Q4 2024 Borgwarner Inc Earnings Call
Thank you for standing by for the Borgwarner 2024 conference call. The call will begin momentarily. Thank you for your patience.
Thank you.
[music].
Nick: Good morning, My name is Nick and I will be your conference specialist at this time I would like to welcome everyone to the Borgwarner Twenty-twenty for fourth quarter and full year results conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing that Starkey followed by zero.
Nick: After todays 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.
Nick: If you are using a speakerphone. Please pick up your handset or asked in your question I would now like to turn the conference over to Patrick Nolan Vice President of Investor Relations. Mr. Nolan you may begin your conference.
Patrick Nolan: Thank you Nick and good morning, everyone. Thank you all for joining us today.
Patrick Nolan: We issued our earnings release earlier. This morning, that's posted on our website Borgwarner dot com, both on our homepage and on our Investor Relations homepage.
Patrick Nolan: With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release.
Patrick Nolan: You see the events section of our page for a full list.
Before we begin I mean, just to inform you that during this call. We may make forward looking statements, which involve risks and uncertainties are detailed in our 10-K, our actual results may differ significantly from the matters discussed today.
Patrick Nolan: 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.
Patrick Nolan: When you hear say on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
Patrick Nolan: When you hear us say adjusted that means excluding non comparable items.
Patrick Nolan: When you first eight organic that means excluding the impact of FX and M&A.
Patrick Nolan: We will also refer to our incremental margin performance.
Patrick Nolan: Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in ourselves.
Patrick Nolan: Our all in incremental margin includes our planned investments in R&D any impact from inflationary impacts and other cost items.
Patrick Nolan: Lastly, we will 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've 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.
Fred: With that I'm happy to turn the call over to Fred.
Fred: Thank you Pat and good day everyone.
Fred: Pleased to share our results for 2024 and provide a company update starting on slide five.
Fred: We delivered approximately $14 billion in sales, which was relatively flat versus 'twenty to 'twenty three.
Fred: Industry production for the full year was down approximately 3%.
Fred: So a solid 2024 hour globe, although about 280 basis points.
Fred: I am pleased that the outgrowth is both on the foundational and all the product site.
Fred: Our portfolio.
Fred: This demonstrates to me the resiliency of the sports video.
Fred: Ability to drive our growth in particularly challenging and volatile end market.
Fred: As Joe will detail, we finished the year by securing multiple new product awards for both foundational and <unk> products, which we believe further supports our long term profitable growth.
Fred: Our adjusted operating margin performance was strong.
Fred: Coming in above 10% and above the high end of our guide.
Fred: This strong underlying operational performance was once again driven by our focus on cost control across the businesses.
Fred: As a result.
Fred: Full year adjusted earnings per share grew by 15% year over year.
Fred: We delivered $729 million of free cash flow, which was up 29% year over year and also exceeded our full year guidance.
Fred: As Craig will detail, we remain well positioned to continue to generate strong free cash flow in 2025.
Fred: We do this while also investing in our business to support our focus on long term profitable growth.
Speaker Change: In efficient powertrain.
Speaker Change: Today is my final earnings call with Borgwarner.
Speaker Change: Before I turn it over to Joe I would like to share a few thoughts with you.
I believe that Borgwarner is positioned to grow profitably regardless of the pace of the powertrain mix change.
I also firmly believes that borgwarner is well equipped thanks to its decentralized operating model to excel.
Speaker Change: In a more regionalized powertrain the outlook.
Speaker Change: I spent 26 years at Borgwarner.
I'm proud of the work that was done.
Speaker Change: I'm proud of our very special combustion portfolio.
Speaker Change: And of the portfolio enhancements that we have executed over the past 10 years.
Speaker Change: We created what I believe is one of the most powerful propulsion portfolios in the world.
Speaker Change: While still keeping at the same time all strong culture.
Speaker Change: Retaining a double digit margin and the free cash flow generation that is quite unique.
Speaker Change: Our tier one auto supplier world.
Speaker Change: I want to thank all board of directors, who has been a key sounding board for me with unwavering support to the implementation of our strategies.
Speaker Change: I want to thank my team members and their stewardship to borgwarner their resiliency and their leadership.
Speaker Change: I of course, one thing all of the Borgwarner employees around the world, who are making a key difference each and every day.
Speaker Change: I've been working with Joe on the CEO transition over the past few months.
Speaker Change: And Ive collaborated with Joe over the past 15 years.
Speaker Change: I have full confidence that Joe is the leader that borgwarner needs.
I also want to thank the analyst community, it's been a pleasure to interact with you over the past few years interactions that I've made me stronger and with which I have always learned.
Speaker Change: And finally of course I would like to thank the shareholders for their trust.
Joe: With that I'm excited to turn the call over to you Joe.
Joe: Thank you Fred.
Speaker Change: On behalf of the management team and all of our employees I would just like to thank you for your leadership over the last 26 years and especially the last seven as CEO I.
