let's turn to slide eight and discuss capacity consolidation actions that we are undertaking within our battery systems business. While we remain pleased with the technological and competitive positioning of our battery systems business, we do see lower demand in North America than we had expected at the beginning of the year. Therefore, it was critical for us to right-size our North American battery system capacity to current market dynamics with consolidation actions that started late in the first quarter. These actions include shifting all battery production from our Hazel Park and Warren, Michigan locations to our Seneca, South Carolina plant. We estimate cumulative cash costs of these actions to be approximately $10 million that will extend through 2026. These actions are expected to result in annual cost savings of approximately $20 million by 2026.

After these actions, all our North American battery capacity will be consolidated into our Seneca plant, which is one of our largest facilities in North America. The intention of this restructuring is to improve the near-term earnings of this business, but also position the business for long-term success. To summarize, the key takeaways from today are the following. First, BorgWarner's first quarter results were strong. Sales performance once again outperformed industry production, supported by a 47% increase in our light vehicle e-products business across the world. Our adjusted operating margin expanded 60 basis points despite a 20 basis point headwind from tariffs, reflecting our continued focus on cost controls and turning sales growth into income. Second, we secured multiple new business awards in the quarter across our entire portfolio, which we believe further demonstrates our focus on product leadership across combustion, hybrid, and BEV architectures.

Finally, we took meaningful steps to manage our cost structure and create a more focused portfolio in response to changing market dynamics. While we acknowledge that we are operating in a challenging and uncertain environment, I'm confident in our team and their ability to effectively manage through another uncertain production environment. We have the right portfolio, a decentralized operating model, and the financial strength to deliver our revised guidance and drive long-term profitable growth. With that, I'll turn the call over to Craig.

Craig Aaron (EVP and CFO)

Thank you, Joe. 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%. We saw sales outgrowth in the quarter of approximately 3.7%. This was driven by strong light vehicle e-product 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 point 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 nine 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. 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 e-product 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 operating margin, which includes a 20 basis point headwind from tariff costs. That compares to adjusted operating income from continuing operations of $339 million, or a 9.4% adjusted operating margin from a year ago. On a comparable basis, adjusted operating income increased $23 million on $5 million of higher sales. This is a great result and reflects our ability to deliver profitability despite a declining production environment. This performance was driven by the benefit of our restructuring efforts, as well as our continued focus on cost controls across our business. Our adjusted EPS from continuing operations was up $0.08 compared to a year ago as a result of strong adjusted operating income and the impact of our share repurchases during 2024.

Finally, free cash flow from continuing operations was a usage of $35 million during the first quarter, which was a significantly lower usage than a year ago, driven by higher operating income, better working capital efficiency, and lower capital spending. Now, let's take a look at our full year outlook on slide 11. First, it's important to note that our guidance includes estimated net tariff costs related to all previously announced U.S. and retaliatory tariffs. We are now projecting total 2025 sales in the range of $13.6 billion-$14.2 billion, which is an increase from our prior guidance of $13.4 billion-$14 billion. This increase is due to stronger foreign currencies and the impact of anticipated tariff cost recoveries, partially offset by a lower market production outlook and the exit of our charging business. Now, let's review our year-over-year sales walk.

Starting with foreign currencies, our guidance now assumes an expected full year sales headwind from weaker foreign currencies of $160 million compared to 2024. However, this is a sales tailwind of $250 million versus our prior guidance, primarily due to the strengthening of the euro and the Chinese renminbi versus the U.S. dollar. Within our guidance, our full year-on-market assumption has been reduced to down 2%-4% versus down 1%-3% previously. This reduction reflects our estimated impact of tariffs on customer demand, primarily in North America. We also incorporated a $30 million sales headwind related to the exit of our charging business during the first quarter. Within this guidance, we expect a tailwind from tariff-related recoveries of up to 1.6% of sales, as this is a pass-through recovery of our costs from our customers.

Additionally, we expect the company's full year sales outgrowth to be approximately 200-400 basis points. Based on these assumptions, we expect our 2025 organic sales change to be down 2% to up 2% year-over-year in line with our previous guidance. Now, let's switch to margin. We expect our full year adjusted operating margin to be in the range of 9.6%-10.2% compared to our previous guidance of 10.0%-10.2%. This revised guidance now assumes 20 basis points of dilution from tariffs, as estimated tariff recoveries will flow through sales with no benefit to margin. Our wider margin range incorporates various industry volume outcomes and a range of results related to tariff cost recoveries. Overall, we view this as strong underlying performance supported by our solid first quarter operational execution, which we expect to continue for the remainder of 2025.

