Chelsea welcomed everyone to the BorgWarner 2023 Second Quarter Results Conference Call and then handed the call over to Patrick Nolan, Vice President of Investor Relations. Nolan mentioned that their earnings release is posted on their website and that they will be attending multiple conferences until their next earnings release. He also warned that they may make forward-looking statements that involve risks and uncertainties. Nolan then discussed the non-GAAP measures they will use to provide a clearer picture of their core business performance and for comparison purposes. He also discussed the market they will compare their growth to and that starting in the third quarter of 2023, their Fuel Systems and Aftermarket segments will be reflected as discontinued operations.

The company reported strong second quarter results, with approximately $3.7 billion in sales and 22% organic growth. The free cash flow usage reflected capital spending and working capital usage. The company also made progress on multiple fronts, announcing new product awards, a long-term component supply agreement, a 2027 plan for accelerating eProducts portfolio, a 2023 sustainability report, and the planned acquisition of the electric and hybrid segments of Eldor Corporation. The spin-off of PHINIA was also completed.

BorgWarner unveiled their Charging Forward 2027 strategy at their Investor Day in June, which builds on the success of their initial Charging Forward strategy. The three pillars of the strategy are to continue eProduct growth, increase eProduct profitability, and maintain strong top quartile margins for their foundational products. Additionally, BorgWarner announced the acquisition of the electric and hybrid segment of Eldor Corporation, which is expected to generate additional 2027 sales of EUR 250 million and expand their high-voltage power electronics beyond inverters.

BorgWarner acquired Eldor to add scale, capacity, and capabilities to their power electronics engineering resources. They estimate that the addressable market for power electronics is $31 billion by 2030. They also announced a long-term agreement with onsemi to secure the supply of semiconductor dies needed to support their growth. Finally, they have taken several steps to secure the long-term supply agreements necessary for their growth and have announced new product awards.

BorgWarner reported double-digit organic revenue growth in their second quarter financial results, driven by higher industry production and outgrowth in Europe and China. The company has also been selected by a leading Chinese OEM, a major East Asian OEM, and a thermal and energy management solution supplier to supply IDM, eMotor and inverter, and high-voltage coolant and heaters, respectively. Looking ahead, BorgWarner's Charging Forward 2027 strategy has laid out the path for the next four years.

In Q2, pro forma adjusted operating income was $369 million, a 10.1% margin. This was a result of solid conversion on higher revenue, customer recoveries of material cost inflation, and the acquisitions of Santroll, Rhombus and SSE. Foreign exchange drove a 1% decrease in revenue, but organic revenue increased 22%, and customer recoveries were an $11 million tailwind year-over-year.

The company's adjusted EPS improved by $0.31 compared to a year ago, and free cash flow was a $42 million usage due to higher capital spending and increased working capital. For the full year, guidance now assumes a $35 million headwind from weaker currencies, and organic growth of 13-16%, with eProduct revenue expected to be between $2.3 and $2.4 billion.

The company is expecting total 2023 revenue to be in the range of $14.2 billion to $14.6 billion, with an adjusted operating margin of 9.2% to 9.6%. The net year-over-year impact of material cost inflation on full year margin is likely to be a 10 basis point to 20 basis point headwind. The company is investing more in R&D to support its eProduct portfolio and is expecting full year adjusted EPS from continuing operations in the range of $3.50 to $3.85 per diluted share.

In the second quarter of 2023, BorgWarner achieved organic growth of 22%, generated 10.1% adjusted operating margin, and delivered strong revenue growth and bottom line adjusted EPS. They expect to deliver free cash flow from continuing operations in the range of $400 million to $500 million for the full year, excluding approximately $150 million in onetime cash costs related to the spin-off of PHINIA. Despite a modestly lower full year revenue outlook for their ePropulsion segment, they still expect a slightly positive segment margin in Q4. They currently have eProduct business with seven of the 10 largest global light vehicle manufacturers of electric vehicles and high-voltage plug-in hybrids.

