BorgWarner at BofA Summit: Strategic Flexibility in Auto Market

On Tuesday, 15 April 2025, BorgWarner Inc. (NYSE: BWA) presented at the BofA Securities Automotive Summit, outlining its strategic positioning in a changing automotive market. The company highlighted both opportunities and challenges, focusing on its balanced portfolio of internal combustion engine (ICE) and electric vehicle (EV) technologies. Despite facing tariffs and inflation, BorgWarner is confident in its ability to navigate market uncertainties and drive growth.

Key Takeaways

• BorgWarner is leveraging its diverse portfolio to outgrow end markets.
• The company is actively addressing tariff impacts and maintaining strong customer relationships.
• A significant focus is on the Chinese market, with numerous e-product launches planned.
• Financial strategies include cost management and achieving mid-teens incremental conversion.
• BorgWarner is exploring M&A opportunities to leverage core competencies.

Financial Results

BorgWarner reported a stable financial performance, managing business at a mid-teens incremental conversion rate.

• Expanded margins by 50 basis points in 2024, despite flat sales.
• Focused on cost controls, restructuring savings, and supply chain efficiencies.
• Liquidity target set at 20% of sales; exceeded this target with a $2 billion untapped revolver.
• Gross leverage target of two times was met at the end of last year.

Operational Updates

BorgWarner emphasized its operational adaptability, particularly in the face of shifting market demands.

• Seven manufacturing plants in Mexico; significant imports to the US from Mexico, Canada, and China.
• 30 e-product launches planned for the year, half in China.
• Emphasis on flexible equipment to allow redeployment across programs.

Future Outlook

The company is optimistic about the future, particularly regarding electrification and expansion in China.

• Electrification seen as key to decarbonizing mobility affordably.
• Aiming to strengthen ties with domestic OEMs in China and support their global growth.
• Exploring acquisitions that align with core competencies and offer near-term benefits.

Q&A Highlights

During the Q&A session, BorgWarner’s leadership addressed strategic priorities and market dynamics.

• Focus on aligning with top customers in China, who account for over 90% of business there.
• Flexibility to redeploy equipment if project volumes change.
• Program extensions seen as beneficial due to reduced R&D investment needs.

In conclusion, BorgWarner demonstrated a proactive and confident approach at the BofA Securities Automotive Summit, emphasizing its strategic adaptability and growth potential. For further details, readers are encouraged to refer to the full transcript below.

Full transcript - BofA Securities Automotive Summit:

John, Host: It get it get settled. We’re very happy to have up next. We view BorgWarner as one of the leading powertrain technology companies on the on the planet with a great portfolio of ICE technology as well as EV technology. But if I were to set up a powertrain company, would set it up in a very balanced fashion with the way this company has. But, you know, the market obviously disagrees with us for the for the moment, so we’re gonna get into some of those disagreements in the in in this session.

We’re very happy to have Joe Fadoul, president and CEO Craig Aaron, CFO and Patrick Nolan, VP of IR. And, Pat, thank you for all the help. You’re you’re always a treasure chest of information for us, so thank you for joining us as well. Maybe if we could just open open it up first, Joe. You’ve been with BoardWarner since 2010, I believe.

So it’s it’s it’s been a while. But you just took over as CEO in February. So I was just wondering if you could talk about, you know, just generally some of the the positions that have been taken in the company, how it’s been set up before you before you took over. Then and also kind of that in the sort of the context of a very uncertain macro environment suddenly. It’s been a little bit uncertain for for a while, but suddenly gotten a little bit more uncertain.

And what you think the the biggest, you know, issues and opportunities are from BorgWarner that may be slightly different or maybe the same as what you’re what Fred used to talk about.

Joe Fadoul, President and CEO, BorgWarner: Sure. So, John, first, thanks for hosting the conference, well attended conference. You know, from where we’re sitting today, you know, the way we view our business is this is the strongest portfolio we’ve had. And you could argue that BorgWarner, you know, may be one of the strongest powertrain players in the market. And the reason we believe that is, you know, first if you go back, when I started, you know, what I found at BorgWarner is a very strong combustion portfolio.

So when you think about turbochargers or exhaust gas management, four wheel drive, timing systems, where we’re number one or number two in all of those products. You know, we started from a position of strength. About ten years ago, you know, we started to make this transition toward electrification. We began with an acquisition of Rimi International, which brought us really good motor technology. And over the course of years, you know, we’ve been able to outgrow our end markets with this portfolio, and in the last few years, we accelerated toward electrification with a number of acquisitions that brought us inverters, that brought us more motor technology, onboard charging, and a number of other products.

