Thank you for standing by for the BorgWarner 2024 conference call. The call will begin momentarily. Thank you for your patience. Good morning. My name is Nick, and I will be your conference specialist. At this time, I would like to welcome everyone to the BorgWarner 2024 Fourth Quarter and Full Year Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Press star two. I would now like to turn the conference over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Nick, and good morning, everyone. Thank you all for joining us today. We issued our earnings release earlier this morning. It's posted on our website borgwarner.com, both on the homepage and on our investor relations homepage. With regard to our investor relations calendar, we will be attending multiple conferences. You can see the events section of our IR page 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 detailed in our 10-Ks. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods. If you hear us say "on a comparable basis," that means excluding the impact of FX, net M&A, and other non-comparable items. If 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 margin includes our planned investment in R&D, any impact from inflationary impacts, and other costs. Lastly, we will refer to our growth compared to our market. When you hear us say "market," it is weighted for our geographic exposure. Please note that we have 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. Frédéric Lissalde: Thank you, Pat, and good…

Thank you, Fred. On behalf of the management team and all of our employees, I would just like to thank you for your leadership over the last 26 years and especially the last seven as CEO. I also want to personally thank you for your mentorship and friendship over the years. You've been an inspirational leader to me, and I believe you've clearly positioned the company well for our next phase of profitable growth. We wish you nothing but success as you move on to the next chapter and hope you enjoy your well-deserved retirement. Now let's turn to Slide six for what I view as the drivers of BorgWarner's value proposition. First and foremost, we have what I view as a strong product portfolio that is resilient to the varied pace of propulsion mix changes that we see across the world. Second, we have strong market share positions across our foundational portfolio, with several of our e-products also improving their market share position. Third, I view BorgWarner's financial strength as a key driver of our success. It allows us to continue to invest in our business regardless of near-term fluctuations in market volumes or mix. Our financial strength is also a differentiator when our customers award us new business. And our financial strength is a direct end result of the financial discipline ingrained into the company's culture. Fourth, the long-term relationships that we've established with our light vehicle and commercial vehicle customers around the world are also a very important driver of our success. These relationships allow us to partner with our consumers to meet their efficiency and value needs beyond just pursuing individual program awards. Lastly, I firmly believe that our decentralized operating model creates speed, accountability, and agility. The agility afforded by our operating model allows us…

Thank you, Joe. Good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our fourth-quarter results. First, we reported just over $3.4 billion in sales, which was down approximately 2% versus the prior year, excluding FX and M&A. Market production in the quarter was down approximately 4%, so we saw sales outgrowth in the quarter of approximately 220 basis points, which was slightly below our full-year outgrowth of 280 basis points. Second, we had strong adjusted operating margin performance in the quarter at 10.2%. This was driven by solid operational performance, a continued focus on cost controls across the business, and restructuring actions. This strong fourth-quarter performance allowed us to deliver a full-year adjusted operating margin above 10%, which was up 50 basis points from 2023. Third, we had strong free cash flow in the quarter, up $539 million, which allowed us to outperform our 2024 free cash flow guidance and deliver $729 million in free cash flow for the full year. Now let's turn to Slide nine for a look at our year-over-year sales walk for Q4. Last year's Q4 sales from continuing operations were just over $3.5 billion. You can see that the weakening U.S. Dollar drove a year-over-year decrease in sales of $32 million. Then you can see a decrease in organic sales of about 1.5%, which was 220 basis points above market production. This outgrowth was primarily due to strong e-product growth in Europe and Asia, as well as strong foundational growth in Europe, North America, and the rest of the world. In China, we saw challenges in the quarter due to lower volumes on an existing EV program, which we previously highlighted, and declining foundational sales. Finally, the acquisition of Eldor added $6 million of sales year over…

Thank you, Craig. Nick, we're ready to open it up for questions.

At this time, we will pause momentarily to assemble our Q&A roster. And your first question today will come from John Murphy with Bank of America ML. Please go ahead.

Good morning, everybody, and Fred, congratulations. Look forward to visiting you in Burgundy. It'd be a lot of fun, hopefully. And, Joe, I apologize. You're gonna have to deal with us now. But thank you. First question, the portfolio that is well balanced almost in whichever direction powertrains go seems like a very good way to be positioned, and you're set there. Just curious as you look at sort of the short-term swings that we're seeing in programs, stuff like Ford canceling the three-row EV last year, when those shifts happen very quickly, how well do you think the portfolio is hedged? And do you think you pick up those lost sales with something like the Explorer, the ICE version, or something like that? How quickly did that get balanced out? And maybe sort of, with that, is that one of the key drivers of why we're seeing this $100 million variance in inorganic sales, or what else is driving that $600 million organic variance?