Based on this sales and margin outlook, we're expecting full year adjusted EPS in the range of $4-$4.45 per diluted share, with the midpoint unchanged from our previous guidance. We continue to expect full year free cash flow to be in the range of $650 million-$750 million. With that, that's our 2025 outlook. Let me summarize my financial remarks. Overall, we were very pleased with our first quarter results. Our sales outgrowth, margin, and free cash flow performance represent a strong start to the year, and we believe positions us well to meet or exceed our revised guidance. I'm confident in our global teams and their ability to effectively manage through any near-term uncertainty from tariffs or other events.

As we look ahead to the balance of 2025, our outlook aligns with our best assessment of market dynamics and the financial impacts of currently announced tariffs. As we continue to focus on what we can control, we are still expecting to deliver on our financial priorities. First, we still expect to continue to outperform market production with an expected full year sales outgrowth of 200-400 basis points. Second, the midpoint of our EPS guidance is unchanged despite the headwinds of tariff-related costs and a lower market production outlook. Finally, we expect to have another year of strong free cash flow of $700 million at the midpoint of our guidance, which is consistent with our prior guidance.

We believe our ability to drive strong free cash flow in combination with our investment-grade balance sheets allows us to continue to create shareholder value through a balanced capital allocation approach. With that, I'd like to turn the call back over to Pat.

Patrick Nolan (VP of Investor Relations)

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

Operator (participant)

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please pick up the handset before asking your question. To withdraw your question, please press star two. In the interest of time, please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our Q&A roster. Our first question will come from John Murphy with Bank of America. Please go ahead.

John Murphy (Managing Director)

Good morning, guys. I'm going to try to steer clear of tariffs and get to the core business. If we think about slide six, Joe, I mean, you have some great extensions here and some great wins. So 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 e-product awards, which sound like they're pretty good wins here, some pretty big products, what are the kind of return characteristics you're expecting there? And one of the big things that's happening right now is there's concern around rare earths.

As we think about e-motors and other e-products, is there any kind of risk that we should think about there or solutions that you found?

Joe Fadool (President and CEO)

Sure. Good morning, John. 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. 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. 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. Finally, with regard to rare earth, we do have products that consume rare earth elements and specifically magnets.

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. We are hopeful to get approval on those. In the meantime, we continue to look for other options to make sure we can continue with supply.

John Murphy (Managing Director)

Okay. 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 are you 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 were not made in the past or the market is shifting? That battery exit of $10 million cash cost and then $20 million benefit to operating income next year is quite phenomenal. Right? I am just curious if there is anything else like that out there.

Joe Fadool (President and CEO)

Yeah. 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. 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. 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. We still feel technologically and from a competitive standpoint really good about that business.

As usual, we want to take decisive actions when we see some of the market dynamics that we see today.

John Murphy (Managing Director)

Very helpful. Thank you, guys.

Operator (participant)

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

Colin Langan (Automotive and Mobility Analyst)

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 started to get better next quarter. 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?

Patrick Nolan (VP of Investor Relations)

Yeah, Colin, I'm not going to comment on the rest of the year. Obviously, a lot of moving pieces right now. As we look at Q1, we feel really good about our growth in general, our 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. Where did that come from? A lot of it was on the light vehicle side of our portfolio. Light vehicle e-product growth of 47%. We've been talking about for some time, really watch PDS. PDS grew quite significantly in the quarter, about 30% year-over-year. When you look at the light vehicle e-product portion of the portfolio, they grew by over 60% year-over-year. The good news is we saw that across all regions of the world: North America, Europe, China.

We're really seeing a nice pull from that business. That's the comments I would have on your question.

Joe Fadool (President and CEO)

Maybe to add a little bit of color to that, I just returned from China at the Shanghai Auto Show. 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. The speed of that market combined with the success we're having, we're really optimistic about the growth potential there.

Colin Langan (Automotive and Mobility Analyst)

That's great color. 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 2%. 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?

Patrick Nolan (VP of Investor Relations)

Yeah. So just to recap, where were we in our February guide? We assumed overall light vehicle production down 1%-3%. We're now expanding that to 2%-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%-4% in February, and now we're assuming 7%-12%. So that was really the shift that you see in those figures.

Colin Langan (Automotive and Mobility Analyst)

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

Patrick Nolan (VP of Investor Relations)

Thank you, Colin.

Operator (participant)

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

James Picariello (Director and Head of U.s. Autos Research)

Good morning, everybody. Yeah, I actually was going to hit on North America light vehicle production down 7%-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.