As I look at it today, we’re very pleased with the portfolio. It’s very strong. From our standpoint, we are leveraging growth across that portfolio independent of where the growth is coming from. So our goal is to outgrow our end markets. So I think our biggest opportunity is really capitalize on that portfolio now.

We worked really hard to build that portfolio, especially with the investments the last five years. We’re able to do that because we have very strong customer relationships. Our customer diversity is very high. So I see growth opportunities on all sides of the business now. You know, we were focused heavily on the East Side under Fred’s tenure because that’s where the market was was headed quickly, and most people believe that.

But now we see the growth across the entire portfolio. So that’s our big opportunity. Of course, the challenges are like any other automotive supplier these days. You know, will there be an impact in volumes this year, tariffs and uncertainty obviously playing a big role. So but, you know, my focus is outgrowing our end markets, leveraging the core competence we have.

It’s really continued to build on the portfolio even though we feel it’s very strong. Know, we still wanna make organic investments and inorganic investments. And then finally, which is really important, is driving enhanced financial performance. So we wanna expand margins and generate a lot of cash.

John, Host: That’s a that’s a great start. I I wanna stick on on on sort of tariffs and the trade stuff, you know, first, and then get into the the the good guys because there’s a lot of good stuff to talk about. Can you talk about sort of your setup for your your footprint in North America, US, Canada, and Mexico?

Craig Aaron, CFO, BorgWarner: You

John, Host: know, what your exposures are, but why they are? Right? Not just, you know, not just, you know I mean, because there’s reasons that you set you set up your footprint like most companies the in the way you have. And and what could be the opportunity or the flexibility to reassure to to The US from from from Mexico, I guess, probably be the, you know, the the bigger potential or maybe not, right? It might not make sense.

So if you can just talk about that, that footprint, why it is, and what the potential could be for you.

Joe Fadoul, President and CEO, BorgWarner: Yeah. So maybe how do we set up our footprint? So generally, we focus investing in the region where our customers are and where they’re gonna consume the product. So you know, we don’t ship tremendous product from one region to another. The sales in North America are about 30% of our total sales, so it’s pretty significant.

Now if you think about our footprint in North America, we’ve got seven plants in Mexico, and a lot of our products we produce in both The US and Mexico. By the way, we don’t have any plants in Canada. Yep. You know, for us what’s important is first we gotta get some clarity on all the tariff noise. You know, nobody’s gonna make a long term move until there’s some clarity on what the actual tariffs are gonna be.

Short term, we’ll focus on recovery of those tariffs from our customers. And then mid and long term, you know, we’re starting some conversations with customers. You know, should there be some product relocations, or can we leverage some existing capacity we may have? But we’re not gonna make those moves for until we get better clarity. And it takes time.

John, Host: By the way, we can’t

Joe Fadoul, President and CEO, BorgWarner: do that in a vacuum. You know, we need our customers to support any change we make, And we’re in a strong, you know, financial position to to do that if necessary. So to be clear,

John, Host: the the most of the the products that you’re producing in Mexico are going into vehicles that are that are that are produced in in Mexico or how are there any parts that you’re producing that are that are that are crossing the border on their own? And if they’re crossing the border, usually, the importer record, I think, is is is the is the automaker itself. So they it’s almost like it’s going into a vehicle, I think, from your perspective. Maybe I’m getting that wrong, is that about right? Yeah.

Joe Fadoul, President and CEO, BorgWarner: Well, first we do serve the local Mexico market where there’s production and we bring parts across. I don’t know if you want to comment on roughly import.

Craig Aaron, CFO, BorgWarner: Yeah. So when we look at last year as a a a good reference point, about 875,000,000 is the amount that we imported into The US. When you break it down by region, about 55% of it was from Mexico, Ten Percent of it was from Canada, and 5% from China. So just some good statistics that that the group can use here to to kind of model what they see fit, but that that’s a good way to look at the imported value from last year, what that may mean into 2025 and beyond.

John, Host: But upon the and just on the import, I’m I’m not sure this is even clarified yet, but I think most of the way it’s set up is is the import is actually the import of record is actually the the automaker. Is that is that is that correct? Into The US? I think that comes down

Joe Fadoul, President and CEO, BorgWarner: to the terms of your agreement.

John, Host: You create

Joe Fadoul, President and CEO, BorgWarner: You know, sometimes it’s us, sometimes it’s the automaker. Got it.

John, Host: Okay. And then we don’t think this is gonna happen necessarily, but, I mean, there is kind of a draconian situation where if tariffs really stick, which sounds like they might not as of last night or yesterday with the, you know, the the potential relief on on on on parts, you know, is if there’s this potential two to 3,000,000 unit decline in industry volume, how are you guys set up to handle that, which would be sort of a a, you know, sort of a normal not normal, but like a but a a pretty tough downturn in the industry here in The US.

