Operator:

Good morning, everyone. My name is Beau, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2024 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Frédéric Lissalde:

Thank you, Pat, and good day, everyone. I'm very pleased to share our results for the second quarter of 2024 and provide an overall company update, starting on Slide 5. At approximately $3.6 billion, our Q2 sales were relatively flat year-over-year, outperforming a modest decline in production. For the first half of the year, we outgrew our market by about 350 basis points. Once again, the sales outgrowth shows the resiliency of our efficiency-focused portfolio, which is, I believe, positioned to outgrow the market in any type of propulsion mix scenario. We secured multiple new product awards across combustion, hybrid and electric for both passenger cars and commercial vehicles. Turning to our bottom line for the quarter. We delivered a very strong 10.4% margin, which was up 30 basis points versus prior year. We delivered EPS of $1.19 per share, which was $0.13 increase versus prior year. Our first half 2024 margin and EPS performance has allowed us to increase our full year margin and earnings guidance, as Craig will detail later. We carried on our restructuring actions, now focusing our ePropulsion segment to adjust our cost structure to current market dynamics. We expect that these actions will result in annual run rate cost savings of about $100 million by 2026, with immediate positive impacts. We also introduced a new business unit structure, designed to maximize cost synergies, enhance our go-to-market global strategies and bring further simplicity and clarity to our shareholders. Lastly, we remain focused on efficient deployment of our capital and announce our intention to repurchase $300 million of BorgWarner stock in the second half of 2024. Next, on slide 6, I would like to take a moment to highlight our 2024 sustainability report, which was published earlier this month. BorgWarner's vision is a clean, energy-efficient world. And I'm proud to lead a company where our business goals go hand-in-hand with our sustainability goals. At BorgWarner, sustainability means delivering value to all stakeholders for today and tomorrow. I would like to highlight just a few points of progress described in the report. First, BorgWarner has reduced Scope 1 and 2 greenhouse gas emissions by 32% from the 2021 baseline, making progress on our SBTI validated goal to reduce it 85% by 2030. Second, the company engaged our supply chain management and engineering teams to advance the company's goal of reducing Scope 3 emissions, 25% by 2030 compared to a 2021 baseline. And third, we performed above all benchmarks on employee sense of inclusion and belonging on the company's engagement survey. I would like to thank our entire team for their dedication and excellence in innovating products for cleaner mobility, making leaps towards achieving our climate and other sustainability goals, and investing in our people. Now, let's look at some new product awards on slide 7. First, BorgWarner has secured multiple contracts to supply its electric cross differential or exD to three major OEMs. The companies will incorporate BorgWarner exD technology into both rear and front wheel drives of electrified powertrain application. Start of production is expected in 2024 and 2026. Our exD is part of our Electric Torque Management System, which offers a range of products that intelligently controls, wheel torque, to increase stability provide superior dynamic performance and improve traction during launch and acceleration. Next, BorgWarner secured awards to deliver high-voltage eFan systems for use on a major global OEM series of electrical commercial vehicles in North America. This marks the largest eFan business win in North America for us with expected start of production in Q4, 2027. BorgWarner complete eFan system is comprised of three components, including a fan and eMotor and an integrated high-voltage inverter with the capacity to reach up to 10 kilowatts of power and 40-newton meters of torque. Lastly, BorgWarner has secured two EGR Cooler Awards with a prominent North American-based commercial vehicle customer. Start of production is expected to be in Q4, 2027 with implementation across various medium-duty commercial trucks. Our emissions reducing EGR solution offers high robustness against thermal fatigue and optimizes cool and distribution throughout the engine for increased performance. We continue to see strong interest across our EGR product portfolio, which supports the need for highly efficient combustion engine that meets increased fuel economy needs and stringent emission requirements across the world for combustion and hybrids. Now, let's turn to Slide 8, where I would like to discuss our new business unit structure. As we have continued to outgrow the market, and leveraged the leadership, robustness, and scale of our product portfolio, it is now the right time to align our business unit structure to further enhance our ability to execute on our strategy. We believe this will drive cost synergies, higher focus, and clarity for all stakeholders. As such, beginning in the third quarter, BorgWarner will reorganize its four business unit and associated financial reporting segments as follows; our Turbos and Thermal Technology business unit is led by Dr. Volker Weng. This business unit is unchanged. Our Power Drive System, which today is our externally reported ePropulsion segment will continue to be led by Dr. Stefan Demmerle. This business unit is also unchanged. Our Drivetrain and Morse Systems businesses are now combined into one business unit and is led by Isabelle McKenzie. We've combined our Commercial Vehicle Battery and Charging businesses into one business unit, which is led by Henk Vanthournout. To summarize, the takeaways from today are this, BorgWarner's second quarter results were strong. Our sales performance once again outperformed the industry. Our adjusted operating margin was the highest since the PHINIA spin-off, and our cash generation was very strong and support our $300 million of intended share repurchase in the second half of the year. We secured multiple new business awards in the quarter, which we believe further demonstrate our product leadership position in all powertrain architectures. BorgWarner is focused on powertrain efficiency, this includes combustion fuel efficiency and electron efficiency, whether it is for Hybrids or BEVs. I believe BorgWarner can support any powertrain architecture. We are world leader in efficient mobility with a product portfolio that we believe is uniquely positioned to outgrow industry production for years to come. This quarter, we took additional meaningful steps to manage our cost structure in response to the industry mix dynamics, as well as to provide increased clarity and transparency from a global product line organization. As we look forward, we expect to continue to secure global growth opportunities as the world transitions to more efficient mobility, thanks to our product leadership position in combustion, hybrids and BEVs. At the same time, we will continue to appropriately manage our cost structure, as industry volumes and production mix outlook change, while continuing to preserve our long-term profitable growth and technological edge. This will allow BorgWarner to continue to deliver sales performance through organic growth above market production, convert that growth into higher earnings and create long-term value for our shareholders. With that, let me turn the call over to Craig.

Patrick Nolan:

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

John Murphy:

Good morning, guys. Just a main question here around the eProduct restructuring. One, why does why does include -- it not include Europe? Why is it only North America and China? And is this -- just in response to program cancellations or push-outs, meaning that the business is just not materializing the way you're expecting? And it appears, just given the very quick savings that some of these programs may have been loss-making for you, even if they come through. So maybe just kind of confirm that. So, why not Europe? Is it just program cancellations and push-outs? And were the programs loss-making to start with and maybe any other color around this?

John Murphy:

Okay. And then maybe just a follow-up on the Seesaw on the ICE and potentially on the hybrid side. Are you seeing any benefits that might come to that side of the business where you're gaining a little bit of revenue that might come in at higher incrementals, that maybe it's this year or maybe it is we go through 2025 and 2026 through the course of this program?

