BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our fireside chat with BorgWarner. My name is James Picariello. I cover the auto space at KeyBanc. I'm very pleased to have BorgWarner's CEO, Fred Lissalde; and CFO, Kevin Nowlan, with us today, and joining them, of course, Head of Investor Relations, Pat Nolan. Thank you, guys, for the time. Really appreciate it. Fred has a few slides to walk through, and then we'll jump right into questions. [Operator Instructions] With that, I'll hand it right off to Fred. Thanks. Thanks again.

Thank you, James. And welcome, and good morning. Good morning, everyone. I've got just a couple of slides to ground ourselves on the latest announcement that you've seen on BorgWarner. First, a few weeks ago, we talked about Project CHARGING FORWARD. And this is a nice summary of who we are going to be and how we're going to get there. So Project CHARGING FORWARD has 3 pillars. We're growing into eLV, both organically and inorganically; growing into eCV, also both organically and inorganically; and also in parallel, we're optimizing our combustion portfolio. One way to look at this is to think about the fact that our combustion portfolio enables Project CHARGING FORWARD. Today, we're less than 3% on battery electric vehicle, which is pretty much where the market is, quite frankly. We're going to move to 45% by 2030. And you will see, each and every step of the way we'll keep you posted about where we are. And the whole management team, the whole Board is fully, fully behind that strategy, which we feel very, very comfortable with. What I would say is that it's not a sudden change about what we've been doing in the past years. We've been building this to this point for at least the past 6, 7 years. If you want to go to the next slide, Pat. I want to show you that, this is an example of what we've done inorganically. But first, organically, we've developed some of our own products in the BEV area, like e-heaters that are eating battery coolants and also BEV cabins, like our EDM, which is the transmission and the motor for battery electric vehicle. And you see also here on this slide, the strategic approach that we've had from an inorganic standpoint, starting back in 2015 with Remy, that brought us rotating electrics and integrated drive modules, drive motors. And then we had Sevcon, we had Romeo Power, and the last one was Delphi Technologies, which got us at scale power electronics and software. And that was really important. And you see, with the announcement this morning that I'm going to talk about a bit later with the Hyundai iDM, it's very, very important to have, under one roof, the mechanical, the motor and the power electronics. Result of this is that back in 2014, we had about $400 of potential content per vehicle in BEVs. And now we have more than $2,600 of potential content in BEV, which is much higher than the content that we have in combustion. We are a few steps from closing on the AKASOL transaction, and we'll talk most probably into -- in the Q&A. On the next slide, you see that we've announced this morning the name of the OEM that we are partnering with for our iDM launching in the second part of 2023. So we've announced the iDM in the last Q1 call. Now we are able to tell you that it's Hyundai Motor Company, Hyundai/Kia. And I'm very, very excited, very proud about that. Hyundai is, we think, a blue-chip customer and a potential winner in the field of battery electric vehicle. Long-lasting relationship with Hyundai Motor Company paid off. And simply, we won the business because we have a better product. It's smaller, it's lighter and more efficient and more competitive than everything else they've seen. 400 volts, 135 kilowatt, which is pretty impressive and also scalable. So very proud about that. It's the first iDM that we've booked 6 months -- 6, 7 months after the closing on the Delphi transaction. And I want to use this opportunity to thank everyone in BorgWarner and in ex-Delphi that have joint forces so fast after the closing to get this baby home. Last slide, Pat. So I think our story at BorgWarner is that if I look at the company story, I see a story of evolution. The DNA of the company is around profitable growth. We take superior technology. We move them into products that we commercialize and manufacture at scale in 3 continents, driving profitable growth. We've done that organically in the past. We can talk variable cam timing. We can talk about DCT. We've done that inorganically in the past, too. We can talk about turbochargers. Can talk about EGR. And now we are applying the DNA of this company for e-products, leveraging the great technology that we have on motors and on power electronics and software that we've got from Delphi Technologies. We've been building that for the last few years. And now we're in a position to accelerate what we call that Project CHARGING FORWARD at the same time as the market is pulling more than ever. So we plan to create significant and sustainable value by aligning our business strategy and the market pool. This is the few slides I wanted to share with you. And I turn it back over to you, James, for Q&A.

Great. Well, that's a fantastic intro and sets the stage. We'll spend most of this time talking about electrification, I promise you that. But just to kick things off, maybe just with a macro update, I mean regarding the chip shortage, OEM downtime announcements. The second quarter is slated to be the most challenged, right? We're 2 months in now. How are things trending from BorgWarner's standpoint? How would you characterize this second quarter relative to your full year? And how about the thought on -- also on mix, right? Product mix. Content mix was a benefit in the first quarter. Is that something that sustains the rest of this year?

