BorgWarner Inc. (BWA) Earnings Call Transcript & Summary

It looks like we're ready to get going with the next presentation. Once again, I'm Ryan Brinkman. Thanks for coming to the 2022 JPMorgan Automotive Conference. Very excited to get going with BorgWarner, including with Kevin Nowlan, Vice President and Chief Financial Officer; as well as Pat Nolan, Vice President of Investor Relations. I see Eddie Sander from IR as well in the front row. So Kevin, Pat, Eddie, thanks so much for coming to the conference.

All right. Well, thanks for having us, Ryan. And I thought I'd open with a few slides just to level set, and then we'll sit back down and let Ryan hit us with some Q&A. And so I'll start by talking about Charging Forward. 17 months ago, we announced our project Charging Forward strategy, which is really the strategy to reposition the company more aggressively toward electrification. And you can see, jumping off of 2021 where our revenue in pure battery electric vehicles was less than 3% of our overall revenue base. And the strategy involves accelerating that to 25% of our portfolio mix in 2025 and then 45% in 2030. And there's 3 pillars of that strategy, you see them on the left. First is versus driving organic growth. This is the growth in the part of our EV portfolio that we already had preexisting prior to the announcement of Charging Forward in March of last year. That would be growing things like IDMs, inverters, gearboxes, e-motors, those types of things. The second element of the strategy is EV-focused M&A. And you've seen us executing some of that over the last 1.5 years, and I'll talk about that more on the next slide. And then finally, optimizing our combustion portfolio, which means what? It means looking at parts of our portfolio that we don't think fit with BorgWarner longer term. Places where we don't have product leadership, where we don't have growth prospects in a particular product and we don't have a strong margin and cash flow generating profile. So if we don't tick all those 3 boxes, then it's a candidate for disposition. And executing on those things is how we drive the 2025 and 2030 objectives. Now we announced Charging Forward 17 months ago, but that doesn't mean our journey started just 1.5 years ago. This has actually been going on for some period of time at BorgWarner, really dating back to 2014, 2015. And really, the initial foray, I'll say, into the space of really accelerating electrification came with the Remy acquisition in 2015, which gave the company rotating electric capability. But then the real accelerator, that I'll say the cornerstone of what's become Charging Forward was the acquisition of Delphi Technologies in 2020. And that really gave us technology leadership and scale in electronics and software. Then since then, you've seen us execute a few other acquisitions. AKASOL, a leader in battery modules and packs for the commercial vehicle off-highway in industrial space. You've seen us buy, back on April 1, Santroll's light vehicle e-motor business based in China. And then finally, Rhombus Energy Solutions, which we announced last week, which is a stationary charging business building on and complementing the existing capability that we've been working on internally in Europe dating back to 2017. And so the result of all this is if you look at the portfolio where it was constructed for the EV world. Back in 2014, it was about $399 of content opportunity per E-Light vehicle. But where we are today through the organic evolution and the inorganic evolution is a content opportunity on a light vehicle that's 6x that. And that doesn't even count the battery packs and the charging, which because they don't really apply to a light vehicle per se, and each of those are worth tens of thousands of dollars of content per individual unit. I think if you look at this next slide, it really gives you an idea of how to think of the portfolio and how it all fits together, what we're doing in the E space. And it's really focused on how we manage and improve the efficiency of moving electrons from the grid all the way down to the wheel. And so that's what you see on this particular slide. And so as you think about the growth for BorgWarner, it's really going to come in these categories, whether that's again from the organic perspective or an inorganic perspective. On the right side, you'll see some places where we've really developed some product leadership, and I'll talk about that a little bit more, whether it's inverters, IDMs or even our high-voltage cooling heaters. And on the left side, where you're seeing more development investment dollars going. That's a little bit of the theoretical of where we're focused. If you look at how we've turned that into practical business wins and what's driving our real revenue wins, you can see a sampling of that on this slide. And this is just because we can only fit on the slides to make it still readable. But if you look back over the last 1.5 years, 2 years, we have announced more than 20 wins in the EV space, in the e-product space. But you see a sampling of some of them on this slide, whether it's the 800-volt electric motor, you see on the top left there with a global commercial vehicle EV customer, which launches in a couple of years. You see in the top right that 800-volt silicon carbide inverter for a premium German OEM, which launches in 2025. Last week, we talked about the commercial vehicle battery system you see on the top there with a European commercial vehicle OEM. So again, it's continuing to see progress with the AKASOL business. And then finally, I'd be remiss if I didn't talk about the high-voltage silicon carbide inverter down at the bottom right there, which was an