John Murphy :

Okay. And just one just Bob, most of this, it sounds like it's head count on R&D. Is that a fair statement?

John Murphy :

Got it. That's really helpful. All right. Thank you guys.

Operator:

Thank you. We go next now to Colin Langan at Wells Fargo.

Craig Aaron :

Yes. So when we think about first half, second half, I think actually, the better way to look at it is year-over-year. And when you think about our margin 9.3% to 9.6% in the second half of the year, when you look at the high end of our guide, we're incrementing in mid-teens. On the low end, we're decrementing in the low double digits. That's excluding the benefits of restructuring. So Colin, when you include restructuring, we're incrementing in the 30% range on the high end of our guide, and on the bottom end of the guide, we're holding flat. For us, I think that's really good underlying performance. And so that's how we're looking at it year-over-year.

Frédéric Lissalde :

Yes. Colin, the outgrowth for Q2 is 120 basis points. And this is essentially impacted by eProduct revenue at the low end of our guide. And also essentially the program in North America -- BEV program in North America that's not really not really performing well. I would look at a smooth out growth quarter-over-quarter as a good proxy. I think 300 basis points for the first half is where we want to be, and -- be around 400 basis points for the full year, which is also where we kind of want to be.

Frédéric Lissalde:

It is.

Frédéric Lissalde:

Thank you.

Chris McNally:

Thanks so much team. Maybe if I step back for the impressive guide raise of 30 bps. I mean, basically, the way I think about it is essentially given the organic revenue reduction of a little bit less than $300 million, you probably would have lost 20 or 30 basis points on normal incremental. So if you add those two, it's about a 50 to 60 bps of operational sort of better-than-expected performance, and I think what we're all trying to work out is if you look at Q2 and a 10.4% margin, while you still have ePropulsion losses in the double digits. Can you just walk us through some of the contents why we can't propel out that 10% plus margin for 2025, 2026? Where obviously, where you've discussed lower what rolls off? Anything just qualitative, I know there's a lot of moving parts and one quarter doesn't make sort of a trend. But we're all trying to figure out if ICE is here for a little bit longer, what is the negative that trains that down? Because obviously, ePropulsion you will get better than this minus double-digit margins. It's a long question, but curious why we can't see more strength in the foundational business.

Chris McNally:

And then this idea is obviously, we're going to see pure ICE, right, so ex plug-in, ex-hybrid, ex-EV volumes decline over the next couple of years. Should we assume that if we were to be able to isolate that margin of business that's coming down, meaning they'll see decrementals, because also often at the end of life of a lot of these programs, you actually see R&D also come down. So that's one of the things that we're trying to figure out. If we were to isolate specifically ICE foundational programs, will they see margin decline as units go down over the next couple of years? And, obviously, then the question will some of these programs may be extended or volumes may come down less. But just if we were to think about it, not how you report but should we see margins on a like-for-like basis on pure ICE coming down?

Chris McNally:

No, that's helpful. I know that's a tough one to isolate. And I think as you -- as we also see in the four new segments, some of the margin progression, I think Fred that actually may be easier for the investment community to kind of see the trend segmented in these segments where we do get a little interplay of ICE, EV and Hybrid. Thanks so much. Really appreciate it.

Operator:

Thank you. We go next now to Joe Spak at UBS.

Craig Aaron:

Yes. Thanks, Joe, for the question. You're right. Yes, we said $40 million to $50 million starting the year. Now after this restructuring, it's going to be down to $20 million to $30 million. And how I look at it is our eProduct portfolio is still growing $0.5 billion. It's still going to be up about 25% year-over-year, and that $20 million to $30 million is supporting a lot of launches that are going to be happening in the future. It's really focused on application engineering, and that's really what that $20 million to $30 represents year-over-year.

Craig Aaron:

On that growth, we're going to continue to support those programs with R&D, and we're still focused, as always, on 15% return on invested capital on all new programs.

Frédéric Lissalde:

Yes. Back to your prior question, I just want to add that we're incrementing mid-teens, including the year-over-year additional $20 million eR&D spend. On battery, it's on track. Seneca is doing a great job, and they're now food in production. We are on track also for Europe. And the battery business performance is, of course, contributing positively to the incremental margins that we are delivering for the first half and also an important part of our guiding up for the full year.

Operator:

Thank you. We’ll go next now to Dan Levy at Barclays.

Craig Aaron:

Yes. The quick answer is coming from both really, really strong growth in the quarter like you saw. It's coming from both sides of the portfolio on the Battery business and the Foundational business. And I think we're also -- so we're converting on that extra sales at the same time, really focused on cost, taking productivity actions supplier savings, restructuring, those are all the benefits that you're seeing come through our P&L. But the short answer, it's really coming from both sides of the business.

Craig Aaron:

Yes, the drivetrain, the foundational side, we're seeing good strength out of Asia.

Frédéric Lissalde:

Dan, our guide reflects what we see in the market, and we expect the market to be down 2%, 3% year-over-year, with the biggest reduction being in China, followed by North America and Europe. In China, we see a bit of a weaker consumer demand now impacting production rates. In North America, we're seeing some customers working to address their inventory level. And in Europe, there is also a bit of a weaker demand and depletion of backlog. But all that is embedded in our guide, both on the top line and bottom-line.

Operator:

We'll go next now to Mark Delaney at Goldman Sachs.

Frédéric Lissalde:

Hey Mark. So, remember, eProduct are -- go both into hybrids and BEVs and in China, NEVs encompasses both hybrid and BEV. The fastest growth is hybrids in China. We're launching a lot of new products in China, about 95% of our eProduct in China are made with a big Chinese carmakers. A lot of our products also are used for potential exports and also potential localization. So, we're very happy with our business in China. The impact of the tariff. I think it's a little early to anticipate. But China is certainly a part of the world where we are gaining scale, and that's very helpful when we go with those eProducts supporting the e side of Hybrids and BEV in other parts of the world.

Frédéric Lissalde:

Thanks. Yes, acquisition, together with organic product development has allowed us to create that very unique portfolio that we're growing organically. Acquisition may remain an important part of the strategy over the long term. But I can tell you that I would classify our approach as being even more stringent and prudent than in the past. And I don't see M&A highly likely to be announced over the next couple of 2, 3 quarters, thus our intention to repurchase $300 million of stock or pretty much giving back to shareholders 100% of our cash generation. That's what I would tell you Mark.

Operator:

Thank you. We go next now to Adam Jonas of Morgan Stanley.

