It's not going to be a great year for the automotive industry, either in the U.S. or globally, and the latest results from BorgWarner (NYSE:BWA) bear that out. The automotive equipment company expects its end markets to decline between 2% and 5% in 2019, and organic revenue growth is going to be hard to generate.
On the other hand, BorgWarner has a well-earned reputation for outperforming its industry, and management highlighted its backlog as a source of growth. Let's take a closer look at the fourth quarter.
BorgWarner's fourth-quarter earnings report: The raw numbers
Starting with the headline numbers for the quarter:
- Net sales of $2.573 billion represented organic growth of 2%, compared with guidance of 1% to 4.5%.
- Non-GAAP operating income of $323 million represented a 1.2% decline.
The numbers tell only part of the story, because end market conditions were tougher than management had predicted at the start of the quarter. CEO Fred Lissalde, for example, pointed out that "global light-vehicle production came down about 3%, versus our expectation of about 1% decline going into the quarter."
In this context, BorgWarner's 2% organic growth is a good result. Moreover, the relative outperformance applied across all BorgWarner's regions. BorgWarner's light-vehicle revenue grew by high single digits in North America, and even in China, Lissalde said the company "saw a low-single-digit revenue decline," which was "more than 10% better than the industry decline." Likewise, BorgWarner's Europe revenue declined by low single digits, compared with a 6% decline in European light-vehicle production.
Guidance for 2019
The good news is that BorgWarner expects to continue outperforming its end markets, but management expects "challenging conditions in China and Europe" to continue in 2019.
BorgWarner's organic sales guidance for 2019 calls for a 2.5% decline to a 2% increase, compared with a 2% to 5% decline in end markets. On a regional basis, BorgWarner is expecting a 10% end-market decline in China in 2019, with Europe down 3% and North America down 2%.
Management's operating-income guidance for 2019 calls for a range of $1.18 billion to $1.27 billion, down from $1.296 billion in 2018.
Moreover, the first-quarter guidance indicates that conditions will get worse before they get better. Organic revenue is expected to decline by 5.5% to 7.5%, notably lower than that forecast for the full year.
The reason? Management put it down to it being affected "by launch timing and customer inventory adjustments." Although these impacts should abate in the following quarters, it still leaves investors facing a difficult-looking first-quarter.
What about the longer-term outlook?
While this year is going to be difficult, as long as the global economy is growing, the automotive market is likely to grow in the long term. To that end, Lissalde pointed out that the 2019-2021 backlog stands at $2 billion to $2.4 billion but is back-end loaded with $750 million to $875 million in 2020 and $800 million to $950 million in 2021, compared with $430 million to $580 million in 2019.
Moreover, 80% of the backlog comprises hybrid (70%) and electric vehicles (10%) and just 20% for combustion engines, a sign that BorgWarner can benefit from the secular shift toward hybrid and electric vehicles. Lissalde therefore believes the backlog will "keep us on track to reach $14 billion of revenue by 2023."
Despite the doom and gloom about the automotive market in 2019, BorgWarner continues to position itself for long-term growth while waiting for an upturn in global light-vehicle sales and production. The first quarter is likely to be relatively weak, but investors should look out for management's guidance for 2019 on the next earnings call.