Joe Fadoul, President and CEO, BorgWarner: Yeah. So clearly, two to 3,000,000, fairly big number from where we’re at today. You know, for us, again, 30% of our sales are in this region. You know, if we see a lower production environment, short term, we’re gonna, you know, we’re gonna slow down discretionary spending and and focus really on managing any kind of decremental that might exist. If we think those changes are gonna be longer term in nature, meaning the tariffs are pretty sizable and they’re gonna have some kind of impact for a longer period of time.

You know, it’s one thing we feel we’re quite good at is adjusting our structure to what we think is gonna be more a midterm or long term change in the market.

John, Host: But in okay. I mean, in your from your customer base, I mean, you’re probably hearing a varied set of responses at this point, right, from not importing to taking down production. I mean, is that know, I mean, are there any kind of extremes that you could talk about positively or or negatively or what what are you hearing generally without getting into too too short term stuff, you know, from from the automakers?

Joe Fadoul, President and CEO, BorgWarner: I think it’s early days. You know, I think they’re all waiting. We’re we’re all in the same bucket. Yeah. So we’re all kind of waiting.

Where is this thing gonna land? You know, I I think you’ve seen like we have Ford and Stellantis offering pretty attractive pricing to stem product or to motivate folks to to buy more vehicles where the tariffs land is, you know, big question mark for all of us, what the impact it has. I think we’re just gonna have to wait and see.

John, Host: Now there there’s there’s one one other layer below below this from a from a from a macro sort of regulatory standpoint is EVs versus ICE. And there’s some changes that might be coming with the car based EC two mandate, EPA, and it’s a fuel economy emissions regulations. If those get watered down or car gets, you know, eliminated, you kind of alluded to I mean, you got a great ICE portfolio. If programs get extended or we shift back in the direction of ICE, how do you think that will will impact the the business?

Joe Fadoul, President and CEO, BorgWarner: Yeah. So our products are driven primarily by two things, as you know, regulation and the need for customers that just have more efficient vehicles, right?

John, Host: Or like to drive fast too, right? You can do some pretty good stuff on that too fast.

Joe Fadoul, President and CEO, BorgWarner: Can drive customer demand. But you know, the main drivers of regulation or striving for better efficiency, as you said, you know, we’ve got a very resilient portfolio. So in this particular market, you know, our great combustion products, which we’re number one or number two in, can go into ICE vehicles, they can go into hybrids. So for us, it’s exactly what we built this portfolio for is, you know, this level of uncertainty. If the market, like in The US, is driving for more combustion than hybrids, we got a great portfolio to serve them.

If the markets want, you know, more hybrids and more EVs over time, we’re in a great position for that. So, you know, we think we’re in a great position to support the market regardless of where it goes.

Doug, Unidentified speaker: John, can ask

John, Host: you a

Doug, Unidentified speaker: question on Europe for a sec? Know, we’re US, you know, domiciled, so we kind of look more at The US, but Europe is a big part of your platform. And, you know, the tariffs in Europe could be quite extreme, whoever is gonna be importing here, and there may be less relief in in European tariffs. How are you thinking about your your European platform, especially those vehicles that could be imported into The US?

Joe Fadoul, President and CEO, BorgWarner: Yeah. So maybe starting with the regulation in Europe, you know, through that strategic dialogue that was happening in the first quarter, the conclusion of that was not necessarily relief on the regulatory environment. It was more they’re gonna take a three year average and allow the OEMs to meet the requirements over a three year average. But, you know, what they don’t meet this year, they gotta catch up a little bit in year two and year three. So from our view, there’s not a big change in what the demand is looking like.

We still see strong RFQs across the entire portfolio, especially when you think about hybrid and EVs. So we’re in a great position to support that. In terms of, I think your last question was around exporting, you know, we’re a powertrain company, and those powertrains can go in a variety of vehicles. We’re focused on making sure our customers have good technology for whatever they’re trying to achieve. We don’t we don’t really track what vehicles they go into to the nth detail nor whether, you know, how many of those get exported or not.

We just don’t have that kind of transparency. And if we think about

John, Host: the other regions that Doug just got into, mean, Europe will have a higher EV penetration than The US over time. How much? We’ll see. China will be much higher. You serve all the you know, you serve the globe.

You serve them serve Europe, as Doug just mentioned, and then China as well. You know, as you think about sort of the the investment burden that spread from that fragmentation of of powertrains. Right? I mean, you know, twenty years ago, we’re all talking about ICE globally, and it was kind of a little bit easier and a little bit more more consistent. How do you how do you think about serving sort of those those different constituencies now of sort of this in this fragmentation of of powertrain?