Frédéric Lissalde:

Adam, I think we need to focus on what we can control. And what we can control is create a great product that is versatile across different production mix scenario. Outgrow the market, increment, generating cash and be smart about the cash utilization. As I mentioned before, in Mark's prior question, M&A was essential and helped us together with organic product development to create that very unique portfolio. Now, I think we have a great portfolio, and we're focusing on growing it organically and going back to the BorgWarner basics of outgrowing, converting generic in cash.

Craig Aaron:

I think for us, it's about transparency to our shareholders. When you look at the second quarter, we were blacked out for the majority of the second quarter, and we wanted to provide clarity to the investment community that we wanted to allocate all of our free cash flow to shareholders. It was the right time given Fred's comments earlier about M&A. So we wanted to provide clarity and transparency.

Craig Aaron:

Thank you Adam.

James Picariello:

Hi, everyone. Just as we think about eProduct sales, now trending towards $2.5 billion for the year. The first quarter finished at $500 million for your 10-Q filing. Can you confirm how the second quarter trended? So if you gain a sense for what's implied in the second half? And on AKASOL, specifically, another -- and I think a few other questions, we're getting at this another supplier this morning that is pretty decent commercial vehicle BEV exposure, just cut its commercially sales expectation for the year by a substantial clip. That supplier doesn't compete directly against Ford, but from an end market perspective, is this something that BorgWarner seeing at all in your Battery Systems business? Thanks.

Frédéric Lissalde:

Yeah. I think our numbers in commercial vehicle have been adjusted a little bit in the prior quarter. The impact of eProduct is essentially linked to light vehicle at this point in time. I would just remind you that we're growing 25% year-over-year on eProducts from about $2 billion to about now about $2.5 billion, which is if you take a step back, in our growth versus what you see in powertrain electrification.

Craig Aaron:

Right now, Eldor is unchanged, and that's how you should think about it. Obviously, we're focused on the total business and targeting $100 million in cost savings by 2026.

Patrick Nolan:

With that, I'd like to thank you all for your questions today. If the any follow-ups, feel free to reach out to me or my team. Bo, you can go ahead and conclude today's call.

Operator:

Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2024 First Quarter Results Conference Call.

Patrick Nolan:

Thank you, Britney. 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 homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the Events section of our Investor Relations homepage for a full list.

Frederic Lissalde:

Thank you, Pat, and good day, everyone. I'm very pleased to share our results for the first quarter of 2024 and provide an overall company update, starting on Slide 5. With approximately $3.6 billion in sales, we delivered close to 7% organic growth in the quarter despite a modest industry decline. We delivered strong incremental performance in the quarter on an all-in basis, which allowed us to achieve a 9.4% margin. This Q1 performance provides a nice start to the year, and we believe it positions us well to deliver on our full year guidance.

Craig Aaron:

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our first quarter results. First, we reported close to 7% organic sales growth despite a modest decline in industry volume. Second, we had strong margin performance, which was driven by solid conversion on higher revenue as well as appropriately managing our costs. This led to a year-over-year incremental conversion of over 23% on an all-in basis.

Patrick Nolan:

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

Colin Langan:

You started off very strong here, I think, something like 8% growth over market in Q1. Your margins seem to be in the midpoint of your full year guidance. But the guide for the year is -- has implied sort of growth over market, but actually moderate a bit and maybe at the midpoint, margins wouldn't change. Anything sort of onetime in nature we should be thinking about in Q1 that kind of boosted results? And then any reasons we should be thinking about things moderating a bit as we go through the rest of the year?

Colin Langan:

Okay. That sounds good. Slide 8 was pretty helpful. Maybe if you could talk a little about your plug-in -- PHEV opportunity. The content there, how much of your sales today are there? And have you seen any change yet, I guess, quite early on interest in that given the EPA rules seem to be more favorable towards PHEV?

Colin Langan:

Got it. And have you seen any interest in PHEV improve? Or is it still just too early?

Operator:

Your next question comes from John Murphy with Bank of America.

Frederic Lissalde:

Yes. In China and in Europe, we see upticks in hybrids. Actually, if you look at the share of growth of new energy vehicle in China, actually, hybrids are growing faster than BEV over the past few months. So -- and we're part of those. So the answer to your question is, on a global basis, yes. And in North America, it's too early to say.

John Murphy:

And on the capacity side, is there any way to potentially be a little bit more capital efficient? Or is that possible? And I would certainly box you into a powertrain tech company across the board. That's where I'd box you, Fred. Didn't mean to put you in one direction or the other.

Dan Levy:

Maybe in the quarter, you could just break out what was the split of revenue between eProducts and foundational? And then foundational, I assume, is still putting up pretty solid growth of the market. Maybe you could just talk about some of the dynamics driving that, please?

Dan Levy:

Yes. Within the growth over market, do you have a sense of what the growth of the market was for foundational and what regions or products were driving that?

Dan Levy:

And the outgrowth within foundational was -- any sense on where that was?

Dan Levy:

Great. Okay, and then a second question on margins. And I know you've noted that you're aiming for mid- to high teens incrementals across the business. But maybe if you could just give us a sense of within some of the foundational product, is it possible that we actually are seeing higher incremental margin simply because there's less R&D that you've incurred, less application engineering, more that you are leveraging, getting a sense whether there is some split in that contribution margin between eProduct versus foundational.

Operator:

Next question comes from Noah Kaye with Oppenheimer.

Craig Aaron:

Yes. Thanks for the question, Noah. So I just want to take a step back. We repurchased $277 million of the company's shares over the last 2 quarters. So $177 million in the fourth quarter of last year. $100 million in the first quarter of this year. Obviously, pleased with our Board of Directors, we got that additional authorization, takes our total authorization up to -- a little over $760 million. We're going to continue to repurchase opportunistically, just like we did in Q4 and just like we did in Q1.

Noah Kaye:

Okay. Helpful. And then good to get the housekeeping on eProduct sales in the first quarter. Just can you give us some guideposts, even getting to the midpoint of guide for the year around how you're thinking about the cadence of ramp? I know you have some capacity coming online for battery. But is this a fairly ratable ramp? Is it really heavily weighted to 3Q or 4Q, any particular quarter? Can you just help us think through how the ramp should proceed over the course of the year?

Operator:

Your next question comes from Joe Spak with UBS.

Frederic Lissalde:

And Joe, I guess you were thinking about North America here in your question, aren't you?

Frederic Lissalde:

Okay. Yes, because in the rest of the world, as I alluded to before, it's happening, right? I think we have all the building blocks to support our customers here in North America as they also want to have those advanced hybrids. I feel that it's still a little bit early to get into the specific cities or which products they need from BorgWarner. We are in the early phases of discussions about architecture. So I think it's going to take a little bit more time.