Joe Fadool (President and CEO)

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

Patrick Nolan (VP of Investor Relations)

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

Craig Aaron (EVP and CFO)

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

James Picariello (Director and Head of U.s. Autos Research)

Appreciate it. Thanks.

Craig Aaron (EVP and CFO)

Thank you.

Operator (participant)

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

Joseph Spak (Managing Director)

Thanks, everyone. Maybe just sticking with tariffs for a second. You are 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 have 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. Can you just help us understand how you are getting to that level for three quarters of the year?

Joe Fadool (President and CEO)

Sure. Yeah, I can bring you some color there. Maybe first of all, it's important to know our updated guidance includes everything we know about tariffs. Whether it's IEEPA 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. Compared to six weeks ago, there's a lot more clarity out there. I believe from a tariff impact, it'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%-60% of our cogs is material.

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. That gives you a little more color about the size of it. I would say the IEEPA portion of this is really only a quarter of the total amount. For us, it's really important to take a global view, identify mitigating actions, and customer recovery. I'm really confident in our team and their ability to manage through this.

Joseph Spak (Managing Director)

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. 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?

Joe Fadool (President and CEO)

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. We have other ones that are more indirect, and that's where we purchase components that are being tariffed inbound. That could be tariffed inbound in this part of the world, or it could be somewhere else in the world. I'm sure Pat's happy to walk you through that in detail.

Joseph Spak (Managing Director)

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 in what you admit is a little bit of an uncertain environment, at least for the back half. I guess the other part of that is, are you reconsidering any timing of buybacks given the multiples near five-year lows?

Patrick Nolan (VP of Investor Relations)

Yeah, thanks for the question. 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. 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. 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 it opportunistically as we work through Q2 and the balance of the year.

Joseph Spak (Managing Director)

Appreciate it.

Patrick Nolan (VP of Investor Relations)

Thank you.

Operator (participant)

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

Dan Levy (Senior Equity Research Analyst)

Craig, good morning. Thanks for taking the questions. I wanted to start first with a question on some of the M&A deals in the past. I recognize that charging, you've come to the conclusion that it's just not a profitable business. Maybe we can go back to some of the other deals you've done, Akasol, Central. The market's different. We appreciate that. You've done some restructuring. Are these deals still driving the initial benefits that you expected? Charging was a bit of a different situation. I'm just wondering how you're viewing maybe what other actions you may need to take to the portfolio.

Craig Aaron (EVP and CFO)

Yeah. First of all, we won't comment on any particular acquisition that we've done. We're continuously reviewing the portfolio to see areas we can strengthen it. In the case of charging, our overall assumptions changed for that business, starting with the market outlook. Then, our inability to build scale in a timely period where we could reach our 15% return on invested capital target. 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, we give it a critical eye and we take decisions as appropriate.

Dan Levy (Senior Equity Research Analyst)

Okay. Thank you. Then, similar as a follow-up, I wanted to ask about the margins in PowerDrive 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 break-even, what other actions there are, and maybe just anything that's going to impact the direction of margins here.

Patrick Nolan (VP of Investor Relations)

Yeah, Dan, maybe I'll just comment on the first quarter. When you look at PowerDrive Systems, really strong growth in the quarter, up 30% year-over-year. I mentioned earlier, light vehicle e-product 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.

Dan Levy (Senior Equity Research Analyst)

Okay. Thank you.

Patrick Nolan (VP of Investor Relations)

Thank you.

Operator (participant)

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

Mark Delaney (Analyst)

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 e-products, especially as you mentioned, OEMs are starting to settle on their updated plans for combustion hybrid vehicles? Do you see the top line going forward as more driven by e-products?

Joe Fadool (President and CEO)

Sure. I can answer that. 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 e side, the beautiful part about hybrids is it pulls from both sides of the portfolio, and the content per vehicle opportunity for us is quite high. 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. Our focus is to drive outgrowth over and above our end markets, and it's through leveraging our portfolio and our core competence. As we do that, drive enhanced financial performance to expand margins and generate strong cash flow.

Mark Delaney (Analyst)

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. 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 the 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.

Joe Fadool (President and CEO)

Yeah. 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 e-product growth. It is a competitive market, but I always like to come back to why do customers want to work with BorgWarner? I heard this a lot when I was at the Shanghai Auto Show. First, it is just our ability to bring competitive technology to the market. The second is we have great customer intimacy. We have been in China over 30 years, and we have had terrific strong relationships, especially with the domestic OEMs who really command more than 70% of that market today, and we are slightly overweight with the domestics. I think the third is really our speed to market. I gave the one example.

Although it is a very competitive market, it's a very attractive market. We see the transition toward hybrids and new energy vehicles. That's exciting for us because we really get to exercise our new portfolio, and we still feel quite optimistic about China.