Does that mean, you know, the investment burden is higher, returns and margins are are ultimately lower? Or, you know, how do you think you can manage through that, you know, currently and then, you know, over over the long term? Is there enough scale to to serve serve all all markets without having any incremental burdens?

Joe Fadoul, President and CEO, BorgWarner: Yeah. The way the way we’ve kinda run the business is if you look the last five years, the heavy lift was the portfolio. So we had to do a number of acquisitions, and of course, we invested heavily when we were winning a lot of new business on the East Side. That was the massive lift we had to do. You know, from here forward, since we feel really good about the portfolio, it’s more around winning new programs that come through an RFQ process.

Of course, we will discount those volumes, you know, depending on the experience we’ve had with the OEM, but our customer diversity plays a very important role here. It gives us a view into all the powertrain cycle plans, and we can aggregate that information to help us make better investment decisions, but in general we chase RFQs, we win new business, we have an ROIC of 15% that every new program has to achieve if we make an investment. So for us, it’s a little bit more business as usual versus last five years. We’re doing a lot of heavy lifting to get the portfolio in place.

John, Host: So now we’re at point with whichever direction the market goes in, believe you’re very well positioned. Can you remind us of are we sort of at a point where no matter which way it goes, we have the same incremental margins and the margin potential and what those incrementals could be on the upside and then, you know, unfortunately, based on some of the stress we’re going to see right now potentially on the on the downside?

Craig Aaron, CFO, BorgWarner: Yeah. I mean, we manage the business at a mid teens incremental conversion. I think 2024 was a great example of BoardWarner in action. You know, what did we do on relatively flat sales? We expanded margins 50 basis points, you know, how did we do that really focusing on cost controls.

So we focused on restructuring savings and productivity and supply chain savings. If we get into a scenario this year, where industry production is a headwind, we’re going to follow the same playbook really focus on cost controls across the business, and those three levers. I think 2024 is a great example of what BorgWarner can do on relatively flat volumes. And I have complete confidence in the business units that they can execute in the same manner as we go into 2025.

John, Host: And then if we think about another issue and opportunities is inflation, right? I mean, seems like pre, pre tariffs, you know, that would have been normalized and not a big not necessarily a a big issue. But now tariffs, you know, it can become a a large issue for some of your some of this your your tier two and three suppliers, right, that you guys are are dealing with. I mean, if you think below you, you know, what kind of issues you’re hearing from, you know, this inflate this inflation that may be tariff reduced or maybe just, you know, natural inflation from other other macro factors. Is that something that you guys I started game planning and understanding how you’re going to either absorb it, push it back on tier twos, or potentially pass it through to to your automakers and maybe, I mean, using, you know, experience over the last couple of years, with your your customers as kind of a a guide.

Yeah, answering?

Craig Aaron, CFO, BorgWarner: Yeah, what did we learn from inflation, the inflationary time, I think a couple things one, be really focused on our costs across the business, like I mentioned earlier, but also work with our customers, we have deep customer relationships. Obviously, that’s what Joe mentioned earlier. And we need to utilize those relationships to manage manage through these difficult times. I think we did a fantastic job during the inflationary period. It really we found a solution to not have a material impact on BorgWarner’s margin.

As we go into the tariff, we’re gonna dust off the same playbook and execute it. Well, I have no doubt that we’ll be able to navigate the situation just like we did the inflationary period.

John, Host: Got it. And China. China is a shifting market, you know, or changing market very quickly, and it’s gonna continue to change. The domestics are gaining massive market share, not just in market, but, you know, rest of the world outside of The US, at least at least at at the moment. Maybe you can remind us what your position is in in that market with domestics versus internationals, and what you think the opportunity is both in China then going international with them.

Because I think there’s a there’s a a fear over time that a Chinese supply base rises up, you know, that is maybe more domestic. That could be that could be a challenge. That might not be the case. I’m just curious on on from your standpoint on that as well.

Craig Aaron, CFO, BorgWarner: Yeah. So we have a really strong China business. It’s about 20% of our sales last year. When you look at that breakout, that 20%, about 75% of that 20% was with local OEMs. And when you look at the e product side of our business, we’re overweight, about 90% supports local OEM.

So again, we have a really strong business, we get a lot of questions about, you know, how are we able to have so much success in China. And it really comes down to deep customer relationships. You know, China OEMs move at a much different pace than Western OEMs. Programming gets developed in about half the time as the Western world. And our China team knows how to run with them.

We run shoulder to shoulder. And that’s why we’ve had a lot of success beyond providing great technology at a competitive price. So I think it’s a factor of all of those things. When you look at we have 30 e product launches going on across the business this year, and about half of them are in China. I have complete confidence in our China business not only for this year, but for many years to come.

