Yahoo Finance BorgWarner Inc. (NYSE:BWA) Q1 2024 Earnings Call Transcript
BorgWarner Inc. (NYSE:BWA) Q1 2024 Earnings Call Transcript May 2, 2024
BorgWarner Inc. beats earnings expectations. Reported EPS is $1.03, expectations were $0.87. BorgWarner Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2024 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Relations. Mr. Nolan, you may begin your conference.
Patrick Nolan: Thank you, Britney. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It is posted on our website at borgwarner.com, both on our home page and on our Investor Relations home page. 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 Investor Relations home page for a full list. Before we begin, I need to inform you that joining 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 will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes of prior periods.
In the hearsay on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us say adjusted, that means excluding the impact of FX and net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales. Our all incremental includes our planned investment in ER&D, any impact on net inflationary impacts and other cost items. Lastly, we refer to our growth compared to our market. When you hear us say market, that means the change in light and 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 Fred.
Frederic Lissalde: Thank you, Pat, and good day, everyone. I’m very pleased to share our results for the first quarter of 2024 and provide an overall company update, starting on Slide 5. With approximately three billion in sales, we delivered close to 7% organic growth in the quarter despite a modest industry decline. We delivered strong incremental performance in the quarter on an all-in basis, which allowed us to achieve a 9.4% margin. This Q1 performance provides a nice start to the year, and we believe it positions us well to deliver on our full-year guidance. Additionally, we continue to take steps in the quarter to create longer value for our shareholders. We secured multiple new eProduct awards. These awards once again demonstrate our focus on taking the leading-edge technology, working closely with our customers to help support them as they transition towards electrification.
And as I will discuss, we continued to expand our product offerings for electrified vehicles. We focused on the efficient deployment of our capital by repurchasing $100 million of stock during the first quarter, as Craig will highlight, we received an increased share repurchase authorization of $500 million from our Board of Directors. Now, let’s look at some new product award on Slide 6. First, BorgWarner secured additional e-motor award with Shell Pang. These awards include BorgWarner’s 800 volts e-motor systems comprised of state and rotor components, which are customers for use on two occurring SUV models. Start of production is planned for 2025. BorgWarner’s 83H220 eMotor offers high to density, enhanced efficiency and superior durability.
We are thrilled to extend our eMotor business with Xpeng and build on our strong partnership with them. Next, I would like to highlight a new product line for electrified vehicles, which is our electric talk vectoring disconnect or EVD. BorgWarner secured new business awards with Polestar and an additional major European OEM; sub ETVD for their battery electric vehicles. ETVD is currently in production for the 4-star 3 SUV and production for the major European OEM is expected to begin later in 2024. The ETVD offers a three-in-one system, replacing the differential and featuring both talk vectoring and an on-demand disconnect functionality for and hybrids. ETVD is part of BorgWarner’s electrical management system portfolio which helps improve electrified vehicles traction and ability.
The added weight in hybrids and battery electric vehicles often results in reduced agility and safety performance. BorgWarner Systems helps overcome this by enabling a lighter feel and increasing traction, which improves safety. The ETVD is a great example of applying our foundational expertise and capabilities to develop an innovative solution to address our customers’ needs as they transition towards application. Now I want to take a few moments to remind you of the strength of our foundational portfolio on Slide 7. First, it is important to highlight BorgWarner’s estimated average content opportunity for combustion vehicle, which is approximately 550 on a global basis. You will note that this content opportunity varies by region. I would point out that our content opportunity in North America is the highest of the 3 major regions we operate in.
So to the extent that combustion vehicles have a longer tail in North America that could provide a positive sales, margin and cash flow tailwind for BorgWarner. We also continue to see potential opportunities for growth across our national portfolio, which add a 2023 revenue of about $12 billion. I would like to list just a few. In Turbo, we continue to see North American opportunities as penetration in the region is about 44% compared to 92% penetration in Europe and 69% penetration in China. If EV growth slows in North America, the remaining combustion vehicles may need to improve efficiency, and Turbo challenging is one of the biggest enablers to make this happen. For our EGR business, we see penetration opportunities on hybrid architectures.
