BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

Good morning. I'm Ryan Brinkman, the U.S. autos analyst at JPMorgan. Thanks for joining us for the 2021 JPMorgan Automotive Conference. Very happy to get started with our next presentation, which is a fireside chat between myself and Frederic Lissalde, the President and Chief Executive Officer of Borgwarner; and Patrick Nolan, Vice President of Investor Relations. Fred and Pat, thanks so much for being here. We really appreciate it.

Pleasure.

Maybe a good first place to start is just by reviewing some of your recent electrification awards. As part of the charging forward plan that was discussed back in March, you targeted a very aggressive growth in electrification. There wasn't an immediate positive reaction in the shares, though, indicating that some investors may be still had doubts that you really could grow electrification revenue so quickly as to more than offset any decline in internal combustion revenue. And I think our takeaway from the charging forward event was sort of, hey, the proof will be in the pudding, right? That we're just going to have to see as the awards come in. And it does seem that you have had a number of awards already, right, that are highly encouraging, such as the Hyundai integrated drive module win. And very recently, you announced just a bevy of others, including dual inverters for hybrid electric vehicles and plug-in hybrid electric vehicles in China in iDM for, I think, a luxury manufacturer in China, too. The high-voltage coolant heaters, also new win at AKASOL as well. So maybe just take us through your more recent wins and highlight how or why these awards confirm the bullish view of organic growth that you laid out back at the March Investor Day?

Yes. The proof is in the pudding, and the pudding looks pretty good in the oven. So far, we are on track with project charging forward. So let me remind you a little bit what it means what charging forward means in 2025. In 2025, our goal is to have $4.5 billion of revenue in BEVs, $2.5 billion organic and $2 billion inorganic. From an organic standpoint, you listed some of the wins that we've been able to announce. And we are on track. We've been very successful at the system-level with iDMs where we do it all with iDMs where we are the integrator, but also at the system-level with inverters, high voltage, coolant heaters, motors and others. From an inorganic standpoint, target is $2 billion by 2025. We're pretty much a quarter of the way, 4 months after having announced Project CHARGING FORWARD. As the AKASOL acquisition is going to drive about $500 million in revenue in 2025. So very happy with where we are right now. There is a third leg of Project CHARGING FORWARD, which is the dispositions. And again, here, we've announced a minimum EUR 1 billion to be disposed between now and 8 to 14 months from now. And also here, we're on track. On the inverter side, we've announced 1.1 million inverters to be produced in 2025 for 3 major large European OEMs. It's not all that we're going to be producing, but those are 3 examples leading to high volume. On the eCV side, we've disclosed 800-volt electric motors. And I think that we're very well positioned to hit our goal and meet the objective that we've announced as part of Project CHARGING FORWARD, Ryan.

Very helpful. And I wanted to dig in, if we can, on the revenue synergies associated with some of the acquisitions, that you've made it. It seems to me that your strategy, going all the way back to Remy International acquisition was really for 1 plus 1 to equal 3, right? And that it wasn't just about bolting Remy on top of BorgWarner. It was how the 2 companies' product offerings can enhance each other to provide more value for the customer resulting in more awards for the combined business. Can you revisit the strategic benefit of the Remy acquisition and how that helped you in the market? And maybe draw parallels, if you can, to the acquisition of Delphi Technologies and how Delphi's capabilities are enhancing the combined companies go-to-market? I'm thinking particularly in the area of iDMs. Do you think that already, even with Delphi Tech having closed less than a year ago? Do you think that it has already played a hand in some of these recent iDM awards that you've gotten?

Absolutely. Let me start with that and I'll come back in time with the Remy acquisition. Absolutely, the Delphi acquisition is getting us to a leading position in iDM. Only a few months after the closing on that transaction, we've booked iDM with Hyundai for A class and iDM with a Chinese luxury, which is bigger in output. So we're building our iDM product portfolio at the system level. Also at the component level, we're building a scalable modular component, let's take inverters, for example, 400 volts, 800 volts, 800-volt silicon carbide. And we're booking business together with Delphi that Delphi would not have been able to book. Let's go back in time. In 2012, we're starting talking about the electrification. And coming from the mechanical set, it was logical for us to bring the first puzzle piece, which was molted. And we saw in Remy, a company where we can bring them from starter alternator into drive [ motor ] and use the same product and technology standpoint, use the same manufacturing elements also. We've been very successful in that. All the motors that we have in our iDMs, when it's all BorgWarner made are coming from the acquisition of Remy. The motors -- 800-volts motors that we're selling in commercial vehicles are coming from the acquisition of Remy. So all those acquisitions have shown that we are acquiring companies that are building to our DNA and what is BorgWarner's DNA? BorgWarner's DNA is to bring great technologies and commercialized, industrialized them at scale at the right time when the market is cooling. And we've done that in the past. We're doing exactly that now in the world of electrification. So that's the DNA of the company that we are now applying to the world of e.