Frederic Lissalde:

Joe, you may have seen that our ePropulsion segment is running at about 30% incremental a year, and we're not satisfied with that. So we'll take some steps to improve the margin performance. And again, we have a strategy to adjust costs to wherever the market is going. And we are doing that wherever it is necessary, and this is what we're looking at right now.

Operator:

Your next question comes from Douglas Dutton with Evercore ISI.

Frederic Lissalde:

You're talking about eProducts?

Frederic Lissalde:

So on eProducts for 2024, about 45% of the $1.9 billion in light vehicle is for China. Within that, 95% is for the Chinese OEMs.

Frederic Lissalde:

I unfortunately can't disclose some of those names, and I can't disclose which product we have with those names in particular. So not that I would love to do it, but I just can't.

Alex Potter:

Great. So first, maybe following on that question from China. I'm interested in, I guess, hearing your opinion regarding the degree to which China, that market can serve as maybe foreshadowing or a harbinger of the way the rest of the world will evolve. Obviously, China has been moving much more quickly toward electrification. There's a lot of dynamism regarding the architectures that those new companies are pursuing. Do you think that China represents the way the rest of the world will eventually evolve? Or do you see those markets sort of trending in different directions with China doing its own thing and the rest of the world doing their own thing?

Frederic Lissalde:

Yes. I don't have the granularity of what happened over the past 2 weeks, but overall for the full year, our view of the market is already below companies like IHS. So -- but we will adjust to whatever comes to us.

James Picariello:

Just back to the eProduct, based on the first quarter's performance and the visibility into the year. Can you just speak to AKASOL's Battery Systems revenue? I believe this business guidance, called for $700 million to $800 million in revenue. Just curious if there are any moving pieces tied to this within the eProduct range? And can you clarify what portion of this year's eProducts sales attributes to hybrid?

Craig Aaron:

Yes. I think the way we're looking at it is we're focused on executing at the mid- to high teens on an all-in basis, wherever that growth may come from. So I think that's how you should think about it. We're really pleased with our 23% all in, in the first quarter. We think it sets us up quite well to execute for the full year. So that's how we're looking at it. We're really focused on incrementing on an all-in basis regardless of where the revenue growth comes from.

Luke Junk:

First, looking at the segments. Just hoping you can maybe unpack the top line strength that you saw year-over-year in Drivetrain and Battery Systems? This quarter sounded like that was foundation related in large part, maybe just sustainability of that strength in the margin, they've stepped up nicely sequentially, especially as well. I don't know if there's anything specific to point to.

Luke Junk:

Got it. And then for my follow-up, maybe a bigger picture question, Fred. And just thinking about eProduct net engineering requirements going forward, both as you think about on a gross basis and ePropulsion margins going forward here now you can improve those margins. But I'm also wondering, just given some increases in uncertainty in the West, if you can push for more engineering recoveries as you book business or building structures to pay for more of that engineering?

Operator:

We have time for one final question, and that question comes from Mark Delaney with Goldman Sachs.

Frederic Lissalde:

You're absolutely right. Power electronics is a key strength of the company. Borg has always been focused on efficient systems and efficient mobility. And power electronics is the new frontier of efficiency in BEV and -- or hybrids, fighting against those switching losses and fighting against those mechanical losses, downstream the inverter. So the answer to your question is absolutely yes. We're focused on that and at the system level, at the electronics level, at the power module level. And that's our DNA. That's what we do best.

Patrick Nolan:

Thank you all for your great questions today. If you have any follow-ups, you can follow with me or my team. With that, Britney, you can go ahead and conclude today's call.

Operator:

Good morning. My name is Savannah, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 Fourth Quarter and Full Year Financial Results Call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks there will be a question-and-answer period. [Operator Instructions] I would now like to turn the conference over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Fred Lissalde:

Thank you, Pat, and good day, everyone. We're pleased to share our results for 2023 and provide an overall company update, starting on Slide 5. With approximately $14 billion in sales, we delivered more than 12% organic growth in 2023. Our margin performance was strong, coming at the high end of our guide. During the course of '23, we adjusted our eProducts top line to reflect what we saw in the marketplace. It resulted in a slightly lower top line for the Company but higher margins. This is a good example of the product portfolio resilience that exists at BorgWarner. We delivered $565 million of free cash flow in 2023. This free cash flow supported the $177 million of share repurchases that we executed during the fourth quarter as well as the closing of the Eldor acquisition. Our challenging forward progress continues on multiple fronts. We secured multiple new eProduct awards during the fourth quarter, adding to the already announced over the course of the year. These awards were across our portfolio for both BEV and hybrid architectures. We continue to see a strong sourcing pool for our products based on the strength of our portfolio globally. Lastly, we took steps to enable new business awards by executing several strategic actions to further strengthen our eProduct portfolio, like the acquisition of Eldor Electronics business as well as the strategic agreement with BYD, FinDreams Battery for LFP packs outside of China. Now let's look at some new eProduct awards on Slide 6. First, BorgWarner has been selected by XPeng to supply its eMotor rotor and stator for the X9 MPV as well as for their next electric B-class sedan. Production began in January 2024 for the X9 and we're planning to start producing for the B-class sedan in Q3 '24. Our high-voltage hairpin 220E motor offers high power and torque density and higher efficiency at a competitive cost. We're excited to supply XPeng with our proven stator on rotor as we believe it continues to position us for long-term success in China, where NEV penetration is already more than 35% of the market. Second, BorgWarner has secured in the world with a major global OEM to extend its existing business, supplying 400-volt high-voltage coolant heaters for some of the automakers light vehicle based platforms, specifically for its passenger truck and SUV programs. This business win is one of the three awards with North American OEMs incorporating BorgWarner's high-voltage cooler and heaters into their vehicles. Third, BorgWarner has secured in the world with a major Chinese OEM to supply its 90-kilowatt dual inverter on a series of the automaker’s plug-in hybrids and range extended electric vehicles. Production is expected to begin in September this year. The dual inverter is developed for hybrid vehicles as an integrated solution. The product utilizes BorgWarner's Viper power module platform and leverages our inverter product leadership and scale. Next, on Slide 7. In addition to securing new business, we took multiple steps to build additional capabilities within our eProduct portfolio, driving product leadership and differentiation. I would like to highlight three of them today. First, BorgWarner completed its acquisition of the electric hybrid systems segment of Eldor. This provides us with additional capabilities in onboard chargers, DC/DC converters and integrated high-voltage boxes, all of which are expected to complement BorgWarner's existing product portfolio in hybrids and BEV. Next, BorgWarner is continuing to expand its product portfolio for battery electric and hybrid commercial vehicles through our agreement to form a joint venture with Shaanxi Fast Auto Drive Group, a Weichai subsidiary. We're working together to accelerate the product efficiency and growth in the Chinese CV market with the largest CV powertrain supplier in China. BorgWarner will then be able to use these products and technologies for the rest of the world. Finally, BorgWarner signed an international strategic relationship agreement with BYD subsidiary, FinDreams Battery for LFP sales and tax. Under this agreement, BorgWarner will be the only non-OEM localized manufacturer unaffiliated with FinDreams Battery with rights to localize LFP battery packs for commercial vehicles, utilizing FinDreams Battery blade cells. These packs are expected to be sold in the CV market in Europe, the Americas and select Asia Pacific regions. The LFP battery chemistry is an exciting technology that is cost competitive in comparison with some other cell chemistries. We're seeing increased demand from our customers for tax with LFP sales. FinDreams Battery is right for BorgWarner in this area with over 20 years of experience in batteries with numerous successful product launches. Next, on Slide 8, I would like to summarize the growth we expect in our eProduct sales in 2024. We expect 2024 eProduct sales of $2.5 billion to $2.8 billion, representing a year-over-year growth of 25% to 40%. One important driver of our 2024 growth is expected to be our battery system product line. Battery Systems demand from our commercial vehicle customers, trucks and buses continues to outpace our ability to produce. However, we are continuing to increase our capacity to meet this strong customer demand, both in Seneca, North Carolina; and in Europe. We expect this capacity expansion to help drive a $250 million to $350 million increase in battery systems sales in 2024, which equates to 55% to 75% year-over-year growth with more to come. Then looking at the other parts of our eProduct portfolio, our guidance assumes 14% to 27% year-over-year growth, with the mid-point roughly in line with our expected BEV hybrid market growth. Overall, we expect 2024 to be a heavy year related to the number of launches across our light vehicle portfolio from iDM to motors from power electronics to thermal management globally for both BEVs and hybrids. While we expect another year of volatility in BEV and hybrids volume for the industry, we believe our capacity expansions and intense launch activities will support our outlook. Finally, on Slide 10. I want to take the opportunity to remind you of the intent of Charging Forward 2027. Charging Forward 2027 has three pillars; one, eProducts growth; two, eProduct profitability; and three, maximize the foundational value. The first two pillars centered around supporting BorgWarner's long-term profitable growth. We continue to believe that despite near-term volatility, the mid- to long-term trends towards electrification, BEV and hybrids remain strong. We believe that BorgWarner clearly positioning itself to be among the leaders in terms of eProduct business awards and to do so profitably. The third pillar of Charging Forward is an enabler of this long-term growth. Our foundational business brings customer relationship, technology capabilities and the ability to internally fund our investments. As importantly, with this leading market positions and strong margin profile, we believe our foundational business provides near-term earnings resiliency during times of BEV and hybrid market volatility just as we highlighted at our Investor Day back in June. As Kevin will review, that is evident both in our 2023 results and our 2024 outlook. The key takeaway is that both our eProducts and our foundational business lines play important role in Charging Forward 2027. This was true when we unveiled our plan in June and it remains true today. As I look back on 2023, my take is this

Patrick Nolan:

Thank you, Kevin. With that, we're ready to open up for questions.

John Murphy:

Just a first question here. I understand you have to run a business and sometimes it makes sense in the volatile wall that we live in to take a slightly conservative tack. But if I were to tell you, instead of your volumes being flat to down 2.5%, they might be flat to up 2.5%. At the midpoint of the range, that would add about $355 million in revenue to your outlook. Would it be reasonable to sort of assume that those could convert about 15% to 20% incremental margin, and that would kind of really translate into about 5% upside to earnings and potentially cash flow. Is that a reasonable way to think about it, if that were to happen?

John Murphy:

And then just a quick follow-up. I mean the market is shifting all over the place, although it's not moving as quickly as it's kind of some of the commentary would lead you to believe. If we saw a greater hybrid penetration not just in 2024, but maybe in 2025 and beyond, Fred, is there potentially a shift in cap allocation and slightly in strategy that you could execute and not leave capital stranded? I mean, how sensitive are you to shifts between EVs and hybrids? And how much would you have to ship the strategy and cap allocation?

Operator:

Question will come from [Technical Difficulty]

Kevin Nowlan:

With respect to the year-over-year conversion in '24, there's nothing unusual to really think about. I mean you're right, we're looking at the mid-teens and that is on an all-in basis. If you look at -- we are investing a little bit more in eProduct R&D again in 2024. It will be up organically about $40 million to $50 million, but that's embedded within that conversion. So we're looking at our conversion now given the scale of the business from an eProduct perspective on an all-in basis, and we expect to contribute in the mid-teens with that in mind.

Fred Lissalde:

So let me take a step back here. I think Borg is very good at taking great technologies and commercializing them and globalizing them. Look at what we've done with Delphi, look at what we've done with Akasol, which was -- which literally had lower revenue. This year, we had about $750 million at the midpoint. The plan with Eldor on DC/DC converters on both charges is exactly that. And so, I'm very optimistic about the drive that we can generate and profitable growth that we can generate from the engineering base that we acquired with Eldor.

Unidentified Analyst:

And just you touched today on this year's guidance being sort of flexible between EV and ICE profitability. And at your Investor Day, you talked about '27 same dynamics of it, EV mix is higher to sort of offset higher or lower, you'd add a dollar basis to be similar in '27. But you're still forecasting like a fivefold increase in your EV powertrain sales through I mean that would imply probably a lot of ER&D as you try to prepare for those launches. So is that flexibility going to be consistent over the midterm? Or is there going to be some puts and takes because you have some pretty chunky R&D needs to get ready for that $10 billion that you talked about in '27?

Operator:

Our next question will come from Joe Spak with UBS.

Fred Lissalde:

So I would say, Joe, that we're outgrowing the inflational side by about 300 basis points. I would tell you that on the side, I see more upside than downside at this point in time. And we are constantly as we presented a few months ago and as we review the team regularly, we're constantly restructuring in a position of strength. And that, I believe, will allow us to maintain the foundation of margins as it is called by our third pillar of Charging Forward.

Fred Lissalde:

So if you take the CV packs, growing 65% CAGR year-over-year. And we are ramping up in U.S. significantly in Q2 and in Europe at the end of the year and more to come. So I would say that the end of 2024 jump-off point on CV is much higher than the current year. On light-vehicle, roughly 60% of the programs that we've disclosed so far, we're launching this year or we've launched at the tail end of last year. So even if there is some variability possible, I think you're right, the jump-off point at the end of this year is going to be from a much bigger base on a light-vehicle standpoint, as it is, I just alluded to on the CV side. So I would say that if the customer volumes are holding as our country forecasting, we would expect to be within that range in 2025.