The efficiency benefit of EGR and cooling and hybrid is higher than traditional combustion-only vehicles as the internal combustion engine operates in a steadier state. Our timing system business also sees penetration opportunities in plug-in hybrids and range-extended EVs as engine timing chain is the preferred technology in those hybrids due to its superior durability and strength. And finally, we see our all-wheel drive business benefiting from penetration score on combustion vehicles in Southeast Asia and from a longer tail for North American vehicles. Maximizing the value of our foundational products means capitalizing on these potential growth opportunities, while at the same time, maintaining the strong margin and cash profiles of these businesses.
Now let’s turn to Slide 8 and take a step back. Let’s discuss how we believe our foundational and eProduct portfolios are positioned for growth under various combustion, hybrid or best growth scenarios. Starting with our combustion or foundational portfolio, which are on the top left of the slide, BorgWarner has decades of experience in product leadership in these fields. We have a number one or number two market share for these products and can support our customers around the globe. This is critically important as customers potentially consolidate their supply base and look to industry leaders that have the financial strength and long-term technology leadership to support them. Let’s jump to the right side of this page where you see the breadth of our eProduct portfolio.
This portfolio has grown organically through M&A over the past several years. We have systematically built a technology-focused portfolio that supports our customers’ needs in EVs from grid to wheel. This has allowed us to establish product leadership in multiple areas of our portfolio, including inverters, e-motors, high-voltage cooler meters and we expect that our technological differentiation, scale and share leadership will continue to enable us to secure new business. Quite simply, our foundational and eProduct portfolio support hybrid propulsion since the hybrid vehicle needs both downside combustion engine as well as an electric powertrain. We can utilize the expertise of both our portfolios to support our customers which we are already doing successfully in Europe and in China.
Importantly, when we sell products for hybrid applications, we are able to utilize the same engineering resources, modular design, manufacturing footprint and sometimes even actual product lines that are utilized for beds and combustion vehicles. We believe BorgWarner is well positioned to be successful under various electrification adoption scenarios, including regional specificities. Our product has been purposefully built for this type of an environment, focus on achieving above-market growth regardless of varying levels of electrified propulsion adoption. Our focus is to convert growth into income at the mid-to-high teens level on an all-in basis. To summarize, the takeaways from today are this: BorgWarner’s first quarter results were strong.
Our sales growth once again outperformed the industry and we delivered strong conversion on an all-in basis. We secured multiple new eProduct awards in the quarter, which further demonstrate our product leadership position. We focused on efficient powertrains, and we believe that we have a resilient portfolio of products that allows us to convert mid-to-high teens wherever the incremental revenue comes from. And we continue to our shareholders through our first quarter share repurchases and increased authorization from our Board. As we look forward, we expect to continue to manage our business holistically. We plan to take the necessary steps to manage our costs while continuing to preserve our long-term profitable growth. While we cannot control the near-term volatility in propulsion mix across the globe, we can focus on BorgWarner - driving sales growth above market production through technology-focused product levers converting that growth into earnings on an all-in basis and following a balanced capital allocation strategy that creates long-term value for our shareholders.
With that, I will turn the call over to Craig.
Craig Aaron: Thank you, Fred, and good morning, everyone. Before I dive into the financials, I would like to provide a quick overview of our first quarter results. First, we reported close to 7% organic sales growth despite a modest decline in industry volume. Second, we had strong margin performance, which was driven by solid conversion on higher revenue as well as appropriately managing our costs. This led to a year-over-year incremental conversion of over 23% on an all-in basis. Now, let’s turn to Slide 9 for a look at our year-over-year sales walk for Q1. Last year’s Q1 sales from continuing operations was just under 3.4 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in sales of almost 1% or $32 million.
Then you can see the increase in our organic sales which was up roughly 7% year-over-year driven by growth in China and in Europe. Finally, the acquisitions of Eldor and SSE added $11 million to sales year-over-year. Some of all this was just under 3.6 million 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 339 million, equating to a 9.4% margin. That compares to adjusted operating income from continuing operations of 305 million or a 9% margin from a year-ago. On a comparable basis, excluding the impact of foreign exchange and M&A, adjusted operating income increased 54 million on 233 million of higher sales. That translates to an all-in incremental margin of roughly 23%, driven by our higher year-over-year sales and strong cost controls.