Great. I'd like to ask the same question, but this time about the revenue synergies associated with the AKASOL acquisition. Certainly, the acquisition of AKASOL is interesting because it expands your total addressable market by getting you into the additional market for commercial vehicle battery packs in a wholly owned way. And maybe the revenue synergies are not as obvious as with Delphi Tech because AKASOL has less revenue, just $75 million in the back half year. But is it the case now? Or could it be in the future that you can package together in a more complete system, some of the things that AKASOL does and some of the things that BorgWarner does, like maybe the high-voltage coolant heater or some of your thermal management products. Beyond gaining leverage to AKASOL's own high-growth battery business, what would you say are the revenue synergy opportunities on off or whether it's from the product side as mentioned or maybe from a -- I don't know, a customer introduction perspective too, just considering the $2 billion of revenue, you're already doing in commercial vehicles with all these commercial vehicle OEMs all around the world.

Yes. No, you're absolutely right. So I would say that we're very happy with the completion of the AKASOL acquisition. We own 93%, and we've announced that we will start to squeeze out process to get to 100%. On Monday, I'll be with AKASOL opening their first Gigafactory 1 in Darmstadt, Germany. And they have a great book of business in Europe and North America and they've announced $0.5 billion revenue in 2025, which is going to be a significant contribution to charging forward, as I alluded to in your prior question. I see 2 major synergies between BorgWarner and AKASOL besides the technology synergies and helping each other launching product. The first is the cross-fertilization of customer intimacy. The 2 major customers at AKASOL are Volvo Trucks and Daimler trucks and buses, [indiscernible] customers. And as you mentioned, we have $2 billion of commercial vehicle business around the world, and we think we can help AKASOL growing faster. The second thing is around product. We have battery management systems that came with the Delphi acquisition. We have high voltage coolant heaters that cool the -- that hit the coolant of battery packs. And why will you think about getting those 3 elements of the company working together? Absolutely, we will. And I think that in all likelihood, we will find ways to create value for our customers by having people work together in finding product initiative and in a way around the battery packs, around the thermal management of battery packs and around the electronics and software management of battery packs.

Great. Thank you. Maybe switching to the iDMs for the light vehicles again. I've heard you say that it takes 3 things to be successful in the iDM market. It takes the right technology, the right economics, including scale and free content, and requires the agility provided by a vertical integration and in-house capabilities. Can you just touch on how you are positioned to compete in the iDM market relative to the other suppliers that are out there? A couple of other companies we cover seem to be trying to compete in this area but without the vertical integration that you say is really key. Do you expect to meet with more success then than those other companies? And is vertical integration from your conversations with automakers. Is it something that they value when sorting between the different potential suppliers?

Yes. The vertical integration is an asset, having under 1 roof -- not even 1 bar on the roof, it's 1 business unit roof. That mechanical, the motor and the motor controller is an asset. Let me give you a concrete example with the business that we won with Hyundai. With Hyundai, we've been able to go with a low -- with a smaller motors than anybody else in the world because we add that portfolio in the company. And since we are controlling the motor, we have been able to go back to the customer and say, "Hey, why don't we use -- why don't you try that motor sales, which is smaller in nature? We've tweaked a little bit [ the gear set ]. We've tweaked a little bit the software strategy, try it, you'll be lighter, cheaper, more efficient. That's a concrete example of what we can do, having those elements under 1 roof that would be much more difficult to do if you don't have those elements under 1 roof, more difficult and would take more time.

Okay. And then, of course, some automakers have suggested that they would like to assemble their iDMs themselves. And it's kind of confusing because some of these automakers that are bringing the work in-house, they seem to be in other cases, also outsourcing iDM assembly to suppliers. So for example, Ford has talked about doing the F-150 light in iDM in-house, but you do the Mustang Mach-E iDM for them, right? So you've talked about what it takes to compete effectively with other iDM suppliers. But what about when it comes to competing with the automakers themselves for the assembly work and given that some automakers will in-source short of providing complete systems. What opportunities do you see in providing individual components to those automakers wishing to in-source the system assembly? How attractive would it be to supply, for example, just the inverter component to an automaker system? Do you think for some automakers, you will do just that, supply an inverter for their system, but maybe for a different vehicle in a different geography for that same automaker they do outsource the entire iDM. How do you think that shakes out?