We have a great team, and they know how to execute in that market.

John, Host: I think it was just about twenty three years ago, I was the Chengdu Auto Show doing a conference there, and I was in a sea of of people in sort of the, you know, the the drinks afterwards. And I saw Tim Magnel’s face across across the crowd, and we were I think we’re the only two westerners there at the time. So I I can attest to you guys Yeah. You know, Hawken and working very hard in China for for decades. It was an interesting

Tim knew how to sell and and drive the product, so you have a good you have a good foundation. I remember that very, very vividly. But as far as the the speed, right, I think the you know, one of the the the tricks or advantage the Chinese have right now is that they move fast. The the regulatory environment and the customer base is is much more accepting of less than perfect. It’s gotta be pretty good.

Right? It can’t be, you know, you you know, totally, you you know, a mess. But that seems to be kind of okay when you get into sort of HMI, you know, stuff and human machine interface stuff. But on the powertrain, it’s not. Right?

Because because the powertrain is not working, you know, you can be kind of forgiving or not forgiving. So can you just talk about how they are able to move that quickly, particularly on powertrain in two to three year cycles when we’re looking at seven to fifteen year cycles in, you know, in developed markets? I mean, how are they doing? I mean, obviously, you’re helping them. But how are they able to to do that on the powertrain without running into real major issues?

Yeah. Maybe maybe to emphasize a few things

Joe Fadoul, President and CEO, BorgWarner: Craig mentioned. First of all, we’ve been in China for a long time, over thirty years. Yeah. And I’ll be at the Shanghai Auto Show, and I hope not to see Tim’s face

John, Host: next week.

Joe Fadoul, President and CEO, BorgWarner: He’s probably on

John, Host: a never know. He might be there.

Joe Fadoul, President and CEO, BorgWarner: He could be, but he’s probably on a beach somewhere. Yeah. You know, I think going back to this speed topic, that is a huge advantage for them. So if you think about the Chinese, they get two products into the market in the same time frame that a western OEM gets one product. So what does that mean?

Not only are they quicker to market, they’re able to learn more quickly because they’re putting two products in in the same time frame as another OEM is is maybe getting one in. The other thing is they’re much more willing to take products off the shelf and tweak them rather than all new. So if you look at some of the Western OEMs, their traditional powertrain development, they’re building much more from ground up requirements. We find that Chinese automakers, due to speed, are willing to take something, adjust it to their requirements, and and I don’t wanna use the word. It doesn’t have to be exact, but they will, you know, make some compromises where it’s not functional or it’s not safety related in order to get that product in the market more quickly.

So, you know, what customers tell me all the time in China, they love how fast BorgWarner is willing to work. Our operating model, which is very decentralized, gives a lot of autonomy to our teams in China. And, you know, they’re not spending their time calling Germany or our headquarters. Hey. Can I do this?

Can I do that? They’re very savvy, very technical, and they’re able to, you know, support those customers at

John, Host: the same speed. So you’re working with everybody on on the planet in in powertrain. A lot of the the Chinese have have learned from from your help that, you know, to some degree and from some of their JVs with the the the western western OEMs. Do you think we’ll get to a point where you can help your your western, you know, partners or or customers, and they can learn to move as fast? I mean, are you seeing any of that?

Or are we sort of in an environment where things are so entrenched and processes are so entrenched that they’re never gonna be able to move as fast as that with you, right, with with your help in your specific area?

Joe Fadoul, President and CEO, BorgWarner: Yeah. I wouldn’t wanna speak to any particular customer, but trust me. They are all recognizing how fast China is moving and the China OEMs. They’ve they’ve learned so much in the last thirty years. And you’re right.

They’re able to now take all those learnings and, you know, be leaders in many parts of Bev. So, yeah, they’re taking note. Everybody wants to make sure they can compete. We see some OEMs adjusting their product development times. I think what’s what makes BorgWarner such a value to our customers since we’re working with all these OEMs, you know, we’re able to take what we know and share with them.

Hey. This could be an opportunity for you. Maybe here’s our portfolio of products instead of doing it bottoms up. Let’s grab one of these and tweak it and run. So I I think you are gonna start to see a little bit more convergence on timing, but, you know, each customer is approaching a little bit different way.

John, Host: But we are literally just on the leading edge of the curve of of any kind of change happening with most of the incumbent incumbents on on that speed of powertrain powertrain development. Is that Yeah.

Joe Fadoul, President and CEO, BorgWarner: I would say it’s early days. Got it. You know? And and for us, you know, a lot of people talk about the Chinese OEMs as a threat. For us, we we see it as an opportunity, you know.