Speaker Change: I also want to personally thank you for your Mentorship and friendship over the years, you've been an inspirational leader to me and I believe you've clearly positioned the company well for our next phase of profitable growth. We wish you nothing but success as you move on to the next chapter and hope you enjoy your well.
Speaker Change: As her retirement.
Speaker Change: Now, let's turn to slide six for what I view as the drivers of Borgwarner is value proposition.
Speaker Change: First and foremost we have what I view as a strong product portfolio that is resilient to the very pace of propulsion mix changes that we see across the world.
Speaker Change: Second we have strong market share positions across our foundational portfolio with several of our products also improving their market share positions.
Speaker Change: Third.
Speaker Change: I view Borgwarner has financial strength as a key driver of our success.
Speaker Change: It allows us to continue to invest in our business, regardless of near term fluctuations in market volumes or mix.
Speaker Change: Our financial strength is also a differentiator when our customers award us new business.
Speaker Change: And our financial strength is a direct and result of the financial discipline ingrained into the company's culture.
Speaker Change: Fourth.
Speaker Change: The long term relationships that we've established with our light vehicle and commercial vehicle customers around the world is also a very important driver of our success.
Speaker Change: These relationships allow us to partner with our consumers to meet their efficiency and value needs beyond just pursuing individual program awards.
Speaker Change: Lastly, I firmly believe that our decentralized operating model creates speed accountability and agility.
Speaker Change: The agility afforded by our operating model allows us to navigate these times of industry turmoil like we are currently experiencing.
Speaker Change: Yeah.
Speaker Change: With that said.
Speaker Change: Craig is going to review our detailed 2025 outlook in a few moments.
Speaker Change: But from a market perspective, we expect another year of declining industry volumes combined with the uncertainty of tariff implications.
Speaker Change: As such let's turn to slide seven which outlines our strategic focus areas for 2025 and beyond.
Speaker Change: First.
Speaker Change: We aim to outgrow industry production by leveraging our core competencies.
Speaker Change: Borgwarner as DNA remains focused on efficiency.
Speaker Change: Which includes both fuel efficiency for combustion vehicles.
Speaker Change: And electron efficiency for hybrids and Beth.
Speaker Change: Our anticipated outgrowth reflects our customers' demand for efficient propulsion products around the world.
Speaker Change: In combination with our strong product portfolio and deep customer relationships. We plan to continue to help the world deliver innovative and sustainable mobility solutions for a clean energy efficient world.
Speaker Change: Which we believe will drive industry outgrowth for years to come.
Speaker Change: Second.
Speaker Change: We must continue to build upon our existing product portfolio.
Speaker Change: We plan to achieve this by continuing to make thoughtful organic and inorganic investments, where we see a strong business case that delivers value to shareholders.
Speaker Change: Organically, our focus will be to accelerate our scale and gain additional market share across our entire portfolio.
Speaker Change: And we need to stay focused on driving our product culture that nurtures innovation.
Speaker Change: Inorganically, we intend to explore opportunities to improve our current market share position or product Adjacencies, where we can apply Borg Warner's core competencies.
Speaker Change: We believe there will be high quality opportunities in front of us and we are in a strong position to take advantage of the turbulence in our industry.
Speaker Change: Lastly.
Speaker Change: We must continue to drive enhanced financial performance.
Speaker Change: To me this means striving to expand margins and generating strong cash flow.
We will do this through business excellence.
Speaker Change: We'll achieve this by continuing to actively manage our cost structure as we navigate volatile industry volumes changing regional proportional mix and launching new businesses across the globe.
Speaker Change: We believe it will be important to balance all of these factors in order to preserve or warn our strong financial foundation.
Speaker Change: And enhance our margin and cash flow generation as we grow profitably.
Speaker Change: Now.
Speaker Change: Let's look at some new product awards on slide eight.
Speaker Change: Which I believe are strong indicators of our future profitable growth.
Speaker Change: First.
Speaker Change: Borgwarner has secured an award to supply its state of the art variable Cam timing system to a major east Asian OEM for their next generation hybrid and gasoline engines.
Speaker Change: Borgwarner is V C T system dynamically optimizes, the timing of intake and exhaust valve of that improving combustion efficiency.
Speaker Change: And reducing emissions.
Speaker Change: These advanced engines will power a range of the customer's hybrid and combustion vehicles, delivering improved fuel economy, and reducing environmental impact.
Speaker Change: Production of these engines are scheduled to commence in the first quarter of 2026.
Speaker Change: Second.
Speaker Change: Or Warner is expanding our partnership with a major north American based OEM by extending for waste gate turbocharger programmed for I four N V six engine platforms.
Speaker Change: These turbocharger extensions will be deployed on several of the automakers midsized and large suvs as well as truck application with the startup production set to begin in 2026.
Speaker Change: Borgwarner has a longstanding relationship with this OEM, having supply them with our turbo charges over the last 20 years.
Speaker Change: We believe these platform extensions are a testament to the strong collaboration between our engineering teams and we look forward to continuing our work together through the rest of this decade and beyond.
