The operator, Leo, welcomes everyone to the BorgWarner 2023 Third Quarter Results Conference Call and introduces Patrick Nolan, Vice President of Investor Relations, to begin the call. Nolan mentions the company's upcoming events and warns that forward-looking statements may be made during the call. He also explains the use of certain non-GAAP measures and defines terms such as "comparable basis," "adjusted," "organic," and "market." The earnings call presentation is available on the company's website.

In the third quarter of 2023, BorgWarner reported strong financial results with double-digit organic growth and strong margins. Their focus on electric and hybrid vehicle products has resulted in multiple new awards and they are confident in the long-term growth opportunities in this area. Additionally, BorgWarner has committed to reducing emissions through the end of the decade, with their targets being validated by the Science Based Target Initiative.

BorgWarner's Charging Forward strategy is expected to reduce Scope 3 emissions through the use of e-mobility products and a focus on design and purchasing. The company has received several awards for its eProducts, including an onboard charger for a major North American OEM, silicon carbide inverters for Volvo, and high-voltage cooling meters for a global OEM. BorgWarner's efforts have been validated by the SBTi and demonstrate their commitment to a clean, energy-efficient world.

BorgWarner expects to start production of their new program in 2025, which combines inverter and converter elements to manage electric drive and accessory systems in a more efficient and cost-effective way. They have reduced their 2023 eProduct sales outlook by $300 million due to launch delays and slower volume ramp-ups from customers. However, they still expect eProduct sales to increase by 40% and have a long-term view of industry-wide electrification trends. They continue to secure new business awards and their overall industry penetration of electrified propulsion is unchanged.

BorgWarner's pace of new business development remains strong, with a well-diversified exposure to eProduct customers and regions. While there may be some delays in achieving break-even margins for the ePropulsion segment, the company's long-term profitability objectives remain intact. The third quarter results were strong, with expected growth, margins, and free cash flow. The company remains committed to its Charging Forward strategy and is confident in the long-term prospects of electrification.

In the sixth paragraph of the article, the speaker discusses the industry growth in BEV and hybrid vehicles and acknowledges that it will not be a straight line. They also mention that the near-term volatility is not surprising given the magnitude of the industry shift. However, they believe that their company's portfolio is structured to be resilient and deliver strong earnings under a wide range of BEV and hybrid penetration scenarios. The speaker then hands the call over to Kevin Nowlan, who discusses the company's third quarter results. Revenue increased by approximately 1% due to a weakening U.S. dollar and 11% organically, driven by eProduct-related growth in all major geographies. Adjusted operating income also increased, with a 9.6% margin, and this performance includes a planned increase in R&D spending.

The company's higher investment in ER&D did not have a significant impact on their adjusted earnings. They were able to finalize agreements with major customers for inflationary cost recoveries, resulting in an increase in adjusted EPS from continuing operations. The company's full year outlook includes a $110 million reduction in revenue due to weaker foreign currencies and a narrower organic growth outlook of 12-14%. The updated eProduct revenue outlook is $2.0-2.1 billion, down from the previous guidance of $2.3-2.4 billion, due to program delays. The acquisitions of Santroll, Rhombus, and SSE are expected to add $63 million to 2023 revenue.

The company is projecting total revenue for 2023 to be between $14.1 billion and $14.3 billion, with an adjusted operating margin of 9.4% to 9.6%. They expect to see a $60 million to $70 million increase in eProduct-related R&D, but excluding that, they anticipate high teens in full year incrementals. Adjusted EPS from continuing operations is expected to be between $3.60 and $3.80 per diluted share, and free cash flow from continuing operations is projected to be between $400 million and $450 million. The company's leverage and liquidity profile is also strong.

The company has traditionally operated with a low debt to EBITDA ratio, but the spin-off of PHINIA resulted in an increase in the ratio. To address this, they used the spin-off proceeds to execute a tender offer for their 2025 notes, reducing the ratio back down to 2x. They also extended the maturity of their revolving credit facility, maintaining their strong financial position. Overall, the third quarter results were strong with organic growth, high operating margin, and growth in adjusted EPS.