And our strategy is to win in China with the domestics, which we have been doing. We’re slightly overweight with the domestics. And as they grow outside of China, we’re gonna be in a great position to be a partner of choice. We’ve got factories and suppliers and people all over the world, with an excellent footprint, even on as they export vehicles. You know, China exported almost 6,000,000 vehicles last year.

We even picked up a little tailwind on our drivetrain product due to that. So, you know, we think we’ll be in a good position. We wanna keep winning in China so we can support them outside.

John, Host: An even older CEO than than Magnello Fidler, I remember, would talk about the Japanese and how well you guys did with the Japanese in the somewhat early days there. So I’d imagine, you know, it’s that, you know, you guys have this constant ability to win with with new up star up star, quote unquote, but not up star anymore manufacturers over time. So, I mean, it it’s happened it’s happened in the past, and we’ve done very well. Maybe we could just do just touch back on on the competition. When you’re going in, for for, you know, bidding process, you know, even, you know, RFI situations, Are you seeing any new competition, or is it the the the regular, you know, standard players that you see?

Meaning, are there any Chinese, you know, companies that are that are coming into the mix or any other new players, maybe even even from Korea that are coming into the mix?

Joe Fadoul, President and CEO, BorgWarner: Yeah. So our business has always been very competitive. I mean, there’s always pressure on cost and price, and we don’t see any big change there. Yes. There are a few more competitors coming from some of these younger markets, but materially speaking, it it doesn’t change the dynamics of the industry and how we’re operating.

You know, the the thing to remember about powertrain, it is a business of precision. You know, there is requirements to meet, emission regulations to meet, that is not changing and the quality requirements are immense. You know, you need to have a system that has high reliability and people can afford, but is always there and has some fail safe to it if there is a component failure. So you know, for us, remaining competitive into the future is the primary focus and we plan to do that. So I’m sorry.

You hear me?

Doug, Unidentified speaker: I want to ask, you know, you guys are in the leading edge of of of the EV shifts. There’s been, you know, a lot of talk of slowdown in The US and little little, you know, slowdown more in Europe, and and China seems to be doing really well with EVs. How would you just kinda characterize, like, what temperature we are on kinda globally on the EV migration? It’s a broad question, but

Joe Fadoul, President and CEO, BorgWarner: I mean, if you look first globally, we’re still bullish on electrification. Right. Why is that? Electrification is the really only affordable way to decarbonize mobility. And despite, you know, some of the politics going on in this country, long term electrification is gonna grow.

So, you know, we’re we’re bullish on it even though the growth is slower than we expected. So you know, for us what’s important is the regions are probably gonna play out at different speeds.

Doug, Unidentified speaker: Yep.

Joe Fadoul, President and CEO, BorgWarner: And we have the portfolio to support our teams on the ground. If there’s more hybrid and electric vehicles, you know, we got great products from both sides of the portfolio. And especially on hybrids, know, what a great vehicle that is to allow consumers to get more used to plugging in a vehicle and managing, you know, some of the intricacies of a hybrid. For us, you know, the content potential

Doug, Unidentified speaker: It’s a home run. Yeah.

Joe Fadoul, President and CEO, BorgWarner: Per vehicle is a home run. It’s the same as it is in a BEV. So, you know, we still long term believe in the electrification plan, and I think most people, if you see, they’re moving in that direction. So it just may be a little bit slower growth. And we don’t control the growth.

What we control is making sure we’re winning business, controlling our costs, installing the capacity, and delivering on a 15% ROIC.

Doug, Unidentified speaker: Perfect. Thank you. I’ve got one more and then we’ll

John, Host: open up for questions from the audience, then I’ve got a bunch more. But if we think about sort of the growth initiatives, on the EV and the ICE side, it seems like those are kind of maybe evened out more than maybe we thought. We’re now at a point where incrementals are mid teens. How do you think about sort of the mid- to long term margin potential of the aggregate the aggregate portfolio? Is it getting you know, could we ever get close to sort of low to, you know, mid teens, you know, ongoing, you know, operating margins with those incrementals, you know, and the business grows over time?

I mean, how are you thinking about the opportunity to to drive margin midterm, long term, and and where does it settle?

Craig Aaron, CFO, BorgWarner: Yeah. And Joe and I are focused on incrementing in the mid teens on an all in basis. You know, that’s a different approach than a few years ago. We saw a substantial increase in e revenue coming from an industry perspective, and we needed to support it. So we were incrementing in the mid teens, excluding the investment in ER and D.

That’s not our focus anymore. Our focus is incrementing in the mid teens on an all in basis. I don’t think Joe and I view it as a cap, We’re going to continue to focus on incrementing in the mid teens as we move forward. Our goal as a company is really quite simple. Outgrow industry production, turn that growth into income, grow income dollars, grow EPS over time.