award for a North American inverter program for a global OE, which is the biggest inverter award. Actually, the biggest award in BorgWarner's history in terms of both the lifetime revenue opportunity as well as the in-year revenue as we look out to its peak revenue years. So this is just a sampling of what's underlying our charging forward wins in practice. And on top of those wins, we had another win that we announced this morning, if you saw our press release, building on the integrated drive module award that we had from Hyundai a year ago. We were awarded another program, integrated drive module with Hyundai on another ACE segment platform, which is expected to launch in 2024. So I think that's a demonstration, again, of our system capability and the fact that you have a customer coming back to you and asking for more, I think that really demonstrates what we're bringing to the table from both a technology leadership perspective and doing it at a cost competitive position that allows us to win. Next, you see our battery pack business. Again, this is AKASOL. Looking out to 2025, our expectation is that this business is going to deliver more than $600 million of revenue that's the guidance we've been marching toward right now. We'll look to update that as we get into the beginning of next year. But if you ask me right now how this business is performing and whether we think there's downside risk or upside opportunity to that, I would tell you there's upside opportunity, absolutely. We're continuing to win new business, whether it's with the existing OEs that we had already been doing business with or GILLIG that we announced a quarter ago or the latest win that we announced last week, we're continuing to see momentum in this business. In fact, we're accelerating some of our investments in this business because of the demand that we're seeing. We'll be building another facility in North America, for instance, because the demand -- we've already outgrown the capacity that was installed in the North American market a couple of years back. When you look at high-voltage cooling heaters, this is a product that we developed organically based on our thermal capabilities. And if you look at what we've already secured and booked business to date, we'll be producing 4 million high-voltage cooling heaters in the year 2025, which we think puts us among the market leaders in the space. You look at e-motors between what we had with Remy and what we've now acquired with Santroll's light vehicle business. We have 2 million units of booked business looking out to 2025. And based on the pipeline that we're still driving toward, we would expect that number heading into '25, '26 actually to ultimately be about 3 million high-voltage e-motors. Again, positioning us to be among the market leaders from a non-captive perspective there. And then finally, on inverters, given the 3 million booked units we have high-voltage inverters in the year 2025, we expect to be the #1 noncaptive producer in the world in the year 2025. And when you look at the content that we have on these, the $2.1 billion relative to that 3 million inverters, it tells you that the average content on each of these is about $700. That tells you we're playing at the technology leadership end of the spectrum when you think about this because when you get even to a 400-volt silicon inverter, pretty strong capability inverter, that's about $400 of content. When you get to an 800-volt silicon carbide inverter, it could be $800 or more. And you can see where we're skewed more at the high end of that spectrum from a content perspective. And so how does that all come back together as you think about charging forward and our objectives in those 3 pillars of our strategy? Well, first, as it relates to the organic side, our objective was to deliver $2.5 billion of organic growth of business in the year 2025. Based on our bookings to date, we've already achieved $2.9 billion. There's probably a little bit more runway to go there over the next 6 to 9 months. So maybe a little bit of incremental upside to that. But already achieved that objective. So a checkmark there. When you look at M&A in the middle, basically any capability that we're looking to add since we announced CHARGING FORWARD, which is AKASOL, Santroll, Rhombus and others to come. We're 1.5 years into this 5-year journey, and we're already 40% of the way there. But I would just emphasize this column isn't about hitting a particular revenue target. It's about making sure we build the capabilities and scale that we need to be a product leader across the spectrum of the e-Propulsion product category. So it's not about I have just $1.2 billion to go, it's about how do I make sure I position myself to have product leadership across the space. We think that will be manifested if we get another about $1.2 billion in revenue there. But ultimately, it's about building capability. And then finally, with dispositions, we executed a small disposition last year, a couple of hundred million dollars of facility in Water Valley, Mississippi. And we'll continue to work on the dispositions over the next 3.5 years to make sure that we position ourselves to continue to evolve the portfolio more aggressively toward EV. So by the time we get to 2025 and deliver 25% or greater penetration in EV, we're significantly overweight the market at that point. So we're really excited about the progress we've made even in the last 17 months, really the first 17 months since we announced Charging Forward, but definitely more to come across all of these pillars of the strategy. So that's all I had in the way of prepared remarks. So with that, I'll come sit next to you, Ryan, and fire with it.