The company expects to see strong organic growth in the future despite market volatility, and plans to improve profitability and make investments for long-term earnings. Q4 margins are expected to remain in line with previous quarters, with a slight decline due to lower revenue. The recent focus on EV delays is not a major concern for the company, as they are somewhat derisked due to their ability to adjust to changes in EV penetration.

In response to a question about the financial impact of the company's EV launches, Frederic Lissalde explains that their portfolio is resilient and designed to weather a wide range of scenarios. He points out that despite a decrease in E, margins have slightly increased and the top line has remained resilient. The company has set itself up well to deal with volatility and there may be opportunities for better economics on the ICE side of the business as automakers invest in EV products. Lissalde also mentions that the structure of their contracts for EV products may offer some protection in the event of missed or delayed programs.

In 2023, there will be a reduction in the ePropulsion segment due to timing of launches and volume reduction. However, the company is still seeing overall growth and has a strong new business that will contribute to their goal of reaching $10 billion. The company is also focused on maintaining a strong margin profile and will work with suppliers and customers to achieve this. They are confident in their long-term prospects and have structured their portfolio to be resilient under various scenarios.

The company has implemented volume clauses in their EV contracts to ensure they are not negatively impacted by volume shortfalls. They are currently going through their planning process for 2024 and are considering the ramp-up of EV programs. For 2023 and 2025, their revenue assumptions are based on direct production schedules and discussions with their customers.

The company is confident in their mid-decade outlook despite some OEMs pushing out volumes in the near term. They are launching globally with 35 new programs and still have a strong presence in China. The company is also a player in hybrid powertrain and their product portfolio is relevant for both BEVs and hybrids.

The company is seeing growth in both BEV and hybrid vehicles, with similar content per vehicle. They are investing in eProduct RD&E, but the pace of growth is slowing and they expect to see scale benefits as eProduct revenue ramps up. The investments are only growing about 2-4% each quarter and are expected to be relatively flat in the fourth quarter. This slower growth in investments is expected to lead to profitability.

The company is currently in the process of budgeting and long-range planning. They will make adjustments to manage profitability while also balancing it with long-term goals. They believe the outlook for electrification remains strong. The company has a modular design and production approach to help with scaling up. They also have flexibility in their manufacturing footprint to protect margins amid potential fluctuations in EV volumes.

The company is focusing on flexible manufacturing and utilizing existing capacities and capabilities to produce a variety of products. They are pleased with their approach and see it as a way to leverage growth opportunities. When asked about the impact of EV adoption on their ICE business, the company stated that it may affect their margin profile, but their portfolio is resilient and can deliver comparable levels of operating income in either scenario.

The company is seeing a trend of automakers becoming more open to partnering with them on EV powertrain components due to a lighter EV outlook. They have a strong portfolio and financial strength to support customers. They cannot provide a specific margin for 2025, but expect to operate in the mid-9s and trend towards a 10% margin in the long-term.

The company's guidance for this year has been affected by various factors, including a $300 million drop in eProducts revenue and the impact of the UAW strike. The strike is expected to have a less than $100 million impact on the company's fourth quarter and full year results. The slower growth in eProducts and path to profitability may be due to new business in China, but there are also lower volumes in some North American products.

The executives of BorgWarner discuss the challenges they face in ramping up production in China and Asia. They note that even small delays in launches can have a significant impact on the company's quarterly results, and that the company is still in the early stages of growth in the electrification market. They also mention that they have reduced their projections for 2025 due to delays in launches across all regions.

The company expects to reach a revenue of $5 billion by 2025, but has added a downside risk of $4.5 billion due to potential delays in their ePropulsion portfolio. This may impact their product mix, with power electronics being less represented. Despite this, the battery pack business is expected to have strong demand. The company's appetite for M&A may be affected by the current situation, but they still anticipate some M&A to support their 2025 outlook.

Frederic Lissalde, CEO of BorgWarner, discusses the company's approach to M&A and how they are always assessing potential acquisitions from a technology standpoint. He mentions an upcoming transaction that will give them more strength in accessory power electronics and states that the current market does not change their appetite for M&A in the electric vehicle space. He also notes that the current environment may provide favorable valuations and emphasizes the company's disciplined approach to M&A. The call concludes with Patrick Nolan, VP of Investor Relations, thanking participants for their questions and inviting follow-ups if needed.

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