BorgWarner Inc. (BWA) Q2 2025 Earnings Conference Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary presents a mixed outlook: while there are positive developments such as new business awards, cost-saving measures, and a strong shareholder return plan, challenges persist in the battery sales segment and organic growth. The Q&A reveals persistent headwinds in battery sales and uncertainties in market demand. The exit from the charging business and consolidation actions suggest strategic restructuring. Overall, the ratings balance positive strategic moves with ongoing market challenges, resulting in a neutral sentiment for stock price movement.

Key Financial Performance

Sales Performance Sales were just over $3.6 billion, relatively flat year-over-year excluding foreign exchange. Light vehicle eProduct sales increased by 31% year-over-year, driven by strong growth in Europe and Asia. Organic sales were slightly down due to a decline in foundational industry production and lower battery and charging sales.

Adjusted Operating Margin Adjusted operating margin was 10.3%, including a 40 basis point tariff headwind. This was consistent with the prior year margin of 10.4%, demonstrating strong operational performance despite challenges.

Free Cash Flow Free cash flow was $507 million, a 71% increase from the previous year, driven by strong working capital and capital expenditure performance.

Shareholder Returns Over $130 million was returned to shareholders through share repurchases and cash dividends. The Board approved a 55% increase in the quarterly cash dividend per share and increased the share repurchase authorization to $1 billion.

Adjusted Operating Income Adjusted operating income was $373 million, slightly down from $376 million in the prior year. This decrease was attributed to $15 million in net tariff costs, which are expected to be recovered in the second half of the year.

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Operating Highlights

Turbocharger Conquest Business Wins: Secured two significant turbocharger conquest business wins for a major global OEM's next-generation vehicles in Europe and North America. Production is scheduled to begin in August 2027 and September 2028 respectively.

East Asian OEM Turbocharger Partnership: Secured a business win with a major East Asian OEM to supply turbochargers for their 1.6-liter engine, supporting hybrid electric vehicle SUV applications. Production is scheduled to begin in 2027.

Hybrid Sports Car Turbocharger: Secured a turbocharger award with a major global OEM for use in a hybrid option for a sports car platform. Production is expected to begin in 2028.

Dual Inverter for Chinese OEM: Secured an award to supply dual inverters for a major Chinese OEM's hybrid vehicle lineup. Mass production is scheduled to begin by the end of 2025.

Electric Motor Business in China: Secured an electric motor business with a major Chinese OEM featuring a platform-based design for NEV applications. Production is expected to begin in 2026.

High-Voltage Coolant Heater Technology: Secured contracts with two major global OEMs to supply high-voltage coolant heater technology for plug-in hybrid electric vehicle platforms. Production is expected to begin in 2028.

Electric Cross Differential Technology: Secured a new program for electric cross differential technology for a leading Chinese OEM's electric vehicles. This technology improves handling and traction capabilities.

Light Vehicle eProduct Sales Growth: Achieved a 31% increase in light vehicle eProduct sales, outpacing the high teens increase in global hybrid and BEV production.

Global Market Expansion: Secured new business awards across Europe, North America, and Asia, demonstrating global demand for efficient powertrain technology.

Adjusted Operating Margin: Achieved a strong adjusted operating margin of 10.3% despite a 40 basis point tariff headwind.

Free Cash Flow: Generated $507 million in free cash flow, a 71% increase from the previous year.

Capital Allocation: Returned over $130 million to shareholders through share repurchases and dividends. Increased quarterly cash dividend by 55% and share repurchase authorization to $1 billion.

M&A Strategy: Focused on accretive inorganic investments with strong industrial logic, near-term earnings accretion, and fair pricing. Passed on opportunities that did not meet these criteria.

Balanced Capital Allocation: Maintained a balanced approach with 50% of capital deployed to shareholders and 50% supporting technology-focused acquisitions over the last five years.

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Risk or Challenges

Tariff Costs: The company faced a 40 basis point headwind from tariff costs in the second quarter, amounting to $15 million. While they expect to recover these costs in the second half of the year, it remains a risk to margins and financial performance.

Decline in CV Battery and Charging Systems Segment: Organic sales were negatively impacted by a decline in the CV battery and charging systems segment, which could affect future revenue growth in this area.

Foreign Exchange Volatility: The company experienced a year-over-year increase in sales due to foreign exchange fluctuations, but this also introduces uncertainty and potential risks to financial performance.

Market Production Decline: The company anticipates a decline in foundational industry production, which could negatively impact organic sales and overall revenue.

Tariff Recovery Uncertainty: The company reduced its full-year guidance for tariff-related recoveries, indicating potential challenges in fully offsetting tariff costs.

Supply Chain and Cost Pressures: The company highlighted its focus on cost controls, but ongoing supply chain pressures and cost management challenges could impact operational efficiency.

M&A Screening Challenges: The company has passed on several M&A opportunities due to not meeting criteria, which could limit inorganic growth opportunities.

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Guidance & Outlook

Revenue Expectations: BorgWarner projects total 2025 sales in the range of $14.0 billion to $14.4 billion, an increase from prior guidance of $13.6 billion to $14.2 billion. This is driven by stronger foreign currencies and a higher market production outlook.

Margin Projections: The company has increased its full-year adjusted operating margin guidance to 10.1% to 10.3%, up from the previous range of 9.6% to 10.2%. This reflects strong operational execution and lower-than-expected tariff costs.

