BorgWarner Inc. (BWA) Q4 2025 Earnings Call Transcript
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Overview
The earnings call indicates strong financial metrics, including increased revenue and margin guidance, and a positive EPS outlook. The Q&A highlights growth in key areas like turbochargers and power generation, with strategic investments and product launches planned. The company's disciplined M&A strategy and AI initiatives further support growth. Despite some headwinds, the overall outlook is optimistic, suggesting a positive stock price movement.
Key Financial Performance
Net Sales $14.3 billion, up approximately $200 million year-over-year. This increase was supported by a 23% increase in light vehicle eProduct sales, driven by strong demand for hybrid and BEV products.
Organic Sales (excluding Battery & Charging Systems) Up approximately 1.6% year-over-year, led by outgrowth across Foundational and light vehicle key product portfolios.
Adjusted Operating Margin 10.7%, up 60 basis points compared to 2024, despite a 20 basis point net tariff headwind.
Earnings Per Share (EPS) 14% growth year-over-year, attributed to improved financial performance and share repurchases.
Free Cash Flow $1.2 billion, an increase of approximately 66% compared to 2024, driven by strong operational performance.
Fourth Quarter Sales Just under $3.6 billion, up from $3.4 billion in the prior year, driven by stronger foreign currencies and turbocharger outgrowth.
Fourth Quarter Adjusted Operating Income $427 million, equating to a 12.0% adjusted operating margin, up from $352 million or 10.2% adjusted operating margin in the prior year.
Share Repurchases Over $500 million in 2025, contributing to EPS growth and a 13% reduction in outstanding shares since 2021.
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Operating Highlights
New Product Awards: Secured a record number of new product awards across Foundational and eProduct portfolios, including a variable turbine geometry turbocharger, 800-volt secondary iDM, generator module, and battery management systems for various OEMs.
Turbine Generator System: Announced a new product for the data center and microgrid markets, leveraging core competencies like turbocharging and power electronics. Expected to generate $300 million in sales in its first production year (2027).
Data Center Market Expansion: Entered the data center and microgrid markets with the turbine generator system, addressing growing demand for on-site power generation.
Financial Performance: Achieved $14.3 billion in net sales, 10.7% adjusted operating margin, and $1.2 billion in free cash flow in 2025. Returned over 50% of free cash flow to shareholders.
Cost Management: Expanded adjusted operating margin by 60 basis points despite a 20 basis point tariff headwind.
Market Diversification: Expanded into non-automotive markets with the turbine generator system for data centers and microgrids.
Capital Allocation: Returned $630 million to shareholders in 2025 through share repurchases and dividends, with plans for continued balanced capital allocation in 2026.
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Risk or Challenges
Battery Business Challenges: The company faced challenges in its battery business, leading to a decline in the Battery & Charging Systems segment. This decline is attributed to the lack of North American incentives and weaker European demand, which is expected to continue into 2026.
Market Decline and Production Headwinds: The company anticipates flat to declining weighted end markets (down 3%) in 2026, with specific production headwinds in Europe and China impacting foundational product sales.
Tariff Headwinds: The company experienced a 20 basis point net tariff headwind in 2025, which could continue to impact margins.
Declining Battery Sales: Battery sales are expected to decline further in 2026, representing a 150 basis point headwind to year-over-year sales growth.
Capital Spending Increase: The company expects an increase in capital spending in 2026 to support the turbine generator system launch and other light vehicle launches, which could pressure free cash flow.
Dependence on New Product Success: The company’s future growth heavily relies on the success of new product launches, such as the turbine generator system and other eProduct offerings, which carry inherent risks of market acceptance and execution.
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Guidance & Outlook
2026 Sales Outlook: Projected total sales in the range of $14.0 billion to $14.3 billion, compared to $14.3 billion in 2025. Organic sales change expected to be down 3.5% to 1.5% year-over-year, primarily due to a decline in the battery business.
2026 Adjusted Operating Margin: Expected to be in the range of 10.7% to 10.9%, compared to 10.7% in 2025. Margin improvement driven by cost controls and the exit of the charging business.
2026 Adjusted EPS: Projected to be in the range of $5.00 to $5.20 per diluted share, representing approximately a 4% increase versus 2025 at the midpoint.
2026 Free Cash Flow: Expected to be in the range of $900 million to $1.1 billion, slightly lower than 2025 due to increased capital spending for new product launches.
Turbine Generator System Launch: Production expected to ramp up in 2027, with sales exceeding $300 million in the first year. Positioned to address growing demand for on-site power generation in data centers and microgrid applications.
New Product Launches in 2026: Includes innovative battery cooling plates and other light vehicle products to support long-term growth.
Market Trends: Mid-teens annual growth expected in the on-site power generation market through 2035, driven by demand for alternatives to traditional power generation solutions.
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Shareholder Return Plan
Dividends: BorgWarner returned approximately $630 million to shareholders in 2025 through share repurchases and common stock dividends, which represented approximately 52% of their free cash flow for the year.
Share Repurchase: BorgWarner repurchased $400 million of stock during the second half of 2025, exceeding their October guidance due to stronger-than-expected free cash flow. In total, they repurchased over $500 million in shares during 2025. Since 2021, BorgWarner has repurchased over 31 million shares, reducing outstanding shares by 13% and returning $1.3 billion to shareholders over four years. They have $600 million remaining under their current share repurchase authorization.
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Key Q&A
Q:Can we dig in a little bit more to the data center opportunity? How should we think about the margins of that business as it launches? Is the $300 million a target or already booked? Is there any CapEx needed?