Speaker Change: Yeah.
Speaker Change: Third.
Speaker Change: Borgwarner secured an award to supply two types of transfer cases to psych Max's for use and export vehicles.
Speaker Change: Both products are designed by Borgwarner as China, R&D team and will be manufactured in China.
Speaker Change: <unk> production expected to begin in 2026.
Speaker Change: Borgwarner as relationship with site Max's spans more than a decade.
Speaker Change: Our transfer case technology, not only supports the Max's and strengthening its position in the Chinese market, but also empowers its expansion into overseas markets.
Speaker Change: Finally.
Speaker Change: Borgwarner has secured four E Motor awards with three major Chinese Oems used on plug in hybrid range extended hybrid and electric vehicle platforms.
Speaker Change: These programs are expected to launch in 2025 and 2026.
Speaker Change: We are pleased to secure this business in the Chinese market.
Speaker Change: We believe these awards further validate our innovative technology and manufacturing processes, delivering high quality products and services to meet the evolving needs of the Chinese new energy vehicle market.
Speaker Change: To summarize the takeaways from today or.
Speaker Change: Borgwarner ended 2024 with strong results, we delivered 2020 for outgrowth of just under 3% our adjusted operating margin was over 10% and our free cash flow generation was very strong.
Speaker Change: Over the course of the year, we secured new foundational and E product business Awards, which we believe once again demonstrates our product leadership on both sides of our portfolio.
As we look forward, we are expecting to deliver another solid year in 2025, as we focus on what we can control.
Speaker Change: As Craig will detail our guidance includes that we expect to.
Speaker Change: Outgrow industry production.
Speaker Change: <unk> and adjusted operating margin above, 10% and continue to generate strong free cash flow.
Speaker Change: And my priorities align with our 2025 outlook as we will strive to secure new business awards that will allow us to continue to outgrow industry production.
Speaker Change: We will build upon our existing product portfolio by increasing our E products scale and gaining market share.
Speaker Change: We plan to do this through fostering a culture of innovation.
Speaker Change: Customer intimacy and thoughtful portfolio investments that drive shareholder value.
Speaker Change: And finally, we continue to drive enhanced financial performance.
Speaker Change: It's this financial strength and discipline of this company that help differentiate us from our peers and we intend to continue to focus on that strength as I take over as CEO.
Speaker Change: If we effectively execute these priorities.
Speaker Change: I believe we will be well positioned to continue to grow the earnings power of Borgwarner, which we believe will drive long term value for our shareholders for years to come.
Craig: With that I'll turn the call over to Craig.
Craig: Thank you Joe and good morning, everyone.
Craig: Before I dive into the financials I'd like to provide a quick overview of our fourth quarter results.
Craig: First we reported just over $3 4 billion in sales, which was down approximately 2% versus prior year, excluding FX and M&A.
Craig: Market production in the quarter was down approximately 4% so.
Craig: So we saw outgrowth in the quarter of approximately 220 basis points, which was slightly below our full year outgrowth of 280 basis points.
Craig: Second we had strong adjusted operating margin performance in the quarter at 10, 2%.
Craig: This was driven by solid operational performance are continued.
Craig: Continued focus on cost control across the business and restructuring actions.
Craig: This strong fourth quarter performance allowed us to deliver our full year adjusted operating margin.
Craig: <unk>, 10%, which was up 50 basis points from 2023.
Craig: Third we had strong free cash flow in the quarter.
Craig: $539 million, which allowed us to outperform our 2020 for free cash flow guidance and deliver $729 million and free cash flow for the full year.
Craig: Now, let's turn to slide nine for a look at our year over year sales walk for Q4.
Craig: Last year's Q4 sales from continuing operations were just over $3 5 billion.
Craig: You can see that the weakening U S dollar drove a year over year decrease in sales of $32 million.
Craig: Then you can see a decrease in organic sales of about one, 5%, which was 220 basis points above market production.
Craig: This outgrowth was primarily due to a strong new product growth in Europe, and Asia as well as strong foundational growth in Europe, North America, and the rest of the world.
Craig: In China, we saw challenges in the quarter due to lower volumes on existing EG program, which we previously highlighted and declining foundational fails.
Craig: And finally, the acquisition of Al Dor added 6 million of sales year over year.
Craig: Some of all of this was just over $3 4 billion of sales in Q4.
Craig: Turning to slide 10, you can see our earnings and cash flow performance for the quarter.
Craig: Our fourth quarter adjusted operating income was 352 million equating to a strong 10, 2% adjusted operating margin.
Craig: That compares to adjusted operating income from continuing operations of $332 million or a nine 4% adjusted operating margin from a year ago.
Craig: On a comparable basis, excluding the impact of foreign exchange and M&A adjusted operating income increased 37 million and 57 million of lower sales.
Craig: This is a great result, and reflects our ability to deliver profitability. Despite a declining production environment.
Craig: This performance was driven by the benefit of our power drive systems restructuring that we announced in July as well as our continued focus on cost control across our business.