So here is how it works concretely in the field, right? We're meeting our customers all the time. And we start by talking a system. They need an iDM. Let's say that, okay? So in order to discuss the make or buy, they need to have a buy option. They bring BorgWarner in, what would be the products, et cetera, et cetera, that we can provide and they're looking at this make or buy. And you're right, you don't have a one size fits all in different regions. It can be different. Within 1 customer, it is different. Look at Hyundai. Hyundai is making some of it, has designed some of it but make having as the component source from the outside and is buying a full system from BorgWarner. So all that is going to go exist. But first, to be able to sell systems, you need to be able to talk systems and supply systems than we can. Then if the customer doesn't want buy a system over the 30-plus years in the auto space, I've understood that it's never a good idea to fight with your customer. And so we're positioning ourselves into being able to supply components. Inverters is absolutely the one that is the less likely to be in-sourced. And in order to be driving a core value proposition, we need 3 things: one, we need product leadership. The customers need an inverter supply that can do 400-volts, 800-volts silicon carbide and the combination of the above. And sometimes dual inverters as the one we've announced last week. Two, you need scale. It's not enough to have a product. If you can't produce it at scale across the 3 continents and buy at scale and manufacture at scale, you're not going to be competitive. And three, we think there are high level of vertical integration and in-house capabilities, especially for inverters, on power modules but also other components are key. And so ASICs, for example, we do our own ASICs. So those 3 is our core value proposition and look at the content per vehicle of an inverter. An inverter is equivalent to most of the combustion business. Could we have sold it all into one engine. So I'm very happy with where we're positioned from a system level and very happy where we're positioned from an inverter, especially in pass car [indiscernible] so in CV. And in motor, especially when it is part of our systems, but also in commercial vehicle. I think we're positioned the best way to give the maximum degree of discussion and growth for the company when we talk to customers around the globe.

Okay. And we've been talking so far mostly about the impact of electrification on revenue. Maybe a question then on what this all means for margin. I wouldn't expect early-stage electrification revenue to, of course, generate the EBIT margin that your more mature business does. But what can you tell us about, say, the gross margin that you're currently generating or expect to generate on electrification products in comparison to ICE and what that might imply for the eventual EBIT margin that you could make on this product as the revenue ramps and you can absorb the R&D spending that you're doing now to develop the technologies?

Yes, Ryan, maybe I'll take that one. So let make a couple of points to make about margins. So we are a top quartile margin company in the industry. And that's something that we take a lot of pride in and something that we don't expect to change going forward because it's really core to the value proposition of BorgWarner, not only to our investors, but to our customers. Also, when you think about the 11% -- greater than 11% margin target we set out for 2023. We do believe we're firmly on target for that based on our revenue growth profile as well as the synergies that we still have to come from Delphi and the restructuring savings, both from a BorgWarner side, and the former Delphi operations. So we feel like we're in a good target for that 11% plus margin target. But specific to your question on the EV margin profile, we're already incurring headwinds to our margins today, as you alluded to, as we're spending R&D for future growth. So what does that mean in terms of numbers? Today, we're spending roughly 30% of our R&D for e products. That's when from a revenue basis today, they're only low single digits of our revenue. So there's already a significant R&D headwind already built into our margin profile today. Now as that revenue launches, you're going to see incremental margin performance on that revenue that's going to help absorb that R&D burden. And we've outlined that we expect to be breakeven in that '23, '24 period as we start to launch the revenue of this EV profile. So it's really when you think about E, don't think about e as being a headwind to our margins as the revenue come, we're already incurring that margin headwind today.

Interesting. And then I wanted to ask on the ECV or electrified commercial vehicle market. At the Investor Day, you talked about the total addressable market there growing from $8 billion this year, about $29 billion by 2030. So really some huge growth there. We discussed AKASOL's Battery Systems earlier. But can you talk about what other products that you may supply today on the electrification side for commercial vehicles. And you've also talked about building out that eCV portfolio by leveraging your existing eLV portfolio, exploring partnerships or acquiring other companies like AKASOL. What does the eCV portfolio look like today in terms of its completeness? And what are your priorities and looking to try to complete it?