I would say, James, that on the semiconductor, the situation remains very fluid. And it requires an attention of every moment in order to make sure that we keep the flow going as much as we can. We think that Q2 is going to have the largest impact. We hope that stabilization is coming in Q3, Q4. We -- this story is telling me that partnerships are really important, being very close to your customer base, also having partnership with your semiconductor. It also showed me that scale is important. It is tough to say, from a mix perspective, how long customers are going to be able to focus on the accounts that they want to make versus -- some customers don't want the car that are being able to be produced right now. So I don't know how long it's going to last. It is true that here in this country, in the U.S., large vehicle are in high demand. So that's what I can share with you right now on semiconductors. It is a situation that is very demanding for people on the ground, very demanding for plant managers. And here, what we want to do is really be very close to our customers and our suppliers so that we can anticipate. We want to move away from any surprises.

And I know like you don't like talking about specific OEMs. But I just want to ask about Ford, right? Ford's maybe a 10% or 11% pro forma sales type customer for you guys. I think they've been, in my view, at least most transparent in terms of their semi exposure and the production impact. Any way to dimension your specific exposure to Ford, given the quantification that we have from the OEM? And is that something -- was there a contingency already baked into your outlook, your guidance?

Yes. And James, I'm not going to comment on specific and particular customers. What I can tell you is that at the high end of our guide, we've already baked in that we would -- that the world will lose 1.5 million cars between Q2 and Q4. At the bottom end of our guide, it's 2.5 million cars. And we think that this includes public information that we've -- and public comments that we've all heard from several OEMs.

And how about, just very quickly, on the commercial vehicle and off-highway side. I mean commercial vehicle, right, nonauto was about 15% maybe of your pro forma revenue mix. So something material, something that you're now including in your production outlook. How are those end markets trending at this point? How would you characterize that?

Yes, you're right. I mean if you look at commercial vehicle and off-highway put together, it represents, probably based on our Q1 results, about 13% of our global revenue, which means it's about $2 billion on an annualized basis. And when you look at how we're diversified there, that exposure is about 1/4 in North America, maybe about 1/4 in China, and a good chunk, 40% or so, in Europe, and then the rest of the world had about 10%. So pretty sizable business for us at this point and pretty diverse from a geographic standpoint. And linking that maybe to your first question. So far, I'd say the CV market, in general, has been maybe a little less impacted by the semiconductor issues, but we are seeing some impact in that market as well. Now as I just stack up those markets, how are they performing? I'd say one thing that was notable maybe back in Q1 that surprised us to the upside was the strength of the Chinese CV market, which continued to perform strongly, coming off a pretty strong 2020. We still expect that market to decline on a full year basis given the relatively strong production from a year ago, but it did surprise us a little bit to the upside in Q1.

Yes. That's helpful. Jumping right into the electrification story. Regarding the full system iDM award with Hyundai, we now know it's Hyundai. I believe this was -- BorgWarner's first award that combines legacy BorgWarner motor and gearing capability with the Delphi inverter. So I do want to start the conversation there. You're just 7 months into having the Delphi inverter business in-house. I mean how important was it to have won this award with Hyundai, having that Delphi of the power electronics, that inverter piece in-house? Because I mean we do see other drivetrain competitors announce JV and partnership alliances to have access to that inverter. What is that competitive moat? What does that competitive advantage looks like for BorgWarner, having full ownership of that inverter asset?

I think, first of all, I'm very excited that the whole team in BorgWarner is very excited to partner with Hyundai on full iDM. I think it's very important, James. The fact that we have mechanical, motor and power electronics under one roof makes it way easier for our customers and way easier for us. We've been able to really differentiate ourselves from a power density standpoint, power density versus space. That's really important in those small platforms. And we've been able to do that at the speed of light, a few months after the closing of the Delphi transaction. And I think that speaks volume for: first, our system capability that we've also shown to the market with the Mach-E, but also the advantage that we have versus competition in bringing those 3 elements together. And with this, we can design better. We can focus on NVH better. You know our NVH is important for electric vehicle, and you all know how NVH is important for Hyundai and Kia. And so we've been able to join forces. And when you have all those elements in-house, it's faster. It's -- we're more agile. We are faster in responding to our customers. Just makes the whole process of designing, developing, purchasing and manufacturing much easier. I think it's a key win for us. I would want you to remember that it's the first win from a system perspective. It's not the first win that we've done post closing on the Delphi transaction. As we mentioned before, we've booked inverters, power electronics and software at customers that we know would not outsource Delphi. And it's the combination of Delphi's technology and BorgWarner's customer intimacy that we showed you in the past quarters that we've been able to win some of those inverters already. That's the first win that we have showing the system capabilities with the subsystems under one roof. Very proud of it.

Yes. And a nuance question here. But -- and maybe not using Hyundai as the specific example, but more theoretical or hypothetical. Do -- does the OEM go into the whole bidding process with the intent to grant a full system award? Or is that -- is there a leeway there? Is there a huge gray area where, since you have the complete portfolio, you could kind of shift the conversation to a full system award? More of a question in terms of OEM [ and tenant ], and your ability to shift the conversation.