Craig: The net impact of outdoor was a $12 million drag on operating income year over year.
Craig: Our adjusted EPS from continuing operations was <unk> 11, compared to a year ago as a result of strong adjusted operating income.
Craig: Net interest expense and the impact of our share repurchases during 2024.
Craig: This was partially offset by a higher effective tax rate due to various tax restructuring initiatives that we executed in the quarter.
Craig: Free cash flow from continuing operations was $539 million during the fourth quarter, which was down $140 million from a year ago. As a result of lower business activity compared to 2023, and the timing of customer payments.
Craig: Our free cash flow for the full year was strong at $729 million.
Craig: And finally I'd like to briefly address the $646 million of goodwill and fixed asset impairment charges that we recorded during the fourth quarter.
Craig: In the fourth quarter of each year, we perform an impairment test of our tangible and intangible assets.
Craig: The discounted cash flow analysis, we perform requires us to make long term estimate of our sales and operating income and compare that to the carrying value of each business unit.
Craig: Due to the continuing delay of EV adoption across the western World, our discounted cash flow estimates for our power drive system and battery charging systems business units from prior years had to be reduced and pushed out.
Craig: As a result, the company recorded a goodwill impairment charge of $577 million in the fourth quarter.
Craig: We also recorded a charge of $69 million, primarily related to certain property plant and equipment.
Craig: It's important to note that these items are noncash and have a minimal impact on the future earnings or margin profile of the company.
Craig: In our opinion, the delay of EV adoption and parts of the Western World is exactly why we have built a resilient technology focused portfolio that we believe will provide strong results no matter the pace of regional propulsion adoption.
Craig: If regional BV adoption continues to be delayed and we believe are foundational portfolio will compensate with significant margin and free cash flow generation.
Next on Slide 11, I would like to review our perspective on global industry production for 2025.
Craig: We expect our global weighted in light commercial vehicle markets to be down 1% to 3% this year.
Craig: Following a 3% decrease in 2024.
Craig: This forecast includes potential industry volume headwinds of global tariffs.
Craig: Looking at this by region from a light vehicle perspective, we're planning for our weighted north American market to be down approximately 3% to 4% primarily.
Craig: Driven by inventory headwinds and potential inflation due to tariffs.
Craig: In Europe, we expect our weighted market to be down approximately 4% to 6% year over year as we see signs that the lower backlog economic headwinds.
Craig: And in China, we expect the overall market to be flat to down 1%.
Craig: This is due to a tough comparison following last year's growth and the possible economic impact of tariffs.
Craig: With that in mind now, let's take a look at our full year outlook on slide 12.
Craig: First as I just highlighted we have included some level of industry volume headwinds from tariffs and our market volume assumptions.
Craig: However, we have not incorporated in the net cost of tariffs and our financial guidance at this time.
Craig: Since the impact of Borgwarner is influenced by multiple factors.
Craig: These include but are not limited to that.
Craig: The timing of implementation any exception exception on imported materials and our ability to share the impact with our customers and suppliers.
Craig: Now, let's move to our outlook.
Craig: We are projecting total 2025 sales in the range of 13 $4 billion to $14 billion.
Craig: Starting with foreign currencies, our guidance assumes an expected full year sales headwind from weaker foreign currencies of $410 million compared to 2024.
Craig: As I just highlighted we expect our end markets to be down 1% to 3% for the year.
Craig: However, we expect the company to outperform market production by 100 to 300 basis points, which once again demonstrate the resiliency of our portfolio that we believe that position to outgrow market production.
Craig: It is important to note that our guidance includes a 30 basis point outgrowth headwind from lower battery sale prices, which we directly passed through to our customers.
Craig: Based on our updated outlook, we expect our organic sales change to be down 2% to up 2% year over year.
Craig: Now, let's switch to margin.
Craig: We expect our full year adjusted operating margin to be in the range of 10.0 to 10, 2% compared to our 2024 adjusted operating margin of 10, 1%.
Craig: The low end of our margin outlook contemplate the business delivering a full year decremental conversion in the low double digits.
Craig: While the high end of our outlook assumes an incremental conversion in the high teens.
Craig: We view this as strong underlying performance building off of 2024 that well exceeded our expectations.
Craig: Based on this sales and margin outlook, we are expecting.
Craig: <unk> full year adjusted EPS in the range of $4 five.
Craig: The $4 40 per diluted share.
Craig: We expect full year free cash flow to be in the range of $650 million to $750 million with the 2025 midpoint being a decline versus 2024 strong result, due to FX headwinds.
Craig: With that that's our 2025 outlook.
Craig: So let me summarize my financial remarks.
Craig: Overall, we delivered solid 2024 result.
Craig: By a difficult production environment.
Craig: We delivered a very strong 10, 1% margin, which was 50 basis points higher than 2023, and well ahead of the nine two to nine 6% margin reflected in our initial 2020 for guidance.
Craig: This great performance is a result of our focus on appropriately managing our costs.
Craig: Our business.