Fred Lissalde:

For now, we're focusing on '24. We're launching so many products. We're focusing on '24, and we'll let you know what we think finally on '25 in due course. '24 is our focus, but I just wanted to give you the color of the different building blocks between CV and light vehicles.

Rod Lache:

I just want to, first of all, confirm on the question that Joe just asked is based on the growth in eProducts and in a flat market, it would appear that there's some moderation in the foundational business, but you are maintaining that 13% margin. So you're not delevering? And secondly, can you remind us what's embedded for M&A within the eProducts revenue target for 2025? I'm referring to the $4.5 billion to $5 billion.

Kevin Nowlan:

And then on the foundational margin, one of our key strategies is that we know over time, as electrification continues to grow at the expense of underlying combustion-based technology that will put pressure over time on our revenue outlook. And our challenge is to make sure we're managing the cost structure of that business I should even say the overall P&L of that business, whether that's on the price side or the cost side to make sure we're delivering and sustaining our margin profile, we fully expect that to be the case as we go through 2024 and well beyond that.

Fred Lissalde:

Yes. So for customers, I think most probably you need to ask them. I think there is some flexibility. We are hearing commentaries as you do that in the U.S., there is some intention to report hybrids outside of the U.S., hybrid is a big portion of the new energy vehicles. In China, it’s 30% to 40%. In Europe, it's a big percentage, too. What's important to me is that we've built a product portfolio that is totally fungible across hybrid and BEV. R&D is the same engineers, power electronics, motors, transmission, thermal, it's the same thing. For us, it does not matter. We can support our customers to wherever they want to go.

Fred Lissalde:

Rod, I think it's a little too early to see the communication and the RFQ materializing on the hybrid side. But I would say that with the scale that we have in our eProducts that cuts the grass hybrid, different types of hybrids and BEV, we can be one of the enablers of a rapid launch of hybrid powertrain for those customers.

Dan Levy:

And maybe we could just start with Eldor, the broader M&A strategy, specifically, how are you managing, I guess, we could say the integration deals because you have done a lot in the way of M&A. What is the process for integration? How do you manage any integration risks? And then maybe you could just remind us on Eldor, are these losses in line with what you originally anticipated? Or is this a function of maybe a weaker EV environment than when you originally did the deal?

Dan Levy:

And maybe I'll just piggyback on that, Dan, back to the losses being in line. Keep in mind, if you look at what's implied in our guidance this year, we're at 9.6% to 9.9% without Eldor and as we look out the 2027, we thought we were on track to be a 10% margin business. So, we'd already be on the cusp of that without doing Eldor, but Eldor was contemplated that and -- impacting us to the tune of 30 to 40 basis points in the short term because we knew we were investing in a strong engineering shop that doesn't have a lot of revenue today. And so that was contemplated in our original guidance.

Fred Lissalde:

I would say that the capital allocation strategy is pretty much unchanged. We are looking at M&A as an important part of strengthening electrification capabilities. We are very disciplined in the way we look at M&A. We are looking at way more companies than we're actually putting the trigger on. And we think that the current environment could provide some attractive buying opportunities and be rest assured that we will include and consider the near-term impact in the valuation assessment. We are looking at M&As with discounted cash flows. We're taking those near-term impacts are really importantly, the policy on capital allocation also includes the dividends that we've left unchanged even during covet. We've repurchased stocks and buyback is start of the strategy. I alluded to in my prepared remarks on how much we've given back to our shareholders and the spin-off of PHINIA, which I think was a great success. It is also part of the capital allocation strategy. Kevin, do you want to add anything?

Operator:

Our next question will come from Adam Jonas with Morgan Stanley.

Kevin Nowlan:

We don't really break that out, but publicly in terms of what we've been disclosing in terms of an overall R&D or CapEx allocated that way. But what I would tell you is, if you look at R&D first and foremost, we invested about $475 million in eProduct-related R&D in 2023 versus the $700 million or $715 million or so of R&D in total. As we look ahead to '24 organically, we'll add another $40 million to $50 million there from eProduct R&D perspective. And you can expect that the foundational based R&D will probably come down a little bit on a year-over-year basis as it's been doing the last few years. So the R&D will continue to be increasingly weighted towards eProduct, and it is the majority of the investment. From a capital perspective, you can see we stepped up our capital investment last year pretty meaningfully, a couple of hundred million dollars relative to 2022, and that was really focused on investing in some of the eProduct portfolio ramp ups that we needed, particularly within our ePropulsion segment as well as our battery pack business and you'll see a comparable level of investment in capital in 2024 going toward that. I think these will be a couple of the peak years of investment from a CapEx perspective, particularly on that battery pack business. And then you'll probably see it come back down a little bit to more normalized levels as we hit '25 and beyond.

Adam Jonas:

And then just going to temp on that point, Fred, that there are many aspects of eSystems that are agnostic between BEV and hybrid, I'll ask you -- I won't hold you to specifics, but what would be your best guess or a range of how much of your 2024 eSystems and foundational business are going into hybrid include plug-in hybrids? If you were to isolate just hybrid specifically before some of your foundational stuff increasingly is going into hybrids as well, as we all know. So I didn't know if you could isolate a guess of how much hybrid would account for the revenue in '24? A range would be great.

Operator:

Our next question will come from James Picariello with BNP Paribas.

Kevin Nowlan:

Roughly, yes. The portion of the Eldor loss, that's engineering related it's somewhere around $40 million. So you're right, it's $40 million to $50 million of organic step-up of to the R&D. And then Eldor adds about another $40 million, the overall loss and Eldor is around -- the midpoint is around what you said.

Kevin Nowlan:

We're not going to give any segment-specific guidance this year. But what I would say, when you look at the ePropulsion segment, obviously, we were focused on driving toward breakeven in the fourth quarter of last year. That was the guidance as we started out the year last year, and that was truly premised on our ability to successfully convert on the incremental revenue and we were disappointed that we had to pull back on that when we saw some of the volatility in the eMarkets and how that was impacting our revenue. So as we ended the year, you can see when you look at the ePropulsion segment, we ended up coming in at about $540 million of revenue in the fourth quarter, which is about $200 million to $300 million short of our original guidance when we were expecting to get to break even. So that business ended up losing about I think $16 million or so in the fourth quarter. I think what gives us some comfort in the way we're managing the profitability of that business is the fact that we were down $200 million to $300 million in revenue versus our original guidance. If we had simply let contribution margin flow through on that lower revenue, we probably would have had a bigger loss than $16 million in the quarter. So I think we feel good about the fact that we're managing the profitability of that business in light of some of the near-term volatility. But ultimately, the path to breakeven into long-term profitability of that business comes from successfully converting on the incremental revenue. And what we take a lot of comfort in is that we see the contribution margin really flowing through the business. I mean you can see it in the 2024 guide right? We're converting on an all-in basis at mid-teens. And all of the growth in 2024 is coming from the eBusinesses. So, we see the underlying fundamentals of the profitability coming through it. So as we scale that business, we see the path towards the profitability objectives of the Company intact for that portfolio.