Yes. Hi, John. So you look at the RFQs outside of China, they have been slowing a little bit, and we've seen some delays or cancellations. On the other side, we see more RFQs for foundational products, and those usually result in higher volumes of our existing products we're serving a customer with, or it might be extensions because they've delayed an EV truck or SUV. So we're in a great position to take advantage of that and also be ready when they launch those new programs on EVs in the markets.

Okay. And that $100 million organic variance in the 2025 outlook, is that being driven by deltas in volume or program shifts? What's the key driver of that variance?

So for the outlook, or let's say the 2024 results, as you know, we outgrew those markets in that 2% to 3% range. As we look forward, we continue to expect that outgrowth as Craig had mentioned, in 2025.

Okay. And then just maybe one quick follow-up, if you could just remind us what your China exposure is right now with domestics versus international players and where you think that's gonna land in 2025 and how much it may shift towards the domestics in the next few years?

Specifically in China?

In China specifically, yes.

Yes. So as you know, China is about 20% of our global sales. And in China, 75% of our total sales are with the Chinese OEMs. So we're very well positioned with them as they grow in their domestic market and in support of their strong export. One other thing I mentioned, 90% of that business is on NEV with those domestic OEMs. So we're in a great position.

That's very helpful. Thank you very much.

Your next question today will come from Colin Langan with Wells Fargo. Please go ahead.

Oh, great. Thanks for taking my questions and congrats, Fred, on your retirement. It's been a pretty impressive pivot to e-powertrains under your leadership. On e-powertrains, any color on how e-products should perform this year? I noticed the battery side was a bit weaker sequentially, and I think there's some slowing in North America you've indicated. Should we start seeing help? I know Europe with regulations, there should be a light vehicle bounce there. Likely some increase in the US. Does that start showing up in maybe the second half? Or how should we think about that?

So Colin, we are growing year over year in the e-product business. It is softened a little bit mainly due to the battery business, which you referenced. The way we, I guess, you want to think about it is we are flat year over year in battery sales. When it comes to units, the revenue was down a little bit mainly due to cell pricing, which is bringing the overall revenue down. But overall, it's, you know, greater than a $600 million business. We really like that Akasol business we bought, and it's ahead of where we purchased it despite a lot of the turmoil and despite the lower cell pricing.

Got it. And then the guide for this year has 200 basis points growth over market. In the past, you've kind of talked about 4%. You've called out a couple of things. I mean, should we think about eventually getting back to something like a 4% or is this lower EV adoption just kind of holding that back for several years from now?

Yeah. The past few years, our outgrowth has been in that 2% to 3% range. So 2025 is close to this range. You know, my focus is really on outgrowing our markets. We think the portfolio is the right one. In the short term, the biggest driver in 2025 of the lower outgrowth is the delay of a North American EV program, which we previously disclosed. And as I mentioned, the cell pricing on the battery pack business. My focus is really to outgrow on both sides of the portfolio. So we want our foundational products to do what they can to expand market share, and we're in a great position because, as you know, on our foundational products, we're number one or number two in that side of the business. And then on the e-side, as new launches and RFQs start to come out, we're in a good position to also outgrow those markets.

Got it. Alright. Thanks for taking my questions.

And your next question today will come from Ryan Brinkman with JPMorgan. Please go ahead.

Hi. Thanks for taking my question. Just curious, with regard to the products that you manufacture and the extent to which they are installed on products in Mexico versus, you know, brought across the US border. And then what any preliminary conversations with automakers might look like in terms of the pass-through of any potential tariff costs. Thank you.

Yeah. Ryan, let me take that one. So I'll start by saying we generally produce in the same regions as our customers produce. But when we look at 2024, and the amount of imported material and value to the US, it was about $875 million. When you break that down, about half of it originated in Mexico, 10% of it originated in Canada, and 5% originated in China. Ultimately, there's a lot of news going on right now. We're going to continue to watch that. But ultimately, if there's an impact to BorgWarner, we're going to need to find a way to share that with our customers and our suppliers. That's how we're thinking about it.

Great. Thanks much.

Thank you. And your next question today will come from Luke Junk with Baird. Please go ahead.

Good morning. Thanks for taking the questions and my congratulations. Maybe starting with the outgrowth, hoping you could just help us understand at least directionally what that assumes for e-products and PowerDrive. I guess I'm looking specifically in Europe where you had a big launch here in 2024 and in China relative to what are, of course, continued tailwinds around NEV adoption overall? And I guess any offsets we should be thinking beyond what you've already mentioned in any distinct book of business in either Geo as well? Thank you.