Craig: We generated strong free cash flow of $729 million.
Craig: Now as we look ahead to 2025, our outlook aligns with the priorities Joe highlighted earlier.
Speaker Change: First we expect to continue to outperform market production with an expected full year outgrowth of 100 to 300 basis points.
Speaker Change: <unk> headwinds from battery cell pricing and BV program delays.
Speaker Change: Second we expect to once again deliver an adjusted operating margin above 10%.
Speaker Change: We believe this shows our ability to manage our cost structure effectively even in light of a declining production environment.
Speaker Change: Yeah.
Speaker Change: Finally, we expect to have another year of strong free cash flow, which we believe in combination with our investment grade balance sheet will allow us to continue to invest in our business, while navigating a challenging and uncertain market backdrop.
Speaker Change: As I look back on our 2024 results and our 2025 outlook I am extremely proud of the Borgwarner team around the globe and their ability to deliver strong financial results during a challenging and volatile market backdrop.
Pat: With that I'd like to turn the call back over to Pat.
Patrick Nolan: Thank you Craig.
Speaker Change: Decorate and open up for questions.
Speaker Change: Sure.
Speaker Change: At this time I would like to remind everyone. If you would like to ask a question. Please press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before asking your question to withdraw your question. Please press Star and then two in.
Speaker Change: In the interest of time, please limit yourself to one question and one follow up question.
Speaker Change: At this time, we will pause momentarily to assemble our Q&A roster.
Speaker Change: Yes.
Speaker Change: And your first question today will come from John Murphy with Bank of America Ml. Please go ahead.
Speaker Change: Hi, good morning, everybody and Fred Congratulations look forward to visiting you in Burgundy there'll be a lot of fun hopefully Joe I apologize you can have you have to deal with is now.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Our first question.
The portfolio is well balanced.
Speaker Change: Almost in whichever direction.
Speaker Change: Powertrains go it seems like a very good way to be positioned.
Speaker Change: When you sit there and I'm just curious as you look at sort of the short term swings that we're seeing in program stuff like for canceling the three row.
Speaker Change: Last year, you know when those shifts happen very quickly.
Speaker Change: Do you think.
Speaker Change: The portfolio is hedged and do you think you pick up.
Speaker Change: Those lost sales.
Speaker Change: Something like that.
Speaker Change: Explore.
Speaker Change: This version or something like that I mean, how how quickly did that did that get balanced out and maybe sort of with that is that one of the key drivers of why we're seeing this $600 million variance in organic sales or what else is driving that $600 million organic variance.
Speaker Change: Yes, Hi, John so.
Speaker Change: You look at the RF queues outside of China, They have been slowing a little bit and we've seen some delays or cancellations.
Speaker Change: On the other side, we see.
Speaker Change: More RF queues for foundational products and those usually results in higher volumes of our existing products, we're serving a customer with.
Speaker Change: Or it might be extensions, because they've delayed and EV truck or SUV.
Speaker Change: So we're in a great position to take advantage of that and also.
Speaker Change: Be ready when they launched those new programs on Evs and the market's ready.
Speaker Change: Okay and that $600 million organic.
Speaker Change: Variances in the 25 outlook is that being driven by.
Speaker Change: Youll deltas in volume or program shifts, what's the key driver of that variance.
Speaker Change: So for the outlook.
Speaker Change: Or let's say the 2024 results as you know we outgrew those.
Speaker Change: And that 2% to 3% range as we look forward, we continue to expect that outgrowth.
Craig: Craig had mentioned in 2025.
Speaker Change: Okay, and then just maybe one quick follow up could you just remind us what your China exposure.
Speaker Change: Right now with domestic versus international players and where do you think thats going to land at 25, and how much it may shift towards the domestics in the next few years.
Speaker Change: Specifically in China or.
Speaker Change: In China, specifically, yes.
Speaker Change: Yes, so as as you know China is about 20% of our global sales.
Speaker Change: And in China, 75% of our total sales are with the Chinese Oems. So, we're very well positioned with them as they grow in their domestic market and in support of their strong export.
Speaker Change: One other thing I'll mention 90, 90%.
Speaker Change: Of that business is on any deal with those domestic solar in a great position.
Speaker Change: That's very helpful. Thank you very much.
Speaker Change: Your next question today will come from Colin Langan with Wells Fargo. Please go ahead.
Speaker Change: Oh, great. Thanks for taking my questions and congrats on your retirement, it's been a pretty impressive.
Speaker Change: Pivots already powertrain engineer leadership.
Speaker Change:
Speaker Change: On the powertrain.
Speaker Change: Any color on how our products should perform this year I noticed the battery side was a bit weaker sequentially and I think there was some slowing in North America you've indicated.
Speaker Change: And should we start seeing a help.
Speaker Change: Europe with regulation that there should be a light vehicle bounce there likely some increase in the U S does that start showing up in maybe the second half or how should we think about.
Speaker Change: So Colin we are growing year over year in the product business.