Emmanuel Rosner:

I was hoping to follow up on the incremental margins. And just trying to understand a little bit how the math would work for the foundational side of your business. So, we've basically reached a point that where within your 2024 guidance, foundation revenues are already down, I guess, even with the growth of the market. And so I guess, how should we think about contribution margin within foundational? Like does it become sort of like the decremental margin? Do you need sort of like restructuring to sort of like offset this? And if I think about some of our [indiscernible] basically cash-in decisions in the future? Like how quickly can you go from having sort of incremental, if the volume plays out better versus having to sort of like restructure to offset any potential downside?

Fred Lissalde:

I would add one thing is that on the combustion side. We don't really see no new -- we don't really see new engines or new transmissions being developed. It is more a longer life or slightly higher volume on the current product. So even if combustion, as you mentioned, may go back up or longer tail that doesn't prevent us to adjust the [SA] and the engineering as I mentioned, of the foundational P&L.

Kevin Nowlan:

I mean, fundamentally, we're not going to break out the details in terms of our guide, but fundamentally, in order for us to execute on our foundational margin profile over the coming years in line with Charging Forward. It means we need to decrement on an all-in basis in that mid-teens. And for our eProduct portfolio to deliver on its margin expectations we need to convert in the mid-teens. And I think you see the blend of that actually coming through the financials and the P&L in our '24 guidance.

Noah Kaye:

First, just a clarification, what was said earlier. You talked about really this year in [indiscernible] kind of the peak for CapEx, is that meant to be CapEx in absolute dollars? Should we think about sort of reversion to more like 5% of sales on a go-forward basis, that being the '26, '27? I'm just trying to understand the intent of your comments.

Noah Kaye:

And then, Fred, there was good color earlier on the battery pack expectations for this year. But I'd honestly love to delve a little bit more into where you're at in terms of tooling and automation, staffing up cell supply to just help us understand your true visibility into the production ramp as you go throughout the year?

Noah Kaye:

Maybe I can ask one more. It's more generally to help our understanding of your insights into customer behavior given the shifting dynamics around powertrain of choice versus increase in labor costs for some of the OEMs well publicized in North America, but more broadly, how has this translated to the customer expectations around pricing versus value proposition. Do you still feel comfortable in being able to hit the ROIC target, but you've always quoted for this program. Is there anything that you'd call out in terms of kind of customer expectations and there you're in right now?

Patrick Nolan:

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

Operator:

Good morning. My name is Leo, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 Third Quarter Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Frederic Lissalde:

Thank you, Pat, and good day, everyone. We're pleased to share our results for the third quarter 2023 and provide an overall company update, starting on Slide 5. With approximately $3.6 billion in sales, we delivered double-digit organic growth in the quarter. Our margin performance was strong. Our free cash flow was modestly positive in the quarter, which we believe sets us up nicely to deliver on our full year cash flow outlook. Our Charging Forward progress continued on multiple fronts. As I will discuss in a moment, our long-term Scope 1, 2 and 3 emission targets were validated by the Science Based Target Initiative, the SBTi. We secured multiple new eProduct awards during the quarter. I'm encouraged to see these awards across several parts of our portfolio both for BEVs and for several types of hybrid architectures. I continue to be impressed by the sourcing pool for our products and the strength of our EV and hybrid portfolio globally. BorgWarner continues to focus on the long-term growth opportunities in our eProduct encouraged by the high intensity of the new business quoting activities in spite of the fact that we're seeing some near-term pressures on the industry production ramp-up of electrified vehicles. Gaining scale now on EV and hybrid architectures globally is our strategy, and this remains unchanged. We're proud to be in production or launching eProducts for 7 out of the 10 leading OEMs in the electrification area as well as several other OEMs outside this top 10. Now let's turn to Slide 6, which summarizes our commitments to reduce emissions through the end of the decade. Building on our previous commitments to achieve carbon neutrality by 2035, late last year, we submitted Scope 1, 2 and 3 targets to the SBTi. In August, SBTi validated those targets in which we have committed to reduce Scope 1 and 2 emissions 85% by 2030 and Scope 3 25% also by 2030. BorgWarner's Charging Forward strategy is expected to play a pivotal role in reducing Scope 3 emissions as the portfolio shifts towards our e-mobility products. We will also focus on how we design and purchase those products and components. From a design perspective, we're expanding our circularity efforts and placing a greater emphasis on lightweighting. Within the supply chain, BorgWarner is working to enhance our green material sourcing and supplier contribution to our goals. We're proud to have our targets validated by the SBTi as it affirms the direction we are headed and the positive impact we're making in furthering our vision of a clean, energy-efficient world. Now let's look at some new eProduct awards on Slide 7. First, BorgWarner will supply a bidirectional 800-volt onboard charger to a major North American OEM. This onboard charger will be on premium passenger car BEV platforms with an expected SOP in early 2027. The technology leverages BorgWarner's silicon carbide power switches for improved efficiency and delivers superior power density and safety compliance. This is a big accomplishment for the BorgWarner team, highlighting our first major eProduct win with this OEM and also our first onboard charger win in North America. Second, at the IAA in September, we disclosed that BorgWarner will supply silicon carbide inverters for Volvo cars next-generation electric vehicles. Next, BorgWarner entered into an agreement with a major global OEM to supply its 400-volt high-voltage cooling meters for the automakers' European light vehicle program. We anticipate the start of production in 2026. This business win marks the second recent contract secured with this global OEM over the course of just a few months with wins spanning different regions. Finally, a premium European OEM has awarded BorgWarner a program to supply combined inverter and DC/DC converter for use in the customers' always drive B and C segment hybrid applications. Production of this program is expected to start in 2025. By combining the inverter and converter elements, we can manage both the electric drive and the accessory systems of an electrified vehicle, in this case a hybrid, in a lighter, smaller and more cost-effective package. Our knowledge, scale and production experience on inverters, DC/DC converters and onboard chargers or what I would call power conversion technology is a key enabler for BorgWarner to be adding value to our customers by combining these technologies into efficient system packages. Now let's touch on our eProduct sales outlook on Slide 8. Today, we're reducing our 2023 eProduct sales outlook by about $300 million. The 2 largest drivers of the adjustments are launch delays and forecasted slower volume ramp-ups from customers. We now expect eProduct sales to increase about 40% year-over-year. As we have seen these continuing near-term pressures on electrified vehicle production in the marketplace, we have taken the opportunity to reassess what that might mean looking out over the next few years. Looking through that lens, we do believe this has the potential to impact industry-wide new energy vehicle production over the next couple of years. As such, we now expect our eProduct sales to be in the range of $4.5 billion to $5 billion in 2025. As we have looked at the situation program by program, it is our view that the headwinds we are seeing are likely to be short to midterm in nature. As we look further out, we continue to believe that the long-term trends towards electrification remains strong. That is why our view of overall industry penetration of electrified propulsion is unchanged looking out to 2027. I would make the following 3 additional observations. First, we have seen no meaningful changes in the world of quoting activity from our customers. We continue to secure new business awards that are very much supportive of our long-term revenue objective. The pace of new business development has not slowed. Second, our estimated midterm exposure to eProduct customers and regions is well diversified. As we are in the early stages of eProduct revenue growth in 2023, BorgWarner does tend to be currently more exposed to a handful of important launches and ramp-ups of customer products, particularly in China. As we look further out and announce many additional programs over the next 2 years, we expect to benefit from more diversity in the portfolio. Our 2027 eProduct revenue expectations are fairly balanced across customers, across regions as well as across vehicle sizes. Third, we believe our long-term profitability objectives are still intact. As we've told you previously, the biggest driver of our improving eProduct profitability is our ability to leverage the rapidly increasing scale of the business. Since that ramp-up is not happening as quickly as we previously anticipated, it means the path to our ePropulsion segment achieving break-even margin is slightly delayed. As we look ahead to next year, we will assess what, if any, actions are necessary to appropriately balance near-term margins relative to our long-term objectives. Regardless, break-even margins remain in sight and our 2027 outlook remains unchanged, both from a revenue perspective and a profitability perspective. The takeaways from today are these

