The operator, Savannah, welcomes everyone to the BorgWarner 2023 Fourth Quarter and Full Year Financial Results Call. The lines have been muted and there will be a question-and-answer period after the speakers' remarks. Patrick Nolan, Vice President of Investor Relations, will be leading the call and highlights the company's upcoming events and reminds listeners of the risks involved in forward-looking statements. Non-GAAP measures will be used to provide a clearer picture of the company's performance, and terms such as "comparable basis," "adjusted," and "organic" are defined. The presentation for the call is available on the company's website.

During the call, Fred Lissalde shared the company's results for 2023 and provided an update on their overall performance. BorgWarner saw a 12% organic growth and strong margin performance. They also secured new eProduct awards and made strategic acquisitions to strengthen their portfolio. One of their new awards is with XPeng, where they will supply eMotor rotor and stator for the X9 MPV and a B-class sedan. Production has already begun for the X9 and will start in Q3 '24 for the sedan.

BorgWarner has secured multiple new business opportunities in the electric vehicle market, including supplying high-voltage motors to XPeng and coolant heaters to a global OEM. They have also expanded their product portfolio through acquisitions and joint ventures, positioning themselves as a leader in the growing NEV market in China.

BorgWarner is working with a Chinese powertrain supplier to improve product efficiency and growth in the Chinese CV market. They have also formed a strategic relationship with BYD subsidiary, FinDreams Battery, to localize LFP battery packs for commercial vehicles in various regions. BorgWarner expects eProduct sales to reach $2.5 billion to $2.8 billion in 2024, with a significant contribution from battery systems sales driven by increased capacity.

In 2024, BorgWarner expects significant growth in their eProduct portfolio, with a focus on BEVs and hybrids. They believe their capacity expansions and launch activities will support their outlook, despite potential volatility in the industry. The company's long-term strategy, Charging Forward 2027, has three pillars: eProduct growth, profitability, and maximizing foundational value. They believe their strong market position and margin profile in their foundational business will provide earnings resiliency during times of market volatility. Both their eProducts and foundational business are important for their long-term growth strategy.

In 2023, BorgWarner successfully navigated a challenging environment, achieving solid margins and strong free cash flow. They completed the spin-off of PHINIA and secured new business awards in electrification and powertrain. They also formed critical alliances and continued to return capital to shareholders. Looking ahead, they will focus on balancing short-term margins with long-term growth and investing in their future. The company's product portfolio is built for resiliency and they are executing their Charging Forward 2027 plan. This is Kevin's last earnings call and he is thanked for his contributions to the company.

Kevin has played a crucial role in BorgWarner's recent strategic initiatives, and the company is grateful for his contributions and wishes him a happy retirement. Craig Aaron will be stepping into the CFO role next month and is well-equipped to lead the company's profitable growth. Kevin then discusses the company's fourth quarter results, highlighting that revenue was in line with guidance, margins were strong, and free cash flow was solid. He also provides a revenue breakdown, mentioning the impact of the weakening U.S. dollar, organic growth, challenges with BEV programs and the UAW strike, and the contribution of acquisitions.

In the fourth quarter, the company's adjusted operating income was $332 million, with a margin of 9.4%. This is slightly higher than the previous year's adjusted operating income of $321 million and 9.7%. The increase was mainly due to higher sales, excluding the impact of foreign exchange and M&A. The adjusted EPS was down $0.04 compared to the previous year due to a higher effective tax rate. However, the company's free cash flow from continuing operations was $679 million in the fourth quarter and $565 million for the full year. Looking at the company's 2023 results compared to the post-PHINIA spin-off guidance provided in June, it is evident that the company's product portfolio is resilient. While overall sales were slightly below the midpoint of the guidance, foundational sales were higher, and the adjusted operating margin and income were above the midpoint. This demonstrates the company's resilience as discussed in their Investor Day.

In the second half of 2023, the company saw stronger margins despite weaker product sales. For 2024, they predict flat to slightly declining global industry production, with North America down 1% to up 1%, Europe down 2% to 4%, and China down 1% to up 1%. However, they still expect overall organic sales growth, driven by a significant increase in eProduct sales and the addition of $40 million from the Eldor acquisition. With these projections, they anticipate total revenue of $14.4 billion to $14.9 billion and an adjusted operating margin of 9.2% to 9.6%, which includes a negative impact from the Eldor acquisition. They believe this acquisition will help them achieve product leadership in a market worth $30 billion by 2030.

The company expects to generate operating losses for the next few years due to low revenue. However, excluding the impact of these losses, they expect a margin of 9.6% to 9.9% in 2024, with the rest of the business delivering incremental growth. They believe this demonstrates the company's ability to manage costs and drive conversion even in volatile markets. They anticipate adjusted EPS from continuing operations to be between $3.65 and $4 per diluted share. They also expect to deliver free cash flow of $475 million to $575 million, slightly lower than 2023 due to a build in working capital. Despite market volatility, the company remains focused on delivering organic growth, strong incremental margins, and making prudent investments for long-term growth and financial stability.

Kevin Nowlan, the CFO of BorgWarner, announced that this will be his last earnings call after five years with the company. He is proud of the transformation that has taken place during his time there and believes the company is well positioned for success in the world of electrification. He thanked the team and the investment community for their support and is confident that the company will continue to create value for shareholders. The call then opened up for questions, with the first one asking about the potential impact on earnings and cash flow if volumes were to increase. Kevin responded that it was a reasonable way to think about it.

The speaker discusses the company's expected contribution margins and mentions that excluding Eldor, it would be around 16%. They also mention potential headwinds such as R&D, commodity and labor issues. They then ask about when the drag from Eldor will go away.