Speaker Change: It has softened a little bit mainly due to the battery business, which you referenced the way I guess you want to think about it is we are flat year over year in battery sales when it comes to unit.
Speaker Change: Revenue was down a little bit mainly due to sell pricing.
Speaker Change: Which is bringing the overall revenue down but overall it's.
Speaker Change: Greater than $600 million business, we really like that <unk> business, we bought.
And it's ahead of where we purchased that despite a lot of the turmoil and despite the lower sell pricing.
Speaker Change: Got it.
Speaker Change: And then the guide for this year is 200 basis points growth over market in the past you've kind of talked about 4% I think you've called out a couple of things I mean should we think about eventually getting back to something like a 4% or.
Speaker Change: Is this lower EV adoption, just kind of holding that back for several years from now.
Speaker Change: Yes, the past few years, our outgrowth has been in that 2% to 3% range. So 2025 as close to this range.
My focus.
Speaker Change: Is really on outgrowing our markets, we think the portfolio is the right one.
Speaker Change: In the short term the biggest driver in 2025 of the lower outgrowth is a delay of a north American EV program, which we previously disclosed and as I mentioned the sell pricing.
Speaker Change: On the battery pack business.
Speaker Change: My focus.
Speaker Change: It is really the outgrow on both sides of the portfolio. So we want our foundational products.
Speaker Change: To do what they can to expand market share and we're in a great position because as you know on our foundational products, we're number one or number two.
Speaker Change: In that side of the business and then on the E side, as new launches and RF queues.
Speaker Change: To come out we're in a good position to also outgrow those markets.
Speaker Change: Got it alright, thanks for taking my questions.
Speaker Change: Again, if you have a question. Please press star and then one.
Speaker Change: And your next question today will come from Ryan Brinkman with Jpmorgan. Please go ahead.
Ryan Brinkman: Hi, Thanks for taking my question.
Ryan Brinkman: Just curious with regard to the products that you manufacture in Mexico, the extent to which they are installed on products in Mexico versus.
Ryan Brinkman: Broad across the U S border and then what any preliminary conversations with automakers might look like in terms of.
Ryan Brinkman: The pass through of any potential tariff costs.
Speaker Change: Yeah, Ryan let me take that one so I'll start by saying, we generally produced in the same region as our as our customers produce but when we look at 2024 and the amount of imported material value to the U S. It was about $875 million when you break that down about half of it.
Speaker Change: Originated in Mexico, 10% of that originated in Canada, 5% originated in China ultimately, there's a lot of news going on right now.
Speaker Change: We're going to continue to watch that but ultimately if there is an impact to borgwarner, we're going to need to find a way to share that with our customers and our suppliers. That's how we're thinking about it.
Speaker Change: Alright, thanks, so much.
Speaker Change: Thank you.
Speaker Change: And your next question today will come from Luke Young with Baird. Please go ahead.
Luke Young: Thanks for taking my questions and my congratulations to you as well Fred.
Speaker Change: Maybe starting with the outgrowth, hoping you could just help us understand at least directionally, what that assumes for <unk> products in power drive I guess Im looking specifically in Europe, where you had a big launch year in 'twenty, four and in China relative to what our of course continued tier ones around and UV adoption overall and I guess.
Speaker Change: Any offsets we should be thinking beyond what you've already mentioned, an existing book of business and neither geo as well. Thank you.
Speaker Change: Yes, hi, Luc so we see EV adoption increasing year over year.
Speaker Change: All the markets.
Speaker Change: When we think about.
Speaker Change: Our segments one of the things we did last July as you recall, we organized into four operating segments to give better transparency and how each of those businesses are performing so we think that's going to be a good indicator.
Speaker Change: Of how the businesses are performing in terms of outgrowth.
Speaker Change: Got it and then for my follow up I'm, hoping you could just maybe expand on your comments around foundational awards. It's now been a couple of quarters in a row, you've highlighted a good number of foundational words as you mentioned, you're seeing a reacceleration or excuse me I guess, what im trying to square is how that.
Speaker Change: Might translate to outgrowth not this year, but looking out 'twenty six 'twenty, seven and especially it seems like there may have been a lull just given where the industry's focus was a few years ago and those awards and how that might translate to some pick up in 'twenty six plus thank you.
Speaker Change: Yeah. As you mentioned, we have highlighted awards on both sides of our portfolio and an increasing number on the foundational side I think that speaks to the strength of our portfolio and as customers are evolving their cycle plans.
Speaker Change: Theyre looking toward us since we're number one or number two in those foundational products to support them those often look like program extensions.
Speaker Change: In some cases it may be some new programs that they're putting out for bid, but I think what's important here is we want to outgrowth across our entire portfolio and those are great. Examples that we highlighted you see wins in both the foundational and on the east side.
Speaker Change: Understood. Thank you.
Speaker Change: Yeah.
Speaker Change: And your next question today will come from Joe Spak with UBS. Please go ahead.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thanks.
Speaker Change: And again my congrats as well.
Speaker Change: Enjoy.
