BorgWarner Inc. 2026 Q2 Earnings Call

My. Name is Nick, and I will be. Your conference specialist. At this time I would like to welcome everyone to the BorgWarner 2026 Second Quarter Results conference call All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After. Today's presentation. There will be an opportunity to ask questions. If you would like to ask a question during this time, simply press star one on your telephone. If you would. Like to withdraw your question? Press star two. If you are using a speakerphone, please pick up the 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.

Thank you Nick. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com. Both on our home page and on our Investor Relations home page. With regard to our investor Relations calendar, we will be attending investor conferences between now and our next earnings release. Please see the events section of our Investor Relations Home page for a full list. Before we begin, any formula 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. In addition, 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. When you hear us say adjusted, that means excluding non-comparable items. When you hear. Organic, that means excluding the impact of FX and net M&A. We 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. We'll also refer to our growth compared to our market.

When you hear us say market, that means the change in light vehicle production weighted for our geographic exposure. Please note that we 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 Joe. Thank you, Pat, and good morning, everyone. I'm. Pleased to share our results for the second quarter of 2026 and provide an overall company update. Starting on slide five. I want to begin by thanking our employees, customers, and suppliers for all of their trust efforts and continued support in the. Quarter. We achieved sales of over $3.6 billion. Excluding the decline in our battery energy system segment. Our organic net sales were up modestly year over year, outperforming the decline in market production primarily due to strong North American transfer case volumes. Our adjusted operating margin adjusted earnings per share and cash flow performance was strong in the quarter. The. Company continued to operate at a very high level and delivered 100 basis points of adjusted margin expansion and 17% of earnings per share growth in a relatively flat year over year.

Sales environment. This outstanding result was once again driven by our focus on cost controls across our business. I'm excited to report that our strong award activity continued into the second quarter. Today. I'll highlight seven new business awards across our foundational and products portfolios. These wins represent only a portion of the awards secured during the quarter, but I believe they underscore the strength of our technology focus portfolio. Our deep customer relationships, and the global demand for our efficient powertrain technologies around the globe. Equally exciting is the progress we've made in the quarter in taking meaningful steps in our product readiness across our data center and other industrial markets. Portfolio. I will share. A detailed update in a few moments. Lastly, we remain focused on efficient deployment of capital to drive shareholder value in the. Quarter. We returned approximately $134 million to shareholders through share repurchases and payment of a cash dividend. Additionally, our Board of directors approved a $1 billion increase to our current share repurchase authorization, increasing our authorization to $1.35 billion, or approximately 10% of Borgwarner's market cap. These actions demonstrate our confidence in the long term cash generating ability of our business and our focus on driving shareholder value through a balanced capital allocation approach.

As I look back on the second quarter and the first half of 2026. I'm very proud of our team and our results. Once. Again, we executed at a very high level, which I believe puts the company and strong position to achieve our full year sales margin, EPS and free cash flow guidance. Our strong first half performance has also allowed the company to increase our second half. 2026 industrial R&D investment to accelerate our product readiness. We are doing this while delivering on our full year 2026 financial commitments. Turning to slide six. I'd like to highlight seven recent product awards that demonstrate both the competitiveness of our technology and our ability to support our customers powertrain needs in key markets. Let's start with our foundational product awards. First, BorgWarner has been awarded a new E turbo program with a major European OEM for an advanced hybrid passenger car application Further strengthening Borgwarner's leading position in electrified boosting technologies for. Production is scheduled to begin in 2029. I believe. Borgwarner's e turbo innovation and leadership remains a core technology underpinning the industrial power generation product line. Leveraging our automotive scale to disrupt the data center market. Second. BorgWarner has secured new business with the Chinese OEM to supply our torque on demand transfer case with mechanical lock for a newly developed full size SUV in China.