A:The data center win is $300 million in revenue projected by 2027. Margins are expected to be in the mid-teens incremental conversion, consistent with the automotive business. It will be EPS accretive immediately with a strong return on invested capital. CapEx guidance is 4.5% of sales, reflecting investments in 30-plus wins and the turbine generator system.
Q:Can you provide details on the PowerDrive recovery and its sustainability given the EV slowdown?
A:In Q4, there was a 100 basis points benefit. For the full year, PowerDrive Systems saw 23% eProduct growth on the light vehicle side, with mid-teens incremental growth. For 2026, light vehicle eProducts growth is expected in low double digits, with PowerDrive Systems converging in the mid-teens off the 2025 base.
Q:Can you give a sense of the $300 million revenue opportunity for the turbine business and its potential growth beyond 2027?
A:The $300 million is the start of production revenue for 2027, with a ramp-up phase. The data center market is growing mid-teens annually for the next 10 years, and the product is applicable to over 90% of the global data center market. The technology offers fast transient response and an integrated system approach, differentiating it from competitors.
Q:What is the outlook for growth over market in the auto segment, considering the battery drag and secular tailwinds?
A:Growth over market has been impacted by lower-than-expected EV program volumes in the Western world. This dynamic will continue into 2026. However, strong bookings in foundational and eProducts are expected to support midterm growth objectives, with benefits starting in 2027 and beyond.
Q:Can you clarify the content opportunity within the power generation business and its revenue correlation?
A:The $300 million revenue does not directly correlate to the 2 gigawatts of capacity. The $300 million represents the initial year of production revenue. The capacity figure relates to the installed capacity, and future revenue sizing will be determined closer to 2027.
Q:What is the outlook for the turbocharger business and its competitive dynamics?
A:The turbocharger business is expected to grow, with increasing penetration and adoption of more complex turbines like the variable turbine turbocharger. BorgWarner is a top 2 market leader and expects to gain market share from weaker players. The company is prepared to invest in new generations of technology.
Q:What is the future of the Battery Systems business given its revenue decline?
A:The business faces sales headwinds, particularly in North America and Europe, with a 150 basis point growth headwind expected in 2026. The company is minimizing losses and adjusting cost structures, positioning for future growth opportunities in CV battery packs and battery storage outside the commercial vehicle space.
Q:What is the 2026 outlook for e-Propulsion sales and light vehicle growth?
A:Light vehicle growth is expected in low double digits from 2025 to 2026, with mid-teens conversion on the light vehicle side. The battery business will continue to face challenges, but growth is expected primarily in Europe and China.
Q:How does the increase in BorgWarner's multiple affect its M&A strategy?
A:The company remains disciplined in its M&A approach, focusing on leveraging core competencies, near-term accretion, and fair pricing. The increase in multiple may expand the opportunity set, but the company has raised the hurdle for acquisitions to ensure shareholder value and earnings power expansion.
Q:What is the growth outlook for BorgWarner's core business and power generation opportunity?
A:Growth in the core business has been impacted by EV overhang outside China, which will continue into 2026. However, new product wins and launches are expected to drive growth starting in 2027 and beyond. The power generation opportunity is expected to contribute significantly, with mid-teens incremental margins and strong returns.
Q:What are the margin dynamics around the modular turbine effort?
A:The modular turbine effort leverages existing manufacturing and supply chain capabilities. A new plant in North Carolina will handle final assembly, while subcomponents are produced in existing factories. The business is expected to achieve mid-teens incremental margins, immediate EPS accretion, and strong returns on invested capital.
Q:What is the impact of AI and machine learning on BorgWarner's operations?
A:AI and machine learning are being used in quality improvement, cost reduction, and R&D. Applications include visual inspection, reducing labor and scrap costs, and simplifying engineering processes. These efforts are expected to improve quality, cost structure, and fund future projects for long-term growth.
Q:What is the outlook for BorgWarner's business with China domestic auto OEMs?
A:China accounts for 20% of BorgWarner's business, with 70% of that from domestic OEMs. Despite a slowdown in the local market, exports from China have grown, benefiting BorgWarner. The company is in discussions with Chinese OEMs about localization outside China, leveraging its global footprint and technology.
Q:Is BorgWarner considering M&A in the data center market to augment its turbine generator systems?
A:While the company is proud of its organic growth in the turbine generator systems, it remains open to M&A opportunities that meet its criteria of leveraging core competencies, near-term accretion, and fair pricing. The focus is on disciplined growth and shareholder value.
Q:How does BorgWarner address permitting constraints in the data center market?
A:BorgWarner works with its partner, Endeavour, to navigate permitting and installation requirements. The turbine generator system will be UL certified and meet country-specific requirements. The partnership combines BorgWarner's technology and manufacturing scale with Endeavour's market knowledge and customer relationships.
Q:What is BorgWarner's exposure to the DRAM shortage?
A:BorgWarner does not use DRAM in its products and does not foresee any impact on its production timelines or risks to the business from the DRAM shortage.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer to the revenue correlation of the $300 million and 2 gigawatts of capacity in the power generation business, stating that future revenue sizing will be determined closer to 2027. Additionally, they did not provide specific details on the M&A opportunity in the data center market, focusing instead on their disciplined approach and organic growth.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Investor Relations
OEM
Slide
TurboCell
agreement
application BorgWarner
basis point
battery sale
capability
center market
decline
eProduct
eXD
focus
generation solution
generator system
iDM
income
margin basis
margin expansion
microgrid
outlook
power generation
product
production
record
share repurchase
site power
solution center
turbine generator
vehicle
volt
year
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