In the second half of 2023, the company expects to deliver strong organic growth and improved profitability in their eProducts. This is due to an increase in revenue of $450 million to $550 million, and a conversion rate of 15%. However, markets are expected to be down 6% sequentially from the first half to the second half.

In terms of assessing potential risks associated with UAW strikes, the company has not included anything in their guidance, as they do not have a crystal ball. The North American exposure to Ford, Stellantis, and GM is around $250 million a month. Additionally, there are concerns from automakers about EV adoption slowing, which may put pressure on the company's overall profitability.

Frédéric Lissalde explains that the topline has been adjusted due to issues with keeping up with the demand on battery packs and the lower-than-expected production of North American EVs. He assures that the long-term outlook is still clear, though there may be some quarters where growth is not as high. John Murphy follows up by asking if the slower ramping of EVs could benefit margins in the short run, to which Frédéric responds that they are seeing a strong customer pool and steady product wins.

BorgWarner recently spun-off PHINIA, which issued $800 million of debt and retained $350 million for its cash balances. This resulted in an inflow of cash to BorgWarner of $450 million. BorgWarner plans to manage its leverage profile to keep below 2x on a gross debt-to-EBITDA basis.

Frédéric Lissalde of Seneca discussed the impact of a slower-than-expected EV adoption rate on the company's M&A pipeline. He also discussed the gating factors on battery production ramp, which are related to manufacturing equipment and will take 18-24 months to reach full capacity. Seneca has announced $1.3 billion in battery pack revenue for 2027.

Kevin Nowlan of ePropulsion discussed the company's margin progression and how they are confident to achieve a positive margin profile at the end of the fourth quarter. They attribute this to the increased scale of the business and the conversion of the incremental revenue. There was also a small change in the full year guidance, with a better outlook for organic growth due to better production, but the operating margin range remained unchanged.

Frédéric Lissalde discussed the synergies between power conversion engineering, purchasing, and product similarity. Kevin Nowlan then commented on the geographic mix of eProduct revenue, noting that the $450 million to $550 million ramp-up in eProducts is largely driven by product launches and ramp up in China.

Dan Levy asked Frédéric Lissalde and Kevin Nowlan about the growth dynamics of the company, and they responded that eProducts is a significant driver of outgrowth, with customer pricing contributing to a full year basis of 170 basis points. They also stated that the foundational business is continuing to outperform and that eProducts revenue is expected to increase by $450 million to $550 million sequentially from the first half to the second half, despite global markets being down.

Frédéric Lissalde discussed the hybrid business within the foundational piece, and how it is accretive to CPV and margin. He also mentioned that they have disclosed $1.3 billion of hybrid in 2025 on the e-side. He also mentioned that they play a role in high-voltage plug-in hybrids, which are part of the NEV environment in China, as well as range extenders. He then discussed the platform sharing agreement between Volkswagen and XPENG, and how XPENG is a significant customer of theirs.

Frédéric Lissalde discussed Stellantis' strategy to counter Chinese invasion of Europe with low-cost country sourcing. He mentioned BorgWarner's success in scaling up production in China for BYD, Changan, Chery, XPENG, Li Auto, and Great Wall. When asked about the potential expansion of their business due to platform sharing agreements, Lissalde said it depends on the platform and he will let them know when he can. Finally, Lissalde declined to comment on the implications of higher labor costs for OEMs due to union labor utilization.

Kevin Nowlan responded to James Picariello's question regarding the net commodities impact in the quarter and what is expected for the full year. He stated that the pricing element was a positive of 2.5% of revenues and that the net impact on the P&L would be a 10-20 basis point headwind. He also mentioned that the restructuring efforts outlined at the June Investor Day are progressing according to plan. Picariello then asked a high-level question about the potential slowing down of EV ambitions from automakers due to demand or production constraints.

BorgWarner is prepared to flex their R&D spend if OEM intentions change, and are confident in their ability to maintain strong margins on their foundational business. They have constructed their portfolio to be resilient in any potential scenarios, and Patrick Nolan concluded the call by thanking everyone for their questions.

This summary was generated with AI and may contain some inaccuracies.