We think that’s the secret to creating a lot of shareholder shareholder value as we move forward. That’s our focus.

John, Host: So but if you were to think about operating margin sort of in toll, I mean, do you think the the level the level could be over time?

Craig Aaron, CFO, BorgWarner: Our focus is increment in the mid teens. Okay. In the mid teens. So you can get there.

John, Host: Okay. Do we have any questions in the audience?

Jim, Unidentified speaker: Jim, if you want

John, Host: to fire away. Yeah. It’s coming to you right now. Sorry.

Unidentified speaker, Unidentified speaker: Thanks for the discussion. Just want to follow-up on John’s question about China. When we think about your customer diversity and your position today, how are you thinking about winners and losers within China? I mean, there’s a few players like BYD that are very rapid growth, more vertically integrated, but moving international. So I just wanna be sure I understand, you know, that opportunity set for you gaining share within the China players in China versus think more about the opportunity as a BYD moves externally.

And then to the extent somebody that you have a big program with is a loser, but you’ve got another guy that’s a winner, Are you basically leveraging the same manufacturing footprint so that to some extent you’re a little bit indifferent given that diversity? Just want to make sure I understand that dynamic under cost structure. Thank you.

Joe Fadoul, President and CEO, BorgWarner: Sure. So it’s a great question. I mean, there’s a hundred OEMs in China. Who do you focus on? So first of all, since we’ve been there for a very, very long time, we’ve built businesses over time with all the names you know, BYD, Chang’an, Cherry, Great Wall, Geely, and those are the players that are winning inside that market.

Now someone who’s number one this year might be number three next year. We don’t really pay attention nor care. Know, it’s more or less are we winning with the winners. We’ve also got to focus on some of the startups. There are a lot of startups in China that have been in the last five years.

So, Chaopeng, Xiaomi, just to name a few, also are part

John, Host: of our

Joe Fadoul, President and CEO, BorgWarner: base. And there we look at, okay, what is their plan to get to market? You know, are they focused on software defined vehicles? Are they focused on something that can go more global versus a niche in the China market? So our teams on the ground constantly are evaluating that.

We feel really good about our business. Not only are we slightly overweight with the domestics, but over 90% of our business are with the top six customers. And for the most part, those are the customers that are able to export. You know, the small players, they’re not gonna have the funding or the wherewithal to maybe support those other markets and especially when you talk about localizing. It’s the players like Cherry, Geely, BYD, they’re the ones you’re starting to see the expansion and they’re in our customer portfolio.

Craig Aaron, CFO, BorgWarner: The only thing I’d add is we’re really focused on having flexible equipment. So it’s impossible to pick always a winner and a loser. But hey, if if a program doesn’t work out, are we able to redeploy that equipment to another program? That’s always a question we’re looking at. And if that’s not possible, then we need to work with our customers if volumes don’t materialize and get recovery.

So that’s how we manage the risk.

Doug, Unidentified speaker: Said equipment is is is flexible.

Joe Fadoul, President and CEO, BorgWarner: Yes. And it plays back into this idea that the Chinese OEMs are more apt to grab something that’s off the shelf and modify it, which again fits better to manufacturing concepts. All of that kind of goes together. You can’t have flexible equipment if you don’t have some modularity to some of your products. So we feel we are in a good position to manage some of that downside risk.

John, Host: I’ve got two more I want to sneak in. Any questions out there? I got

Doug, Unidentified speaker: one balance sheet question. When you are

John, Host: done with your questions. Yeah, that’s the last one. So when we

Unidentified speaker, Unidentified speaker: look

John, Host: at some of what’s happening with with programs right now, there’s program extensions that are that are ongoing. My view has been and I think this might be wrong. My view has been that that’s actually good because then you get to run a program for a year, maybe two, maybe some cases three. We’ll see, you know, how much longer things are, you know, extended right now on on the ICE side. But we’ve heard that that actually becomes somewhat challenging because the way the lines have been set up, you know, the tooling has been set up, It’s, you know, set for the five, six, or seven years of the the original program.

And then if you’re extending it a year or two, that actually can some create some challenges of, you know, refurbishment or replacement, you know, of tooling. I’m just wondering if you guys can talk about that because I’m sure you’re you’re I mean, you’re you’re running into that, you know, like like everybody else is. Is that actually challenging, or is that actually sort of net beneficial on margins and and and returns? And I’m not you know, I mean, not looking for short run answer, but, like, just how does that actually work? Because it sounds like a big opportunity, but it it and we’re also hearing it it might be a little bit problematic.

Joe Fadoul, President and CEO, BorgWarner: I mean, we love extensions. Okay. If you think about it, there’s no new r and d for an extension. Right? We’re a a heavy r and d type of product, highly engineered product.