The net impact of M&A was a 12 million drag on operating income year-over-year. Our adjusted EPS from continuing operations was up $0.22 compared to a year-ago as a result of higher adjusted operating income, a decline in our effective tax rate and the impact of our recent share repurchases on our share count. And finally, free cash flow from continuing operations was a usage of 308 million during the first quarter, which was a higher usage than a year-ago as our working capital performance was impacted by the timing of customer collections due to the Easter holiday as well as the timing of tax payments. Now let’s take a look at our full-year outlook on Slide 11. Starting with foreign currencies. Our guidance now assumes an expected full-year sales headwind from weaker foreign currencies of 100 million compared to 2023.
This also is a sales headwind of 100 million versus our prior guidance with the Chinese RMB and Korean Won being the largest drivers of the change in our outlook. Next, we expect organic growth of approximately 2% to 5% year-over-year compared to our prior guidance of 1% to 5%. This increase is predominantly driven by strong sales growth in the first quarter. Within this guidance, our full-year end market assumptions led to down 2.5% is unchanged. Additionally, we continue to expect to deliver between 2.5 billion to 2.8 billion eProduct sales, which is up significantly from approximately two billion in 2023. Finally, the Eldor and SSC acquisitions are expected to add approximately 30 million to 2024 sales. Based on these expectations, we are projecting total 2024 sales in the range of 14.4 billion to 14.9 billion, which is in line with our prior guidance despite the additional FX headwinds.
Now let’s switch to margin. We continue to expect our full-year adjusted operating margin to be in the range of 9.2% to 9.6%. Excluding the impact of Eldor related losses in 2024, our outlook content to business delivering full-year incrementals in mid-to-high teens on an all-in basis. We believe this margin performance reflects the underlying earnings power of our company and our focus on delivering strong conversion on higher sales also appropriately managing costs. Based on this sales and margin outlook, we are expecting full-year adjusted EPS in the range of 3.80, 4.15 per diluted share. This increase compared to our prior outlook is being driven by the impact of our share repurchases and full-year share count and a reduction in our tax rate outlook compared to our prior guidance.
Turning to free cash flow. We continue to expect that we will deliver free cash flow of 475 million to 575 million for the full-year. Let’s turn to Slide 12 and discuss our recently increased share repose authorization. As Fred highlighted in his opening remarks, we repurchased approximately 100 million in BorgWarner stock during the first quarter. This brings our share repurchases since 2020 to approximately 733 million. In addition, our Board of Directors approved an increase in our share repurchase authorization of up to 500 million over the next three years. When combined with the 267 million remaining under our prior authorization, management has the ability to repurchase up to 767 million of the company’s outstanding shares. In addition to the share repurchases I just highlighted, we have also returned about 623 million to shareholders in dividends since the start of 2020.
We also completed the tax-free spin-off Affinion, which returned roughly 1.7 billion of additional capital to shareholders. Adding this all together, BorgWarner has distributed roughly 3.1 billion of capital to shareholders since 2020, while also investing in the company’s future. Our return of capital to shareholders has been a significant area of focus over the past several years. We believe our ability to return capital to shareholders while also investing in the business demonstrates the underlying strength of the company and the importance of a balanced capital allocation approach that is focused on maximizing shareholder value. The 500 million increase in our share repurchase authorization is simply another example of our commitment towards a balanced capital allocation approach.
So let me summarize my financial remarks. Overall, we delivered a solid first quarter. Our revenue growth was ahead of our expectations. And importantly, we delivered strong conversion on this revenue growth on an all-in basis. As this is my first call as BorgWarner’s CFO, I wanted to share how I think about the key financial goals for BorgWarner for the remainder of 2024 and beyond. As we move forward, I expect the company to first, deliver organic growth despite volatility in the global BEV and hybrid markets. Second, drive strong incremental margin performance on an all-in basis. And third, generates strong operating cash flow that allows the company to make organic and inorganic investments to support our long-term profitable growth while also returning capital to shareholders through a consistent quarterly dividend and opportunistic share repurchases.
Executing towards these goals is how we measure financial success at BorgWarner, and how we hope to create long-term value for our shareholders for years to come. With that, I would like to turn the call back over to Pat.
Patrick Nolan: Thank you, Craig. Britney, we are ready to open up for questions.
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