Great. Firstly, I wanted to check in on growth over market, including after the Charging Forward Investor Day last year, you targeted growing 3, 4, maybe 5 points over the market over the nearer term, similar to prior as you undergo this significant portfolio transition. Since then, though, you posted significantly stronger growth over market. So in the 4 quarters of 2021, it was 5, 8, 13 and 8 points faster than market. In the first 2 quarters of this year, you put up another 8 and roughly 7 points of outgrowth. So way above your target. Firstly, maybe revisit the drivers of this seemingly faster-than-anticipated outgrowth the degree to which it reflects maybe cyclical factors like semis driven mix improvement or more structural factors like increased traction for your products. And then secondly, while your ability to hit out your total revenue in 2025 or 2030, those numbers that you put up is obviously dependent upon the performance of the overall market. Does the revenue outgrowth performance in the time sense at the Investor Day, give you any greater confidence in or cause you to maybe see upside risk to the revenue outgrowth figures that you then provided?

Thanks. So a lot there. But with respect to the revenue effort, I mean, we're very pleased with what we've accomplished the last couple of years here. And if I look at what we've accomplished in 2022 alone, so we're about 8.5% to 9% is what we're expecting from an outlook perspective. But so this year, when you look, we're about 8.5%, 9% outgrowth for the full year. Now a little bit more than 3 points of that is coming from some of the pricing for material cost inflation, the recoveries that we're working on with our customers. So you have to keep that in mind. So if you net that out because that's an unusual situation, I'll say, in the current year. We're probably more in that 5.5% ZIP code. But we're pleased with that performance. I mean that's relatively in line with what we've told you to expect kind of in that 3- to 5-point ZIP code. An important point to keep in mind there is, remember, with some of the public disclosure we've had, our EV business. I mean, last year, EV revenue was about $350 million. this year, it's about $850 million. So there's $0.5 billion of revenue growth coming from EV and you can do the math of what that contributes. That's more than 3 points are -- depending on how you want to do the math on it, but we're getting some significant outgrowth there in the portfolio.

Very impressive. And when you look at your electrification product portfolio today, are there any categories that you would call out as especially exciting and perhaps with regard to the size or growth of the addressable market or maybe with regard to BorgWarner's entrants in the market being higher performance or lower cost relative to the competition? For example, within like power electronics, you seem to have booked a really outsized share, you mentioned of the market with your silicon carbide inverter offering. More recently, though, perhaps aided by the Santroll acquisition. You've put up some really exciting growth expectations for e-motors, too. Which are the electrification products or product categories would you say that you're most excited about?

I think what we're most excited about is really the breadth of the portfolio. It's that we're not a one-trick pony that -- we are establishing product leadership in the different places that we're playing. Obviously, we talk a lot about inverters because we've had a tremendous amount of success there in the 1.5 years that we've really owned the Delphi Technologies business and how we've accelerated the growth in that business. So pleased to be the #1 non-captive producer there as we look out to '25. But we are looking at having market leadership now in e-motors among the leaders of the non-captive environment or high-voltage coolant heaters being among the leaders there. And our objective as we look at the spectrum of products and systems that we provide in the marketplace is to ultimately establish product leadership in the marketplace no matter where we play. So we like the idea of just -- we're excited by the breadth of what we're bringing to bear as part of our BorgWarner portfolio. And the fact that even as we sit here today between the booked business and the acquisitions that we've secured that our e-products portfolio, both EVs and advanced hybrids will be approaching $5 billion already in the year 2025. That's EVs and advanced hybrids.