Capital Expenditures and Free Cash Flow: BorgWarner has raised its full-year free cash flow guidance to $700 million to $800 million, a $50 million increase from prior guidance. The company plans to continue investing in organic and inorganic growth opportunities.

Market Trends and Business Segment Performance: The company expects to outperform market production by 100 to 150 basis points in 2025. Organic sales are projected to change by -1.5% to +1% year-over-year. Light vehicle eProduct sales increased by 31% year-over-year in Q2 2025, with strong growth in Europe and Asia.

Strategic Plans and Product Launches: BorgWarner has secured multiple new business awards, including turbocharger and eProduct contracts, with production timelines extending to 2028. These include high-performance turbochargers, electric motors, and high-voltage coolant heaters for hybrid and electric vehicles.

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Shareholder Return Plan

Quarterly Cash Dividend Increase: The Board of Directors approved a 55% increase in the quarterly cash dividend per share, representing an annualized distribution of approximately $145 million.

Dividend Payment in Q2 2025: Over $130 million was returned to shareholders through share repurchases and cash dividends in the second quarter of 2025.

Share Repurchase Authorization Increase: The Board of Directors increased the share repurchase authorization to $1 billion, a 30% increase from the prior authorization.

Share Repurchases in Q2 2025: Approximately $108 million in BorgWarner stock was repurchased during the second quarter of 2025.

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Key Q&A

Q:What is the reason for the headwind in organic growth, particularly in the battery sales segment?

A:The headwind in organic growth is due to lower battery sales, primarily in North America and to a lesser extent in Europe, driven by customer demand. Excluding the BCS segment, organic sales increased modestly, implying an outgrowth of 100 basis points, driven by a 31% increase in light vehicle eProduct sales.

Q:Is the battery sales headwind expected to persist for the full year?

A:Yes, the battery sales headwind is expected to persist for the full year, contributing to a 100 basis point decline in full-year outgrowth. Additionally, there is a 60 basis point impact from tariff costs and recoveries.

Q:How is the company planning to allocate its capital, particularly with its higher cash levels?

A:The company plans to maintain a disciplined and consistent return of cash to investors. In Q2, $130 million was returned to shareholders through dividends and share repurchases. For Q3 and Q4, the company plans to increase its dividend by 55% and continue share repurchases at a similar level to Q2. The company targets a liquidity level of 20% of sales and is currently above that target.

Q:What is driving the high conversion rate in the updated guidance?

A:The high conversion rate is driven by a combination of factors: a 1.5% increase in industry production ($250 million benefit), FX impact ($300 million benefit), and Q2 outperformance. Tariff recoveries and battery outgrowth reductions were headwinds, but overall, the company improved its margin profile from 9.9% to 10.2%.

Q:What is the outlook for eProduct sales growth for the rest of the year?

A:The company aims to outgrow the market, leveraging its portfolio and winning business. In the first half of the year, eProduct sales for light vehicles grew by 39% compared to a market growth of 21%. The company expects continued strong performance, although growth may moderate due to tougher comps.

Q:What is the company's strategy for improving organic growth in its foundational segments?

A:The company aims to outgrow the market in its foundational segments by leveraging its portfolio and winning business. It is optimistic about the potential for advanced hybrids and is seeing increased RFQ activity and program wins in this area.

Q:What contributed to the strong performance in Q2 despite a sales decline?

A:The strong Q2 performance was driven by cost controls, productivity improvements, restructuring, supply chain savings, and a 20% reduction in costs related to poor quality (e.g., warranty, expedited freight, scrap). These factors helped offset a $31 million sales decline and led to a $7 million year-over-year EBIT benefit.

Q:What is the company's long-term outlook for growth over the market?

A:The company aims to outperform and outgrow the market across its portfolio. While recent growth has been in the low single digits, the company is optimistic about its ability to achieve higher growth through business wins and leveraging its portfolio.

Q:What is the company's approach to M&A and capital allocation?

A:The company focuses on inorganic investments that leverage its core competencies and have strong industrial logic. It aims for near-term earnings accretion and avoids overpaying for assets. The company has tightened its criteria for future acquisitions to drive shareholder value and earnings growth.

Q:What is the outlook for the Power Drive Systems (PDS) segment?

A:The PDS segment aims to convert growth into income at mid-teens levels. In Q1 and Q2, the segment achieved this goal, with light vehicle eProduct sales growing by 38% year-over-year. The company is confident in its cost structure and expects continued strong performance.

Q:What is the company's perspective on the battery business and its challenges?

A:The battery business is facing short-term headwinds, with a $100 million impact on full-year revenue compared to prior guidance. However, the company is optimistic about the long-term potential of the battery business, focusing on energy storage and efficient energy conversion. The business is currently slightly EBITDA positive and cash flow breakeven.

Q:What is the company's view on the hybrid powertrain market?

A:The company sees significant growth potential in the hybrid powertrain market, particularly in advanced hybrids like plug-ins and range-extended hybrids. It is experiencing increased RFQ activity and program wins in this area, leveraging both its combustion and eProduct portfolios.

Q:Review of Unclear Management Responses

A:Management avoided providing a long-term target for growth over the market, citing the volatility in the battery business and the inability to predict underlying market demand. Additionally, they did not provide specific details on the timing of stabilization for the battery business or the exact impact of RFQ activity on future growth.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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