Just maybe just one on the guidance just a little bit more more color I just want to understand like that.
Speaker Change: Is what youre, saying that that North America weighted down 3% to 4%.
Speaker Change: And I think if you look at some third parties its closer to down to is that delta sort of the.
Speaker Change: I guess conservatism, you're sort of putting in for maybe some disruption as to what could happen. If if tariffs come in and I just want to be clear on that and then.
Speaker Change: I don't think I heard and I joined a little late I don't think I heard sort of any.
Speaker Change: E products overall, I know you have the new segments, but any sort of your products sort of expectations for this year is there any.
Speaker Change: Color you can provide there just so we can sort of track I guess performance relative to some of the underlying market dynamics.
Speaker Change: Yeah, so starting with some color on the market, we formulate our industry forecasts internally and Directionally for the last few years we've.
Speaker Change: We've been fairly accurate.
Speaker Change: You know when we think about.
Speaker Change: But global markets, maybe we can break it down a little bit so that minus one to minus three starting with North America.
Speaker Change: Down three to four.
Speaker Change: As you know, there's there's a lot of inventory in the system.
Speaker Change: We've also baked in a little bit of headwinds pending tariffs that may come.
Speaker Change: In Europe, 4% to 6% down due to signs of both the backlog and economic headwinds that Theyre seeing China is a brighter spot they are flat to down 1%.
Speaker Change: So thats a little bit of color on your first question, Yes I'll.
Speaker Change: I'll jump in with sales. So our reported 2024 sales a little over $2 3 billion for <unk> products as we move forward, you'll see disclosure in our 10-Qs breaking out E products from foundational and so youll see that as we move forward.
Speaker Change: But anything on the products in relation to the overall guidance.
Speaker Change: We're not providing that outlook as Joe indicated our focus is outgrowth on both sides of our portfolio.
Speaker Change: Okay.
Speaker Change: The second question is.
Thinking in some of your prepared remarks, you talked about building on your portfolio organically and Inorganically and I don't think Thats a.
Speaker Change: Change from what you've talked about in the past as an organization.
<unk>.
Speaker Change: There had been some messaging or communication that inorganic has been paused I guess im wondering as you sort of take over your or how you think about that going forward, especially since we've seen some.
Speaker Change: Activity in M&A in the space and I would say I would even say, it's sort of more broadly in the market like do you is there do you expect a little bit more focus on inorganic opportunities.
Speaker Change: As we move forward from here.
Speaker Change: Yes, so we will continue to invest organically as our top priority we have a terrific.
Speaker Change: Product portfolio.
Speaker Change: And we see lots of opportunities to keep building on that and growing that.
Speaker Change: To outgrow the market.
Speaker Change: We will continue to look at acquisitions as it remains an important part of our strategy. So the industry turbulence that we're all.
Speaker Change: Witnessing right now actually provides a unique opportunity for borgwarner, given our financial strength, so as we execute them.
Speaker Change: If we execute them it will be in a very thoughtful way.
Speaker Change: And our focus is to create long term shareholder value.
Speaker Change: Thank you.
Speaker Change: And your next question today will come from Edison Chu with Deutsche Bank. Please go ahead.
Speaker Change: Thank you for taking the questions and congrats Fred.
Edison Chu: Wanted to ask about <unk>.
Edison Chu: You had quite a bit of success in China with that how are those conversations going in in U S and Europe and you think the volumes there.
Edison Chu: Three or four years be be similar.
Edison Chu: So we have seen some success on <unk> in China as you mentioned.
Edison Chu: I would say the other regions.
Edison Chu: Starting to look at <unk> as a way to especially in the truck market.
Edison Chu: Meet all the requirements for our customers.
Edison Chu: But also provide better overall fuel economy and emission reduction so we.
Edison Chu: We don't see it in big volumes, just yet, but we do see it as an emerging option our architecture for our customers to meet their emission requirements.
Edison Chu: Okay understood.
Speaker Change: And just one thing on the on the guidance for China are you assuming the Scrappage incentives still continue I think theres probably.
Speaker Change: To your point, you've mentioned some some risk but in terms of upside just curious what kind of are you assuming there.
Speaker Change: No we're really looking at our China market that is flattish year over year. So we haven't factored that in at this point.
Okay. Thank you.
Speaker Change: <unk>.
Speaker Change: And your next question today will come from Emmanuel Rosner with Wolfe Research. Please go ahead.
Emmanuel Rosner: Thank you.
Emmanuel Rosner: My first question is on the Capex outflow can you provide a little more context around the.
Emmanuel Rosner: Lower capex budget and to what extend these.
Emmanuel Rosner: I guess extra free cash flow would go towards buybacks versus something else.
Emmanuel Rosner: Yeah. So let me address Capex when you go back a few years, our capex was in kind of the mid fives as a percent of sales 555, 4%. We saw this year come down to below five our guidance as we look at it. This year is maintaining that around the high fours low fives as a percentage of sales. So that's how you should think about it.