That's great. And we've talked about inverters and about e-motors. I know you're happy to sell these components to automakers separately. Presumably, you're even happier to sell them right bundle together with the gearbox as part of what you call an integrated drive module or IDM to provide a comprehensive electric propulsion solution. I wanted to check in on what the latest is with regard to IDMs. What is the relative appetite for different customers, maybe in different geographies or with regard to different vehicle segments for sourcing these components separately versus together. And what do you expect the trend will be going forward in terms of automakers sourcing them together separately? And how is BorgWarner positioned in either case?

Maybe I'll take that one. So just a refresher on IDM. So when we refer to an IDM, as Ryan said, it's the inverter, it's the motor, it's the transmission, all packages under 1 component. And effectively, what this is, is it's the entire EV propulsion system downstream of the battery and then you have some axles that go onto the wheels basically. And we're seeing really good demand for those products. And Kevin responded -- highlighted that in his presentation, our second award with Hyundai. We had another one that we announced about a little over a year ago. And we've announced 2 awards with 2 Chinese OEMs in that market as well. So we have had 4 IDM awards in the past 1.5 years. So pretty good momentum there. Where we're seeing the biggest demand for it is, frankly, in Asia because those OEMs are prioritizing not only technology advantages, but speed to market. So when you think about that IDM award, as we sit here, kind of more than midway through 2022, talking about a product that's launching in 2024, that's a pretty compressed time frame. And that's really what those OEMs in Korea and China are really emphasizing speed to market. Now in other markets around the world, our customers have other factors in their sourcing decisions, i.e., labor, that they have to do it. So in many of those markets, they are choosing to assemble the final module in-house in which case we'll supply the components. We could by the inverter, stand-alone, the motor stand-alone or the gearbox. And that's okay. I think the beauty of the model is we're happy to sell the entire system or we're happy to sell the components of this which way the customer wants to go.

And we talked about inverters, about e-motors, power electronics, right? Recently though, you announced what is, I think, your first battery management system award or BMS, right? But more can you tell us about that award? And I think maybe you cannot yet name the customer, but how does BMS product compare to some of the other markets you've already penetrated such as power electronics and e-motors in terms of addressable market, content per vehicle, or when it comes to your comparative advantage relative to the competition? Could BMS possibly form another important leg of the stool, approaching some of the other product categories within electrified products in terms of financial materiality?

Yes. So we announced that battery management system award on our first quarter call. It's for a global OEM. It's across A, B and LCVs for that customer. So it's a good size award. Really, it's our first battery management system award that we've announced publicly. And what I can tell you is this is an area that we see opportunities to grow in. We're not nearly the scale that we are in inverters and battery management systems. So I think it's one of the areas that we're going to look to grow potentially -- organically for sure, potentially inorganically. But we also need to leverage the scale that we have in that business, not only is selling those systems separately, but we're applying our BMS technology and our own battery package to the AKASOL business.

And could you review the recent acquisition of Santroll, which adds to your e-motor capabilities? What was it that attracted you to Santroll? Was it their technology, engineers, customer relationships, book of business, et cetera? And then after the acquisition, would you say that your e-motor portfolio is now complete in terms of product or a technology perspective? Or are there still capabilities or customer geographic exposures you might still wish to inorganically add.

So taking a step back, when you think about Santroll what did they actually bring to BorgWarner? There's 2 operational factors that we focus on. First, was their vertical integration that they have in their manufacturing process, they do some of their own tooling. In addition, they had some pretty interesting motor design properties that we thought we could apply to our business. So when you take a step back, we're going to be getting a bit more vertically integrated on the motor side in terms of our design and our manufacturing, which we believe is actually going to improve our cost base. And what that translates into, if we were speaking about a year ago, we would have told you that we're likely not going to pursue stand-alone motors. We're going to be more focused on systems. Now with this improved cost base, we actually think we can pursue the stand-alone motor programs. And as a result, we're in a pretty good position from a scale standpoint. We booked about 2 million motors now for 2025. And we believe there's a path to get closer to 3 million by the time we get there. So it's hard to say if we're done on the motor side, but we've certainly gotten to the scale position and the cost position that I think we wanted to get through.