You are absolutely right. The discussion starts at the system level. The discussion starts at the powertrain portfolio level. And they talk to BorgWarner because from a powertrain portfolio level, from a combustion, from a BEV, from an hybrid, we have it all. We're not tainted by, I have to sell this thing or I have nothing to sell. So we start at the system level. We talk with our customers around what we can provide from a system level. They do the same, most probably in-house. They're testing some of our prototypes because we pass on our feet. And they make the decision inside or outside. If it's inside, by the way, James, it doesn't mean that we've lost it all because they will most probably need power electronics software. They might need motor or portions of motors. If they do the thing in-house, they most probably will do the transmission in-house. But that's how it flows. You start with system and then you carry on the discussion.

Yes. No, that's really helpful. And then just in terms of the pace in industry quoting activity, specific to electrification, I mean this Hyundai award, you just announced the award, and now you already have a start of production in 2023, right? So a pretty quick turnaround. I mean is this a sign of the new normal in terms of EV launches and the turnarounds and the accelerated push by OEMs to get these to market as quickly as possible? Just your thoughts there.

I would not say that 2.5 years between award and SOP or between 2 and 2.5 years is the new norm. You're allowed to be able to test a lot of our products before hand, which we think will accelerate the launch phase and the development phase. But I -- generally, what we quote from a system standpoint here is seeing SOP most probably in '24, and sometimes, even later. It depends around the readiness of the OE and the Tier 1 supplier, system supplier to be able to pull that off faster or slower. I would still think that the time between sourcing and standoff production has a tendency to be faster in Asia than in the Western world. But I would not make it a proxy of -- or everything is going to be squeezed to 2 years or 2.5 years.

No. That makes sense. And I do want to ask about content. I mean, EVs, battery electrics represent a 3x multiplier to your ICE business. The Delphi inverter alone, I mean, when you tell me that it's maybe something around the 900 zip code plus -- 900 plus, I mean that would cover your entire ICE content potential. We know you have the inverter awards already in backlog with just 3 European OEMs. Just those 3 account for 1.1 million units by 2025, is the expectation. And that's, again, just across those 3 European customers. Can you share your thoughts on, focusing on the inverter, what your market share might look like by 2025, and not just across those 3 OEMs, but all of your inverter awarded business? And if I don't get a great answer to that question, how about win rate, right? Other suppliers talk about their win rates, right? So they're not bidding on everything out there. So maybe a color on what your inverter win rate is in terms of the project -- the programs that you're bidding on. And any color there, I think, would be great.

Okay. Well, overall, I mean, I'd start by saying we feel really good about the successes we're having in the inverter space, and I think you're going to see there's more to come there. And when you look at the portfolio we have, we have a wide range of products. We -- today, we have the standard 400-volt silicon inverters. Those don't quite command the type of price you alluded to in your question there, but they still have healthy content per vehicle. But then you move to the 800-volt silicon carbide inverters, and now you start to approach the content opportunity per vehicle that you mentioned before. So the range of products gives us a great opportunity there. In terms of your comments around -- question around market share, or how we're positioned, win rate, we're not going to get into the specifics of what our share is. But let me try to dimension it one way for you. If you think about the year 2025 and our Project CHARGING FORWARD disclosures, we said that we expect our EV business on the light vehicle side that EVs will be about 15% of the global market. So for us, that's about, we think, the market globally, then about 14 million EVs, and probably about half of those coming in China. So what does that mean? It means about half of those EVs, about 7 million, are outside of China, spread across Americas, Europe and the rest of Asia. But probably, a significant concentration of those really coming in Europe, so the bulk of those other 7 million units. So of those remaining EVs, those 3 premium European programs that we've talked about, 1.1 million inverters in 2025, relate to kind of those that EV production volume opportunity. Now obviously, some vehicles have more than one inverter, but that's the minority. So I think what you get is a pretty good picture of the type of share we're already getting in the market when you just look at those 3 programs alone. Again, 1.1 million inverters for a non-China market globally, that's something less than 7 million or so, I think you get a sense as to the type of success rates we're having right now.

Right. Yes. No. That's really helpful. At your recent Analyst Day, I mean -- and you had it in the slides, right, in terms of the transformation of your EV revenue mix, by 2025, 10 points above global EV penetration. And I mean that whole trajectory is pretty clear. But I mean a major driver behind that strategy is the intent to divest $3 billion to $4 billion in legacy ICE revenue, right, over the next 4 years, fill that inorganically with $2 billion to $3 billion in acquired EV-related sales. So first off, can you give us an update on what you intend to achieve on the divestitures front over the next 12 or so months? And any color on the assets that are likely candidates, right? And so I'll start. Is the aftermarket business a definite core piece to BorgWarner's long-term portfolio? Or should we not necessarily rule anything out in terms of the divestiture candidates?