Mark Delaney (Analyst)

Just specifically on tariffs in China, I mean, I think you have an in-region, four-region approach in general. Are there any exports into China that are facing higher tariff costs you need to pass on?

Joe Fadool (President and CEO)

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

Mark Delaney (Analyst)

Okay. Thank you.

Operator (participant)

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

Emmanuel Rosner (Managing Director and Senior Autos and Auto Tech Analyst)

Great. Thank you so much. I was hoping to follow up actually on the tariff cost of north of $200 million. I am not sure I fully understand where they come from. Anyway, can you 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 crossed the U.S. border with maybe like $900 million of parts. $200 million plus of that would seem to be like 25% of the total, yet you have high USMCA compliance. Maybe if there is a way to bucket what goes into that $200 million. Also, how much of those recoveries have already been negotiated with customers versus negotiations that still need to happen?

Patrick Nolan (VP of Investor Relations)

Yeah. So when we look at our overall exposure, like we've been discussing, it's about 1.6% of sales across the organization. When you break it into its pieces, about 50% is IEEPA-related and AutoParts 232-related. The remaining 50% is China retaliatory and reciprocal-related. 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. Third, we're working through the recovery mechanisms with our customers.

Emmanuel Rosner (Managing Director and Senior Autos and Auto Tech Analyst)

Right. So where are we in this process?

Joe Fadool (President and CEO)

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 a 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.

Emmanuel Rosner (Managing Director and Senior Autos and Auto Tech Analyst)

Great. Then a follow-up on e-products. I think your prior guidance embedded strong growth in the e-product components business, maybe $500 million 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 e-product point of view?

Joe Fadool (President and CEO)

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

Patrick Nolan (VP of Investor Relations)

I can share with you our e-product 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.

Emmanuel Rosner (Managing Director and Senior Autos and Auto Tech Analyst)

Great. Thanks for the call.

Joe Fadool (President and CEO)

Thank you.

Operator (participant)

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

Luke Young (Analyst)

Hi. 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 and thinking maybe foundational versus e-products at a high level and things that maybe at first blush 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 earths into PDS as well. Thank you.

Joe Fadool (President and CEO)

Yeah. 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. 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? Finally, beginning the customer recovery discussions, which we've already done. 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.

Luke Young (Analyst)

Yeah. Just in terms of any components, I mean, the footprint for battery in the U.S. in South Carolina. Not a Mexico or USMCA compliance question, but just in terms of components that might be coming out of China flowing into battery.

Joe Fadool (President and CEO)

Yeah. That business, like the others, will have some impact due to tariffs. 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.

Patrick Nolan (VP of Investor Relations)

When you think about the battery business, it's really those cells that come from Korea. That's the major impact for that business.

Luke Young (Analyst)

Got it. That's very helpful. Thank you. Thanks.

Operator (participant)

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

Winnie Young (Analyst)

Hi. Thanks so much. This is Winnie Young for Edison. I was wondering if you can help us break down the outgrowth for this year of 240-400 basis points, if there's a way to sort of break that down between foundational versus e-products.

Patrick Nolan (VP of Investor Relations)

Yeah. We do not provide that breakout. We are looking to outgrow on both sides of our portfolio, whether that is on the foundational side or the e-product side of the portfolio.

Winnie Young (Analyst)

Okay. Got it. And then just on maybe M&A opportunities, how you're viewing the pipeline, the current macro environment, if acquisitions and bolt-ons are still sort of the strategy for e-product growth and then mid to long-term things.

Joe Fadool (President and CEO)

Sure. We still remain active on reviewing our pipeline for M&A. We especially think with all the turbulence in the market, it may create some compelling opportunities for us. We are not limiting our scope on it. The way to think about it is we have really opened up the aperture in acquisition targets to leverage our core competence and where we can drive growth and shareholder value. We have raised the bar in terms of criteria. 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. Lastly is valuation. We do not want to overpay.

Especially during times like today where there is 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. With that said, we have used the first quarter to look through the pipeline. We have actually passed on a number of targets because they did not meet one of those three criteria. We want to continue in a disciplined way with the M&A. As Craig had mentioned, we are in a strong cash position, and we are not afraid to use all the tools in the toolbox, including buybacks if necessary.

Winnie Young (Analyst)

That's helpful. Thank you.

Joe Fadool (President and CEO)

Thank you.

Patrick Nolan (VP of Investor Relations)

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.

Operator (participant)

Thank you. This concludes the BorgWarner 2025 First Quarter Results Conference Call. You may now disconnect.