BorgWarner Inc.

Good morning, my name is Brittany and I will be your conference facilitator. At this time, I would like to welcome everyone to the Board Warner 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, press star two. If you are using a speakerphone, please pick up your handset before asking your question. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference. Patrick Nolan, Vice President of Investor Relations Thank you, Brittany.

Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgoiner.com, both on our homepage and on our Investor Relations homepage. With regard to our investor relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the events section of our investor relations homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes or prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A, and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales. Our all-in incremental includes our planned investment in ER&D, any impact in net inflationary impacts, and other cost items. Lastly, we refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we've posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. I'm very pleased to share our results for the first quarter of 2024 and provide an overall company update starting on slide five. With approximately $3.6 billion in sales, we delivered close to 7% organic growth in the quarter, despite a modest industry decline. We delivered strong incremental performance in the quarter on an all-in basis, which allowed us to achieve a 9.4% margin. This Q1 performance provides a nice start to the year, and we believe it positions us well to deliver on our full year guidance. Additionally, we continued to take steps in the quarter to create long-term value for our shareholders. we secured multiple new e-product awards. These awards, once again, demonstrate our focus on taking leading-edge technology, working closely with our customers to help support them as they transition towards electrification. And as I will discuss, we continued to expand our product offerings for electrified vehicles. We focused on the efficient deployment of our capital by repurchasing $100 million of stock during the first quarter. As Craig will highlight, we received an increased share repurchase authorization of $500 million from our board of directors. Now, let's look at some new e-product awards on Slate 6. First, BorgWarner has secured additional e-motor awards with Xiaoping. These awards include BorgWarner's 800-volt e-motor systems, comprised of stator and rotor components, which are customers for use on two upcoming SUV models. Start of production is planned for 2025. BorgWarner's HVH220 e-motor offers high torque density enhanced efficiency, and superior durability. We are thrilled to expand our e-motor business with Xiaopeng and build upon our strong partnership with them. Next, I would like to highlight a new product line for electrified vehicles, which is our electric torque vectoring disconnect, or ETVD. Borkman has secured new business awards with Polestar and an additional major European OEM to supply eTVD for their battery electric vehicles. eTVD is currently in production for the Polestar 3 SUV and production for the major European OEM is expected to begin later in 2024. The eTVD offers a three-in-one system replacing the differential and featuring both torque vectoring and an on-demand disconnect functionality for BEVs and hybrids. ETVD is part of Borbonna's electric torque management system portfolio, which helps improve electrified vehicles' traction and stability. The added weight in hybrids and battery electric vehicles often results in reduced agility and safety performance. World Warner Systems helps overcome this by enabling a lighter feel and increasing traction, which improves safety. The eTVD is a great example of applying our foundational expertise and capabilities to develop an innovative solution to address our customers' needs as they transition towards electrification. Now I want to take a few moments to remind you of the strength of our foundational portfolio on slide seven. First, it's important to highlight Paul Warner's estimated average content opportunity per combustion vehicle, which is approximately $550 on a global basis. You'll note that this content opportunity varies by region. I would point out that our content opportunity in North America is the highest of the three major regions we operated. So to the extent that combustion vehicles have a longer tail in North America, that could provide a positive sales margin and cash flow tailwind for Bore Warner. We also continue to see potential opportunities for growth, across our foundational portfolio, which had a 2023 revenue of about $12 billion. I would like to list just a few. In turbo, we continue to see North America opportunities as penetration in the region is about 44% compared to 92% penetration in Europe and 69% penetration in China. If EV growth slows in North America, the remaining combustion vehicles may need to improve efficiency, and turbocharging is one of the biggest enablers to make this happen. For our EGR business, we see penetration opportunities on hybrid architectures. The efficiency benefit of EGR and cooling on hybrids is higher than traditional combustion-only vehicles, as the internal combustion engine operates in a steadier state. Our timing system business also sees penetration opportunities in plug-in hybrids and range extended EVs as engine timing chain is the preferred technology in those hybrids due to its superior durability and strength. And finally, We see our all-wheel drive business benefiting from penetration schools on combustion vehicles in Southeast Asia and from a longer tail for North American vehicles. Maximizing the value of our foundational products means capitalizing on these potential growth opportunities while at the same time maintaining the strong margin and cash profiles of these businesses. Now, let's turn to slide 8 and take a step back. Let's discuss how we believe our foundational and e-product portfolios are positioned for growth under various combustion, hybrid, or death growth scenarios. Starting with our combustion or foundational portfolio, which are on the top left of the slide, BorgWarner has decades of experience in product leadership in these fields. We have a number one or number two market share for these products and can support our customers around the globe. This is critically important as customers potentially consolidate their supply base and look to industry leaders that have the financial strength and long-term technology leadership to support them. Let's jump to the right side of this page where you see the breadth of our e-product portfolio. This portfolio has grown organically and through M&A over the past several years. We have systematically built a technology-focused portfolio that supports our customers' needs in EVs from grid to wheel. This has allowed us to establish product leadership in multiple areas of our portfolio, including inverters, e-motors, high-voltage coolant heaters, and batteries. We expect that our technological differentiation, scale, and share leadership will continue to enable us to secure new businesses. Quite simply, our foundational and e-product portfolio support hybrid propulsion, since a hybrid vehicle needs both a downside combustion engine as well as an electric powertrain. We can utilize the expertise of both our portfolios to support our customers, which we are already doing successfully in Europe and in China. Importantly, when we sell products for hybrid applications, we're able to utilize the same engineering resources, modular design, manufacturing footprint, and sometimes even actual product lines that are utilized for BEVs and combustion vehicles. We believe Bourbon is well positioned to be successful under various electrification adoption scenarios, including regional specificities. Our product has been purposefully built for this type of an environment. We're focused on achieving above market growth, regardless of varying levels of electrified propulsion adoption. Our focus is to convert growth into income at the mid to high-teens level on an all-in basis. To summarize, the takeaways from today are this. For one, its first quarter results were strong. Our sales growth once again outperformed the industry, and we delivered strong conversion on an all-in basis. We secured multiple new e-product awards in the quarter, which further demonstrate our product leadership position. We focused on efficient powertrains, and we believe that we have a resilient portfolio of products that allows us to convert mid to high teens wherever the incremental revenue comes from. And we continue to return capital to our shareholders, through our first quarter share repurchases and increased authorization from our board. As we look forward, we expect to continue to manage our business holistically. We plan to take the necessary steps to manage our costs while continuing to preserve our long-term profitable growth. While we cannot control the near-term volatility in propulsion mix across the globe, we can focus on what Borlander does best, driving sales growth above market production through technology-focused product leadership, converting that growth into earnings on an all-in basis and following a balanced capital allocation strategy that creates long-term value for our shareholders. With that, I will turn the call over to Craig.