Yeah. Hi, Luke. So we see EV adoption increasing year over year in all the markets. When we think about our segments, one of the things we did last July, as you recall, we organized into four operating segments to give better transparency in how each of those businesses are performing. So we think that's going to be a good indicator of how the businesses are performing in terms of outgrowth.

Got it. And then for my follow-up, I'm hoping you could just maybe expand on your comments around foundational awards. It's now been a couple of quarters in a row you've highlighted a good number of foundational awards. As you mentioned, you're seeing a reacceleration in RFQs. I just want to try to square how that might translate to outgrowth, not this year, but looking out 2026-2027. And especially, you know, it seems like there may have been a lull just given where the industry's focus was a few years ago in those awards. And how that might translate to some pickup in 2026 plus? Thank you.

Yeah. As you mentioned, we have highlighted awards on both sides of our portfolio and an increasing number on the foundational side. I think that speaks to the strength of our portfolio. And as customers are evolving their cycle plans, they're looking toward us since we're number one or number two in those foundational products to support them. Those often look like program extensions. In some cases, it may be some new programs that they're putting out for bid. But I think what's important here is we want to help grow across our entire portfolio. And those are great examples that we highlighted. You see wins in both the foundational and on the e-side.

Understood. Thank you.

And your next question today will come from Joe Spak with UBS. Please go ahead.

Thanks. And, Fred, again, my congrats as well. Enjoy. Just maybe one on the guidance, just a little bit more color. I just want to understand, like, that is what you're saying that, you know, that North America weighted down 3% to 4%. I think if we look at some third parties, it's closer to down 2%. Is that delta sort of the, you know, I guess, conservatism you're sort of putting in for maybe some disruption as to what could happen if tariffs come in? I just want to be clear on that. And then I don't think I heard, I turned a little bit late, I don't think I heard sort of any, you know, e-products overall. I know you have the new segments, but any sort of e-products sort of expectations for this year? Is there any color you can provide there just so we could sort of, you know, track, I guess, performance relative to some of the underlying market dynamics?

Yeah. So starting with some color on the market, we formulate our industry forecast internally. And directionally for the last few years, we've been fairly accurate. You know, when we think about the global markets, maybe we can break it down a little bit. So that minus 1% to minus 3%, starting with North America, down 3% to 4%. As you know, there's a lot of inventory in the system. We've also baked in a little bit of headwinds pending tariffs that may come. In Europe, 4% to 6% down due to signs of both the backlog and economic headwinds that they're seeing. China is a brighter spot. They're flat to down 1%. So that's a little bit of color on your first question. Yeah. I'll jump in with sales. So I reported 2024 sales a little over $2.3 billion for e-products. As we move forward, you'll see disclosure in our 10-Qs breaking out e-products from foundational. And so you'll see that as we move forward.

But anything on e-products in relation to the overall guidance? We're not providing that outlook. As Joe indicated, our focus is outgrowth on both sides of our portfolio.

Okay. I heard the second question is thinking in some of your prepared remarks, you talked about building on your portfolio organically and inorganically. And I don't think that's a change from what you've talked about in the past as an organization. Right. You know, there had been some messaging or communication that, you know, inorganic has been paused. I guess I'm wondering, as you sort of take over here, how you think about that going forward, especially since we've seen some, you know, activity in M&A in the space, and I'd say I would even say sort of more broadly in the markets. Like, do you expect a little bit more focus on inorganic opportunities as we move forward from here?

Yeah. So we will continue to invest organically as our top priority. We have a terrific product portfolio, and we see lots of opportunities to keep building on that and growing that to outgrow the market. We will continue to look at acquisitions as it remains an important part of our strategy. So the industry turbulence that we're all witnessing right now actually provides a unique opportunity for BorgWarner given our financial strength. So as we execute them, if we execute them, it'll be in a very thoughtful way. And our focus is to create long-term shareholder value.

Thank you. And your next question today will come from Edison Yu with Deutsche Bank. Please go ahead.

Thank you for taking the questions and congrats, Fred. I wanted to ask about eRev. You've obviously had quite a bit of success in China with that. How are those conversations going in the US and Europe? And do you think the volumes there could, you know, in three or four years, be similar?

So we have seen some success on eRevs in China, as you mentioned. I would say the other regions are starting to look at eRevs as a way to, especially in the truck market, meet all the requirements for our customers, but also provide, you know, better overall fuel economy and emission reduction. So we don't see it in big volumes just yet, but we do see it as an emerging option architecture for the customers to meet their emission requirements.

Understood. And just one thing on the guidance for China. Are you assuming the scrappage incentives still continue? I think there's probably, to your point, you know, you mentioned some risk, but in terms of the upside, curious what kind of you're assuming there?

