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    Borgwarner Inc (BWA)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$32.87Last close (May 1, 2024)
    Post-Earnings Price$35.49Open (May 2, 2024)
    Price Change
    $2.62(+7.97%)

    What went well

    • Strong operational performance in Q1, with sales growth driven by China and Europe in both foundational and eProduct businesses, particularly in the drivetrain and battery systems segments. This resulted in a 23% all-in incremental margin.
    • Management is focused on maintaining and improving margins, aiming for mid- to high-teens incrementals, and is adjusting costs to market conditions to improve margin performance across all product lines.
    • The company has significant exposure to the growing Chinese EV market, with about 45% of the $1.9 billion in light vehicle eProducts revenue for 2024 expected from China, and 95% of that from Chinese OEMs, positioning it well in a high-growth market.

    What went wrong

    • Significant dependence on Chinese OEMs for eProducts revenue, with 95% of the $1.9 billion light vehicle eProducts revenue in China attributed to Chinese OEMs. This exposes the company to geopolitical risks and market volatility in China.
    • ePropulsion segment is underperforming in margins, with management admitting that they are "not satisfied" with the 30% incremental margin. This suggests challenges in achieving profitability in the electrification segment.
    • A substantial portion (40%) of eProducts sales is attributed to hybrids, not pure EVs. This reliance on hybrids could be risky if the market shifts more rapidly towards pure electric vehicles, potentially impacting future growth prospects.

    Q&A Summary

    1. eProducts Revenue Outlook
      Q: Do you still expect $4.5B–$5B eProducts revenue by 2025?
      A: The 2025 outlook depends on customer volumes, which will ultimately decide the eProducts revenue. We're focused on securing new business in eProducts for hybrids, strengthening our portfolio, and matching costs to deliver mid- to high-teens incrementals on an all-in basis. We'll provide more details closer to 2025.

    2. Margins and Incremental Conversion
      Q: How are you managing margins amid eProducts growth?
      A: We're balancing costs across all product lines to achieve mid- to high-teens incrementals. While our ePropulsion segment had about 30% incrementals, we're not satisfied and will take steps to improve margin performance. We're adjusting costs wherever necessary to align with market conditions.

    3. China's eProducts Demand
      Q: What is your exposure to Chinese OEMs in eProducts?
      A: For 2024, about 45% of our $1.9 billion light vehicle eProducts revenue is from China, with 95% of that coming from Chinese OEMs.

    4. Share Buybacks and Capital Allocation
      Q: How are you approaching share repurchases this year?
      A: We repurchased $277 million over the last two quarters and have authorization for over $760 million. We'll continue to repurchase opportunistically, considering liquidity, leverage, M&A needs, and maintaining our fixed dividend obligation.

    5. Hybrid and PHEV Demand Growth
      Q: Are you seeing increased schedules for hybrids?
      A: Yes, especially in China and Europe, where hybrids are growing faster within the new energy vehicle segment. Globally, hybrids represent about 40% of our light vehicle eProducts revenue. In North America, it's too early to see significant interest.

    6. Flexibility in R&D and CapEx Spending
      Q: Can you adjust R&D and CapEx amid EV market changes?
      A: We manage costs holistically in line with the current sales outlook. Our facilities and equipment are flexible, allowing us to serve both hybrids and BEVs efficiently. We're focused on converting mid- to high-teens incrementals regardless of where growth comes from.

    7. Foundational Products in North America
      Q: What's the outlook for foundational products adoption?
      A: In North America, we're in early discussions with customers about adopting advanced hybrids. While it's early, we have all the building blocks to support our customers as they transition.

    8. Battery Systems Revenue
      Q: Any updates on battery systems revenue guidance?
      A: Our eProducts guidance at the midpoint is $2.65 billion, which includes $750 million in battery packs for commercial vehicles. The ramp-up is on plan, with capacity increases in Seneca and preparations in Europe aligning with expectations.

    9. Production Schedule Volatility
      Q: Have you seen recent adjustments in OEM production schedules?
      A: We don't have granular details from the past two weeks, but our full-year market view is already below firms like IHS. We'll adjust to whatever comes our way.

    10. Power Electronics Value Proposition
      Q: Is your power electronics offering helping win business?
      A: Yes, efficiency is a key strength of our company. Power electronics are crucial for reducing losses in hybrids and BEVs. Our focus on efficient systems resonates with customers seeking to improve efficiency amid price competition. This has played a role in recent business wins.

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