Q3 2024 Earnings Summary
- 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.
- 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.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2024 | $14.1 billion to $14.4 billion | $3,449 million | Met |
EPS (Diluted) | Q3 2024 | $3.95 to $4.15 (full-year) | $1.04 | Met |
Share Repurchases | Q3 2024 | $300 million (full-year) | $301 million | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Ongoing cost reduction targets | Q2: Targeted $100M savings by 2026, with $20–$30M in 2024. Q1: Did not mention a specific $100M target. Q4: No specific number given. | BorgWarner reaffirmed a target of $100M by 2026, expecting $20–$30M in 2024 from restructuring efforts. | Consistent across Q2 and Q3, more clarity on 2024. |
Margin improvement efforts | Q2: Margin 10.4%, raised FY guidance to 9.6–9.8%. Q1: Focused on managing costs to meet 9.2–9.6%. Q4: Emphasized cost controls rather than a specific margin target. | Achieved 10.1% margin in Q3 (up 50 bps vs. prior year). Raised full-year margin outlook to 9.8–10.0%. | Consistently highlighted; slight improvement each quarter. |
Scaling battery and eProducts business | Q2: 25% eProducts growth, restructuring ePropulsion, new commercial vehicle battery contracts. Q1: $2.65B eProducts in 2024, ramping capacity in Seneca & Europe. Q4: $2.5–2.8B eProducts guidance, expanding CV battery lines. | Emphasized commercial vehicle batteries ($200M in battery/charging revenue); strong increments, capacity alignment. | Consistent expansion; heavier focus now on commercial vehicle battery and capacity use. |
Shifts in growth guidance | Q2: Slight reduction but still expecting 400 bps outgrowth for full year. Q1: No explicit cut in guidance mentioned. Q4: Maintained 300 bps outperformance target. | Reduced growth-over-market assumption to 200–300 bps (was 350–450), noting slower electrified powertrain quoting. | New downward revision in Q3, caution on EV quoting. |
Reliance on one-time customer recoveries | Q2: No mention. Q1: No mention. Q4: No mention. | Cited $24M in non-recurring customer recoveries for eProduct volume shortfalls, boosting Q3 margins. | New item in Q3, short-term margin benefit. |
Eldor acquisition losses | Q2: $9M drag in Q2, total $45M in expected 2024 losses. Q1: Impact excluded from strong incrementals. Q4: Set to lose $50M near term, lowering 2024 margin by 30–40 bps. | $14M drag on operating income in Q3, noted but expected to be non-recurring long-term. | Recurring short-term drag; consistent messaging on gradual improvement. |
Heavy dependence on Chinese OEMs for eProducts revenue | Q2: 95% of China eProducts supplied to major Chinese carmakers. Q1: 45% of eProducts revenue from China, 95% from local OEMs. Q4: Mentioned China deals but not specific dependence. | 15% of total net sales come from Chinese local OEMs, not portrayed as heavy dependence in Q3. | Evolving message; Q3 indicates broader regional balance vs. prior emphasis on China. |
Uncertainty around 2025 eProducts revenue targets | Q2: No direct mention of 2025 uncertainty. Q1: $4.5–$5B target depends on volumes, more clarity later. Q4: Acknowledged uncertainty, prioritizing 2024 ramp. | Management deferred talking about 2025, focusing on 2024 execution instead. | Recurring caution on 2025 figures, near-term focus remains. |
Pressure on foundational (ICE) business | Q2: Balanced ICE/hybrid portfolio, outgrowing demand. Q1: ICE remains relevant via turbo/EGR/hybrid roles. Q4: Expect slow decline, but outgrowing ICE market by 300 bps. | ICE still 40% of net sales; slowdown in EV quoting might extend hybrid/combustion demand. | Consistent resilience strategy; sentiment remains stable. |
Emergence of hybrid adoption | Q2: China’s NEV growth driven by hybrids , Europe slower. Q1: Hybrid gains in China/Europe, e.g., EGR applications. Q4: 30–40% NEV share as hybrids in China/Europe, flexible ePortfolio. | Slower new BEV quoting in West; hybrids seen as an expansion opportunity. | Consistent theme, hybrids form a key growth segment in multiple regions. |
Changes in planned eR&D spending | Q2: Reduced planned eR&D increase from $40–$50M to $20–$30M. Q1: No details on eR&D adjustments. Q4: Slower pace of eR&D growth vs. 2022 peak. | Not specifically mentioned in Q3. | No new update in Q3, earlier periods showed moderation in eR&D spending growth. |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.