No. We're really looking at a China market that is flattish year over year. So we haven't factored that in at this point.

Okay. Thank you.

Your next question today will come from Emmanuel Rosner with Wolfe Research. Please go ahead.

Thank you. My first question is on the CapEx outlook. Can you provide a little more context around the lower CapEx budget and to what extent this extra free cash flow would go, you know, towards buybacks versus something else?

Yes. So let me address CapEx. When you go back a few years, our CapEx was in kind of the mid-5s as a percent of sales, 5.5%, 5.4%. We saw this year come down to below 5%. Our guidance as we look at it this year is maintaining that around the high 4s, low 5s as a percentage of sales. So that's how you should think about it. From a buyback perspective, we have not announced any specific plans. So I wanted to address that a little bit. You know, when we step back and think about buybacks as a company, we've deployed a lot of cash to shareholders, about $3.4 billion since 2020. So we've deployed a lot of cash to our shareholders. I want to step back and talk about our goal. Our goal as a company is to really focus on earnings and cash flow, grow earnings and cash flow over time. And as we think about buybacks for this year, we're going to use the full power of BorgWarner to focus on earnings growth, to focus on full cash and cash flow growth. As we continue throughout the year, we'll look at this lever as an item to pull, and we'll look at it appropriately as we move forward. That's how we're thinking about buybacks this year.

Got it. That's helpful. And then how are you thinking about the growth outlook this year and also beyond for EV products in China, specifically given very competitive market dynamics?

Yes. So, I mean, more broadly speaking, 20% of our total business is in China. And as we mentioned, we're very strong with the Chinese OEMs. In fact, the Chinese OEMs have over 90% of the market share on EVs, and they are 75% of our business. So we feel very well positioned with the Chinese, whether they're serving the domestic market or, as we've seen in the last few years, exporting those vehicles.

We have time for one final question, and that question comes from Dan Levy with Barclays. Please go ahead.

Hi, good morning. Thanks for taking questions, and Fred, congratulations to you. Wanted to first just start with a follow-up on that last question there. PowerDrive was disappointing or soft in 2024. Maybe you can give us a flavor for what turns around in that business. And maybe you could just comment or remind us why Asia, in PowerDrive, was as soft as it was despite EV in China doing as well as it did.

Yeah. Maybe I'll start on the year-over-year performance. So we were down a little over $200 million in sales. When you think about that, that was really on the foundational side of their portfolio as a customer program. When you look at the e-side of the portfolio, it was actually relatively flat. There was just volatility in the market. I'll let Joe comment on going forward.

Right. So as we look forward in 2025, we're in the middle of launching a number of new products and platforms. So that's what's really bringing the additional growth on the PowerDrive side of the business.

And how much of that is China?

Yes, we don't break out specifically China, but let's say that they're a strong, they've got a strong position in the overall market. Let Pat maybe cover that in a follow-up.

Okay. Thank you. And then as a follow-up, wanted to just understand the EBIT bridge. And maybe we could just compare versus 2024 because on organic revenue, flat or down slightly, you still had EBIT up some $60 million. Now in 2025, you know, you've talked about restructuring benefits for e-product. And I would presume there's going to be some pricing benefits for programs that you've tooled for, but the volume is never appreciated. So why aren't we seeing maybe a little more margin benefit given these?

Yeah. So let me walk through the guide. When you start with last year's sales of $14.1 billion, the midpoint of our guide is $13.7 billion. And when you look at the difference and exclude foreign exchange, again, that $410 million, we're basically slightly up about 40 basis points against the market backdrop that we expect is down 2%. So that's where you get about our 250 basis points of outgrowth. As you look at our EBIT line, we're maintaining 10.1% on that relatively flat sales. As we look at the low end of the guide, we're basically decrementing at 10%. At the high end, in the mid-teens. So we feel really good about the performance that you're seeing in the guide. That's how we're thinking about it. It does incorporate the savings year over year from our e-product restructuring.

And what was unique in 2024 that is not repeating in 2025 that you had such strong incrementals?

I think when you look at our performance in 2024, we really focused on restructuring savings. We focused on cost controls across the business, including GSM and productivity. And we're maintaining that as we look into this year. And so we feel really good with where we landed in 2024 and this outlook for 2025. We're going to keep our focus on cost controls as we move forward.

Okay. Thank you.

Thank you all for your great questions today. If you have additional follow-ups, feel free to reach out to me or my team. With that, Nick, you can go ahead and conclude today's call.

Thank you. This concludes the BorgWarner 2024 Fourth Quarter and Full Year Results Conference Call. You may now disconnect.