If you look at some of our wins over the last three to six months, you know, we’ve had extensions. We’ve had some uplift volume uplifts, especially in this part of the world, in addition to new programs. So I think we’re starting to see a few new programs around the combustion side. But, you know, I I wouldn’t say there’s any big retooling needed. Of course, you always have to refurbish your tools, make sure you got investment that has good uptime and good quality.

But no, we we love extensions. We love uplifts. More product with the same R and D is always a good thing.

John, Host: Okay. And then just I’m going let we’ll probably ask this question together. If you could just talk about sort of M and A and what you’re looking at, particularly on the acquisition side, not mergers, but the acquisition side of technology and maybe how you balance that with Doug’s question, maybe you want you know, kick in. We’ll go.

Doug, Unidentified speaker: Yeah. I mean, you’ve always had a very strong balance sheet. If you look at a kind of myriad of of auto suppliers, you’ve been in the higher echelon with the quality, never really flirting with, you know, you know, some investment grade ratings. As we head into this downturn, like, how much focus do you have on a high quality balance sheet?

Joe Fadoul, President and CEO, BorgWarner: Maybe you start with the balance sheet.

Craig Aaron, CFO, BorgWarner: Sure. Yeah. You know, so we have a couple of targets from a balance sheet perspective. Yeah. First is liquidity.

Our target is 20% of sales. That includes our revolver. We have a 2,000,000,000 untapped revolver. As I look at our balance sheet at the end of last year, we’re actually above that threshold. So we’re operating from a position of strength.

And from a leverage perspective, we target gross leverage at two times. Again, when I look at the balance sheet at the end of last year, I put a check mark next to that. I think it’s more important to have a strong balance sheet more than ever. You know, it’s, it’s during these turbulent times that having investment grade balance sheet is really important. And I think it provides us a lot of flexibility to take advantage of inorganic opportunities that Joe can kind of talk about, but also looking into how we can return cash to shareholders if that’s the right thing

Doug, Unidentified speaker: to do. Right.

Joe Fadoul, President and CEO, BorgWarner: Yeah, and specifically about potential acquisitions. You know, acquisitions have always been a part of our strategy. You know, I would say we did a lot of heavy lifting again in the last five years. So you know, how we’re approaching acquisitions on a go forward basis, you know, I would say we’re opening up our aperture a bit to take a look at, hey, what’s out there, especially in a time of so much turmoil right now. You know, as Craig said, we are in a position of strength.

So we would be remiss if we didn’t take a look at what could be a potential acquisition. Now with that said, you know, there’s three criteria that we’re focused on. One is it needs to leverage the core competence we have today. So we want to continue to build a strong portfolio. You’re not going see us do something far out in left field acquisition wise, have good industrial logic.

The second is we want to see near term accretion. You know, so something that can contribute very quickly to BorgWarner. And third is valuation. Okay, especially in this type of time, we don’t want to overpay. You have to run lots of scenarios to anticipate what the market could look like.

And for us, it’s important that we value an asset properly and stick to our numbers. So that’s how we’re approaching

Doug, Unidentified speaker: Good framework. Thank you.

John, Host: Just maybe to follow-up on that before we finish here is, you know, historically, acquisitions in the supplier space have been regional customer and then tech, right, is kind of the way it’s been looked at sort of regional diversity, customer diversity, and then technology. I think for you guys, really, it’s more of the technology side that kind of leads that, you know, the first two. I just wanna make sure we have that straight when you’re kind of evaluating what you’re going after, what it’s like to, you know, the the target sort of more strategically. Yeah.

Joe Fadoul, President and CEO, BorgWarner: I would say regionally, we’re pretty balanced today. So I think that’s probably not the highest priority at the moment. Yep. If you think about our strategy, you know, we’re number one or number two on the foundational side. We’re still building scale on the East Side.

So, yeah, when it comes to more customer diversity on the East Side or when it comes to good technology, we’re in the early days of electrification. You know, we feel really good where we’re at right now, but, you know, we think there’s gonna be some opportunities out there. And, again, we I don’t wanna comment further than that. But

John, Host: But tech tech and and customer diversity in in in in that tech, Right? It’s really

Joe Fadoul, President and CEO, BorgWarner: Yeah. And I I would say building scale overall. Yep. You know, we wanna get to be a top player in electrified products just like we are in combustion side. We know when we do that, we can not only invest well into the future, but provide, you know, top quartile margins like our investors expect.

Great. Well, Joe, Craig,

John, Host: and Pat, thank you very much for the time. Thank you, Jack. And as always, we really appreciate this. Alright.

Joe Fadoul, President and CEO, BorgWarner: Thank you, guys. Yep.

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