Kevin Nowlan and Fred Lissalde discuss the year-over-year conversion in 2024, which is expected to be in the mid-teens on an all-in basis. They mention that the company is investing more in eProduct R&D and that Eldor, a recent acquisition, will have a short-term impact on margins but will position the company for long-term success in a $30 billion market by 2030. They anticipate operating losses in the Eldor business for the next couple of years as they support R&D.

An unidentified analyst asks about the company's guidance for this year and how it will be affected by the increasing focus on EVs. The company's CFO responds by stating that the pace of growth in R&D for EVs is slowing, but still increasing, in order to support the successful launch and ramp-up of programs. The analyst then asks about the impact of the company's strategy on midterm factors, such as the decline in the industry's combustion and hybrid sales.

The speaker responds to a question about the company's revenue growth, stating that they are outperforming the inflational side by 300 basis points and are constantly restructuring to maintain margins. They also address a question about the company's eProducts guidance, stating that their CV packs are growing at a 65% CAGR year-over-year and that 60% of their light-vehicle programs will be launched this year or have already been launched. They believe that their 2024 jump-off point for CV is much higher than the current year and that their light-vehicle programs will continue to grow.

The speaker agrees that there may be some variability in the market, but overall, the company is expecting a jump in growth from a larger base in light-vehicle sales. They are currently focused on 2024 and will provide updates on 2025 in the future. The company's 13% margin is not expected to be impacted by the growth in eProducts and there is no M&A included in the 2025 revenue target of $4.5 billion to $5 billion. However, there is M&A included in the 2027 revenue target. The company is aware that as electrification continues to grow, it may put pressure on their revenue outlook over time.

The company's goal is to manage the cost structure of their business and maintain their margin profile in the coming years, while also being flexible to meet the changing demands of their light vehicle customers. They have built a product portfolio that can support both hybrid and electric vehicles, and there is potential for increased interest in hybrid vehicles in the U.S. market. However, it is still too early to see this reflected in customer communication and requests for proposals.

BorgWarner's eProducts division is well-positioned to support the rapid launch of hybrid powertrains for customers. The company has a disciplined approach to integrating acquisitions, including Eldor, and is managing the business with financial discipline. The losses from Eldor were anticipated and factored into the company's financials, and BorgWarner remains on track to achieve a 10% margin in 2027.

The company had already expected a short-term impact from their investment in Eldor, and their capital allocation strategy remains unchanged. They are looking at M&A opportunities to strengthen their electrification capabilities and are being disciplined in their approach, considering near-term impacts in their valuation assessments. The company also remains committed to dividends and has repurchased stock, with the spin-off of PHINIA being part of their capital allocation strategy.

Kevin Nowlan, responding to a question from Adam Jonas, discusses the company's allocation of R&D and CapEx for eSystems. He reveals that they have invested about $475 million in eProduct-related R&D in 2023 and plan to add another $40-50 million in 2024. The majority of their investment is focused on eProduct, with a decrease in foundational R&D. From a capital perspective, they have increased their investment last year and plan to continue at a similar level in 2024, with a focus on ePropulsion and battery pack business. Fred Lissalde adds that the R&D and CapEx are for both EV and hybrids, and the products are the same for the company regardless of the type of vehicle.

An analyst asks Fred, the CEO of the company, about the projected revenue for hybrid vehicles in 2024. Kevin, the COO, responds by stating that $700 million to $800 million of the projected $2.5 billion to $2.8 billion in revenue is from EVs in the commercial and CV space. The remaining $1.8 billion to $2 billion is from eProduct revenue, for which they will provide a breakdown later. The implied loss rate for Eldor, a company they acquired, is around $50 million, and they are also increasing their organic products R&D spending by $40 million to $50 million. Overall, the additional spending is around $90 million to $100 million.

The eProduct margin in 2023 was not disclosed, but the company is focused on driving towards breakeven in the fourth quarter of last year. However, due to volatility in the eMarkets, the revenue was $200-300 million lower than expected and the ePropulsion segment ended up losing $16 million in the fourth quarter. The company is managing the profitability of this business in light of the lower revenue and believes that successfully converting on incremental revenue is the key to long-term profitability. No segment-specific guidance will be given this year.

The company is seeing a lot of comfort in the contribution margin which is flowing through the business. The 2024 guide shows a conversion of mid-teens on an all-in basis and all the growth in 2024 is coming from the eBusinesses. The company sees the underlying fundamentals of profitability coming through as they scale the business. The next question is about incremental margins and how the math would work for the foundational side of the business. The company's revenues are already down, even with the growth of the market. The speaker explains that the revenue is down about 0.5 to 2 points year-over-year, but the company is outperforming the underlying markets which are down 3% to 6%. The company sees a path towards profitability objectives for the portfolio.

At the Investor Day, the company discussed their expectation of revenue pressure in their foundational portfolio over time. They plan to manage this by holistically managing the P&L, focusing on pricing, cost restructuring, and sustaining their margin profile. The company also expects to execute this plan in 2024 and throughout the Charging Forward plan. The combustion side is not expected to see new developments, but the company can still adjust their engineering and foundational P&L. The company will not break out details, but they need to decrement in the mid-teens in order to meet their margin expectations for both the foundational and eProduct portfolios.

The speaker discusses the financials and P&L in the company's '24 guidance, mentioning a peak in CapEx this year and a return to 5% of sales in the future. They also mention ramping up production lines for battery packs in Seneca and Europe, with high demand and no signs of slowdown in the commercial vehicle market.

The speaker discusses how customer behavior is being monitored and how it relates to the changing dynamics of powertrain options and labor costs for OEMs. They state that the company is still aiming for a 15% return on invested capital and that they have experience in achieving this goal, regardless of the type of product. The call is then closed.

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