Emmanuel Rosner: From a buyback perspective.
Emmanuel Rosner: We have not incorporated anything into this guide.
Emmanuel Rosner: So I wanted to address that a little bit.
When we step back and think about buybacks as a company. We've deployed a lot of a lot of cash to shareholders about $3 4 billion. Since 2020. So we've deployed a lot of cash to our shareholders I want to step back and talk about our goal our goal as a company is to really focus on earnings and cash flow grow earnings and cash flow over time.
Emmanuel Rosner: And as we think about buybacks for this year, we're going to use the full power of Borgwarner to focus on earnings growth to focus on full cash.
Emmanuel Rosner: Cash flow growth as we continue throughout the year, we will look at this lever is an item to poll.
Emmanuel Rosner: We'll look at it appropriately as we move forward, that's how we're thinking about buybacks this year.
Speaker Change: Got it that's helpful.
Speaker Change: And then how are you thinking about the growth outlook there.
Speaker Change: This year and also beyond for EV.
Speaker Change: EV products in China, specifically, given a very competitive market dynamics.
Speaker Change: Yes, so I mean more broadly speaking, 20% of our total business.
Speaker Change: <unk> is in China, and as we mentioned were very strong with the Chinese Oems.
Speaker Change: In fact, the Chinese Oems have over 90% of our market share on Evs.
Speaker Change: And they are 75% of our business so.
Speaker Change: We feel very well positioned with the Chinese whether they're serving the domestic market or as we've seen over the last few years exporting those vehicles.
Speaker Change: Great. Thank you.
Speaker Change: We have time for one final question and that question comes from Dan Levy with Barclays. Please go ahead.
Dan Levy: Hey, good morning, Thanks for taking the questions.
Speaker Change: Congratulations.
Speaker Change: <unk>.
Speaker Change: Wanted to first just start with a follow up on that last question there power drive was.
Speaker Change: Disappointing or soft in 2024, maybe you can give us a flavor for.
Speaker Change: What turns around in that in that business and maybe you could just comment to remind us why Asia empower driveway desktop is why despite.
Speaker Change: EV in China doing as well as it did.
Speaker Change: Maybe I'll start on the year over year performance. So we were down a little over $200 million in sales. When you think about that that was really on the foundational side of the portfolio.
Speaker Change: Our customer program.
Speaker Change: But when you look at the east side of the portfolio. It was actually relatively flat and it was just volatility in the market and I'll, let Joe comment on going forward right. So as we look forward in 2025.
We're in the middle of launching a number of new products and.
Speaker Change: Platform. So that's what's really bringing in the additional growth on the Pds side of the business.
Speaker Change: Yeah.
Speaker Change: And how much of that is China.
Speaker Change: Yes, we don't break out specifically.
Speaker Change: China, but let's say that there are <unk>.
Speaker Change: They've got a strong position in the overall market.
Patrick Nolan: I'll, let Pat maybe.
Speaker Change: Cover that in a follow up.
Patrick Nolan: Okay.
Patrick Nolan: Thank you and then as a follow up I wanted to just understand the EBIT bridge and maybe we could just compare versus 2024, because on organic revenue flat or down slightly you still had EBIT up some 60 million.
Patrick Nolan: Dollars now and 25.
Patrick Nolan: You've talked about restructuring benefits for E product.
Patrick Nolan: And I would presume theres going to be some pricing benefit for programs that you tooled for but the volumes never appreciated. So why are we seeing maybe a little more margin benefit given these developments.
Patrick Nolan: Yeah. So so let me walk through the guide when you start with last year's sales $14 1 billion the midpoint of our guidance of $13 7 billion and when you look at the different and exclude foreign exchange again that $410 million, we're basically slightly up about 40 basis points against the market backdrop that we.
Patrick Nolan: Fact is down 2%, so that's where you get about 250 basis points of outgrowth.
Patrick Nolan: As you look at the.
Patrick Nolan: As you look at our EBIT line, we're maintaining 10, 1% on that relatively flat sales as.
Patrick Nolan: As we look at the low end of our guide, we're basically decrementals at 10%.
At the high end and the mid teens. So we feel really good about the performance that you're seeing US guide that's how we're thinking about it it does incorporate the savings year over year from a REIT product restructuring.
Patrick Nolan: And what was unique in 2024 that is not repeat in 'twenty five that you had such strong incremental.
Patrick Nolan: I think when you look at our performance in 2024, we really focused on restructuring savings we were focused on cost controls across the business, including GSM and productivity and we're maintaining that as we look into this year and so we feel really good with where we landed in 'twenty four and this outlook for 2025.
Patrick Nolan: And we're going to keep our focus on cost control as we move forward.
Patrick Nolan: Okay. Thank you.
Patrick Nolan: Thank you.
Speaker Change: Thank you all for your great questions today, and then additional follow ups feel free to reach out to me or my team with that make you can go ahead and conclude today's call.
Speaker Change: Thank you. This concludes the Borgwarner 2020 for fourth quarter and full year results Conference call you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].