Great. Maybe similarly with AKASOL, just to check in there, including -- I think it's interesting because like with battery management systems, it just seems to be an entirely new tangential product category and hence growth opportunity to focus on commercial vehicle batteries. What kind of growth are you looking for at this point for AKASOL? And how would you rate the performance of that acquisition since you took it on board?

And it kind of dates back to -- probably what we're talking for a moment about Romeo Power because that was our initial foray into the business back in 2019. So as we made that initial small investment, we started to really learn about the space and who the players are and what it took to be successful. And so we decided we really liked what we saw as the potential in that space, which led us to AKASOL. And what we liked in AKASOL was a number of different things. I mean they had strong relationships already with some of the major OEs around the world. They already had a book of business, a backlog of $2.5 billion or so. They're sell agnostic, which we really liked. whether it's cylindrical, prismatic or pouch, they're able to produce modules and packs for any of those. And they already had manufacturing footprint capability across Europe and North America. So that's what we like. So to the heart of the question, and so how is that doing, as I mentioned in my remarks, as I -- as we look at the revenue prospects, I think the demand is accelerating relative to maybe what we were initially thinking. So I think there's more upside than downside potential as we think about that business relative to the $600 million of revenue, and it's evidenced by some of the wins that we're seeing. What that does mean in the near term is it's actually created more of a headwind that's already embedded in our guide. Because, for instance, we're investing in a new manufacturing facility in North America. In our original diligence model, we didn't think we would make that investment until 2024. We've accelerated that investment now into 2022 because of the demand we're seeing in the marketplace for what AKASOL brings to the table. So it's actually created a cost headwind from both a capital perspective and an R&D perspective. But we're okay with that because we like the prospects of what that means as we look out over the coming years. So really pleased with it.

Great. and maybe just as a follow-up to AKASOL, the market for light vehicle batteries, I think, is very much a scale business, dominated by some very large players. Does it look any differently in the commercial vehicle battery market? I recently visited an electric bus factory. And at least at the vehicle level, that is a much less automated industry than the light vehicle industry, almost really hand built. And so possibly may convert less scale advantages. But just curious when competing in the commercial vehicle battery space, if you are bumping up against the likes of Samsung, LG, CATL. And if so, what gives you the confidence to take on these really big players?

You want to take that one?

So maybe I'll talk about that a little bit from a technology perspective. So you're right. I mean you have to know that this is going to be a much smaller volume per program application. What that means is a lot more designing a product that suits that customer need, and knowing that you're going to have to provide a little bit more customer service along with that contract. So why is AKASOL actually in a good position related to those competitive dynamic? . First, on the technology side, they've been in production with these packs for a while. Kevin talked about them being cell-agnostic. They've, in fact, actually produced packs with all 3 cell form factors. I believe that's actually important. Second, they're doing very well from an energy density standpoint. The program that we announced last week for European manufacturers, our first program using our next-generation pack, which has a nice step-up in that energy density. Another factor which I think may be underappreciated is the actual physical design of the battery pack for the commercial vehicle space. In a light vehicle space, you can potentially integrate that into the structure of the vehicle. But given the environment that, that commercial vehicle is going to operate in, it has to deal with much more vibration, much more harshness, much more different weather factors that used to last longer. What that means is the actual -- when you look at a pack design for the commercial vehicle battery packs, it's much more robust in nature. And then the last point is the ability to scale those packs. So many of the bus applications that AKASOL has today, the packs that you have is as big as this table and you're stringing together sometimes 3 or 4 or 5 of those packs together. So you may to not only be able to do that from a pack level, but you need the software and that hardware that can make those packs talk to each other. So I think it's all those factors from a competitive standpoint that's allowing them to actually grab a good hold of that market.

Yes. And we've talked so far today about the faster traction that you've had in the revenue generation for the EV portfolio. Is there any update you can provide on your other target to reach profitability for the EV portfolio, I think somewhere between like '23 and '24 because when you come out with that target, you were looking for $2.5 billion of revenue in '25. Now it's like well over $3 billion, right? So does that put you on a better path toward achieving profitability or maybe there's cost pressures impact on all of the business. And then perhaps as you onboard lots of business, that also means you need to invest more. Clearly, you're tracking ahead on revenue, but how should we think about profitability for your EV business?