We have built a 20 year relationship with this customer, and we're proud to continue supplying our all wheel drive technology for their newest SUV. Start of production is planned for the fourth quarter of 2026. Third BorgWarner continues to expand its variable cam timing business with new program awards in Europe and China. These programs include a program life extension and significant volume increase for a leading European premium. OEMs. V6 engine, family and a conquest win for a major Chinese OEMs 1.5l turbocharged gasoline engine family, replacing the previous incumbent supplier. These. Awards underscore the long term competitiveness of our VCP portfolio across both hybrid and combustion engines. Switching now to our recent E product awards. First, BorgWarner has secured secured a new integrated drive Module Award with a global OEM. This IDM. Features Borgwarner's latest 3 in 1 integrated coaxial drive system, combining an advanced E-motor gearbox and fully integrated Gen four inverter in a compact, high performance package. I believe this award reflects Borgwarner's continued commitment to delivering advanced electrified drive solutions through the strength of our global technology portfolio and localized capabilities. Is expected to begin in 2027. Second, BorgWarner has. Secured a major extension of two high volume, high voltage inverter programs with a major European OEM.

These. Cover updated inverter designs for both plug in hybrid and 800 volt battery electric vehicle applications. Building on a trusted partnership and power electronics. I believe that extending several high volume programs at the same time. Confirms Borgwarner's leading position in power electronics and the strength of our technology. In-House expertise and customer focus. Evolving our inverters generation by generation, together with our customers for both hybrid and fully electric applications is how we build trusted, long term partnerships with the world's leading OEMs Production is expected to begin in 2029. Importantly, all the E! Product awards I just highlighted include Borgwarner's, inverter technology and it speaks to the world class technology leadership and scale BorgWarner has at high powered inverters. This. Has been developed over decades of engineering effort and represents our product leadership in this area. Our automotive inverter competence is another great example of a world class technology that BorgWarner can use. As we continue to advance our product readiness to capture additional growth factors outside of our core automotive markets. As I would discuss in a moment, the world is in need for more power and our highly efficient inverter is a solution that solves this growing problem.

Next on slide seven, I would like to discuss the acceleration of our product readiness across our data center and other industrial markets. Portfolio Let's discuss with an update on our turbine generator launch progress. I'm very. Pleased with the advancements that we've made over the past quarter. First. I'm excited to share that our testing has confirmed that we have achieved carb level emission standards. I view this as an important milestone as we continue to expect our turbine generator to provide a lower emission solution relative to competing technologies. Our URL compliance process continues to progress well. UL component certification is expected to start in September, and our component level evidence books have already been submitted. Construction of the final assembly plant is quickly moving forward with the footprint largely complete. We. Effect our capital equipment installation to begin in the third quarter and overall, I'm excited and pleased with the team's progress, which will position us well to meet the strong interest that we continue to see from end customers, including multiple hyperscalers. Turning next to our battery energy storage system. Our energy storage solutions are intended to support a range of use cases and data center environments.

We. View to position our battery energy storage solutions to support data center AI and mechanical loads. Our. Product scope spans the entire energy, power, time requirements, spectrum offering high energy, long duration, and or high power. Short duration solutions. We are working to widen our portfolio, which includes DC blocks, uninterruptible power supplies, high power racks, and controls. Our solutions are modular, scalable, and sell chemistry, independent. Customer validation and UL compliance is advancing and we. To be production ready to 2027, our quoting activity for our battery energy storage systems continues and I look forward to providing you with additional updates later this year. Turning to our microgrid inverter offerings Initial customer feedback has been extremely positive We believe that we have the right value proposition, including us manufacturing and supply chain. Our. Automotive supply chain is increasingly being viewed as a differentiator, and our decades long experience in highly engineered, high voltage power dense and liquid cooled power electronics is recognized and confirmed by potential customers. For. Customers now have BorgWarner samples and discussions with other potential customers are underway with. Feedback already received. We are quickly moving to develop Gen two designs. While we continue to see the move toward 800V supporting our entry into this market.

We have now begun to develop a high power portfolio spanning applications ranging from 400V to 1500V. As we see potential for volumes across the spectrum. I look forward to progressing toward customer quoting later this year. This summarize. I believe there are three key takeaways from today's call. First, for Warner's second quarter results were outstanding. Our. Sales remained strong at over $3.6 billion. Our adjusted operating margin expanded 100 basis points and adjusted EPS grew by 17% to the second quarter of 2025. Additionally, we increased our full year adjusted EPS guidance, reflecting our continued focus on growing the earnings power of the company. Second, we announced seven new business awards across our portfolio in the quarter, which we believe further demonstrates our focus on product leadership and the need for a highly engineered solutions across combustion, hybrid and Bev architectures. Third. We further improved our product readiness across our data center and other industrial markets. Portfolio. We see strong customer demand and are confident that our mechanical and electronic core competencies will enable us to successfully capture growth outside of our core automotive market. This confidence in our strong first half 2026 performance has allowed us to increase our second half.

Industrial R&D spending to further accelerate our industrial product readiness. And finally, we took meaningful steps to return capital to shareholders during the second quarter with approximately $134 million returned through our cash dividend and share repurchases Additionally, the $1 billion increase to our share repurchase authorization and $1.35 billion total authorization demonstrates our commitment to following a disciplined approach of consistently returning cash to shareholders to create value. Overall, I believe our year to date results illustrate the strength of our team, our product portfolio, and the long term earnings power of our business. I'm excited to continue our positive momentum into the second half of 2026. With that, I will turn the call over to Craig. Thank you, Joe, and good morning, everyone. I'm excited to share the details of our second quarter financials by turning to slide eight. For a look at our year over year sales water. Last. Year's Q2 sales were just over 3.6 billion in the second quarter of this year. Stronger foreign currencies drove a year over year increase in sales of 54 million. Then you can see the sales headwind from our battery business, which drove a year over year decrease in sales of 62 million. The remaining organic sales increase of 18 million, half a percent was modestly ahead of the decline in light vehicle market production for the quarter.

This increase was primarily driven by transfer case outgrowth in North America. Sales were relatively flat year over year and remain strong at over 3.6 billion. Turning to slide nine, you can see our earnings and cash flow performance for the quarter. Our. Quarter adjusted operating income was 413 million, equating to a strong 11.3%. Adjusted operating margin. That. Compares to adjusted operating income of $373 million for a 10.3%. Adjusted operating margin from a year ago. The exit of our charging business in 2025. Increased operating income by 7 million year over year. Excluding this benefit and FX impacts, adjusted operating income increased 28 million on $44 million of lower sales. This strong year over year performance benefited from ongoing cost reduction actions that are teams continue to take across our business. Equally. Exciting was every business unit expanded, operating margins in the quarter and lower corporate costs provided an additional tailwind to our strong results. Our adjusted EPS was up $0.21, or 17%, compared to a year ago. As a result of higher adjusted operating income and the impact of approximately $650 million in share repurchases, or approximately 5% of our market capitalization over the past four quarters. And finally, we generated free cash flow of 492 million in the second quarter, which supported $250 million in share repurchases and 70 million in dividend payments in the first half of 2026.

I believe this once again demonstrates our focus on creating value with our consistent and strong free cash flow. Now let's turn to slide ten and take a look at our full year 2026 outlook. We are maintaining our full year sales, adjusted operating margin and free cash flow guidance However, we are increasing our full year adjusted EPS guidance based on our share repurchases in the first half of 2026. We. Due to Project Total 2026 sales in the range of 14.0 to 14.3 billion, compared to 14.3 billion in 2025. Starting with foreign currencies, our guidance now assumes an expected full year sales benefit of 175 million, compared to 2025, due to the strengthening of the euro and the renminbi versus the US dollar. This benefit is modestly lower than our previous guidance. We continue to expect our weighted and markets to be flat to down 3% for the year. We expect our light vehicle business, which comprises over 80% of our sales, to perform broadly in line with our weighted light vehicle market. Consistent with how we performed in the first half of 2026. However. We expect a sales decline in our battery business due to the lack of North American incentives and weaker European demand.

We now expect this decline to represent roughly 170 basis point headwind to our year over year sales growth. Based on these assumptions, we expect our 2026 organic sales change to be down three and a half to down 1.5% year over year, which is roughly in line with our market and consistent with our previous outlook. Now let's switch to margin. We. Expect our full year adjusted operating margin to be in the range of 10.7 to 10.9%, compared to our 2025 adjusted operating margin of 10.7%. On a year over year basis, we expect the exit of our charging business to drive a ten basis point improvement in adjusted operating margin. Excluding this benefit, the low end of our margin outlook contemplates the business delivering a full year Decremental conversion in the low double digits. At the high end, our outlook assumes we largely offset the impact of the organic sales decline through further cost controls. Similar to what we delivered in the first half of 2026. Our strong first half performance is enabling the company to increase our planned industrial R&D spending, while maintaining our full year adjusted operating margin and guidance commitment. We continue to see strong customer interest in our growing industrial portfolio and believe.