Patrick Nolan:

Thank you, Kevin. Leo, we're ready to open up for questions.

Colin Langan:

If I look at the full year guidance, it implies a pretty low margin or a step down in margins into Q4 of around 9.2%. Anything unusual going on in Q4 driving that weaker margin? Should we be thinking about that sort of run rate into next year? Or is this something more one-off going on in Q4?

Colin Langan:

Got it. And there's obviously a lot of focus the last couple of weeks off of the EV delays. And I do remember from your Investor Day, you highlighted, and I think it was more in the 2030 time frame, that you're somewhat derisked because if EV penetration was a bit higher, you'd have higher sales but lower margin. And if it was lower, you'd have lower sales but higher margin. And dollar-wise, that might be similar. How should we think about that more near term? I mean, are you -- can you -- is there a good hedge offset? Or with all the engineering that's required ahead of these EV launches, that's going to be a bit of a burden if the EV volumes are pulled back a bit in the near term?

Operator:

Your next question comes from John Murphy with Bank of America.

Frederic Lissalde:

A lot of questions, John, in one question. Let me take it in pieces. So first, '23, '25, '27, right? That's a bit of your question. So '23, when you look at the reduction, it's mostly in our ePropulsion segment. It's coming from, as you mentioned, timing of launches and volume reduction, volume reduction in ramp-up. And since we're launching a lot of new products, a delay has a big impact in the quarter and a delay -- and a ramp-up change has a big impact in the quarter. We continue to see volume pressures. But if you take a step back, in fact, it was still growing 40% year-over-year. So that allows us to. When you look at beyond 2023, we've looked at program by program looking at '25. And from what I remember, we announced 29 programs in June, and we booked more programs. seeing a lot of programs. What we see potential delays and downsides enjoy '22 to '23. In '27, we have a strong new business that will be very comfortable with p '25, the launching '25, '26, '27. And so we see a path to $10 billion. But also we've structured the portfolio to be resilient under a wide range of scenario. Again, when you look at the CAGR, '25 to '27, if you take out $1.7 billion of acquisition that we've also taken into account in the $10 billion, CAGR is about 35%, which is a little lower than '22 to '23. That's why we feel comfortable about the fact that the long-term prospect is unchanged. Yes, I think you had a question...

Operator:

Your next question comes from Emmanuel Rosner with Deutsche Bank.

Frederic Lissalde:

Emmanuel, so for 2023, it's obviously linked to EDIs and schedules and detailed discussions that we have with our customers. It's the same for '25. '25 is a bottom-up line-by-line analysis of programs by programs and launch timing accuracy and discussion with our customers. '25 revenue is just around the corner. So we know pretty well, and we see pretty well through when the customers are going to actually launch those programs and the impact that this has on 2025.

Frederic Lissalde:

Emmanuel, we're launching globally. It's just not the North American OEMs. As we mentioned before, we're launching programs -- around 35 new programs that we've announced over the past quarters with 7 out of the 10 largest OEMs in the electrification area and a few others outside of the top 10. So the view that we have is a real global view. As you remember, we were pretty relevant in China and still are. We're launching a lot of new products in Europe, and we're launching in North America. But our view is very global.

Frederic Lissalde:

We've always been a player in hybrid powertrain, in essentially high-voltage plug-in hybrids, a few range extender programs in China. This product portfolio is absolutely relevant for BEVs and hybrids. And in hybrids, most of the combustion products that we had also see a path because there is no hybrid without an efficient combustion engine. Our content per vehicle on hybrid is pretty similar than the ones that you have on BEV. So electrification accelerates our growth, whether it's BEV or hybrids. We've always seen a traction on hybrids, and we're happy to be on some key platforms globally on hybrid powertrains.

Luke Junk:

A couple of bottom line really questions around eProduct. First one for me would just be how we should think about the trajectory of eProduct RD&E going forward. I'm thinking over the next couple of years, maybe. And how you might be able to manage that relative to the lower forecast volumes that you're looking at as well as, I guess, the offsetting pressure from the continued high level of RFQ activity that you're seeing in the market?

Frederic Lissalde:

One thing I would add is, as we presented in our Capital Market Day, with the scale that we have and the number of programs that we're launching and developing globally, that allows us to really implement a very modular design approach that builds from from previous developments and also very flexible and modular production strategies. And that's very important when we grow and scale up.

Frederic Lissalde:

Yes. And we are leveraging the existing footprint that we have. As we discussed before, so far, we are leveraging 25% of our existing facilities around the globe to launch eProducts. And that gives us some flexibility from a facility, from a four-wall perspective. But we also are focusing a lot on flexible manufacturing, where we're not investing production equipment for a particular program, a particular customer but having several types of products flowing through production lines, whether it is power electronics-related, motor-related or, I would say, transmission- or iDMs-related. So we are pretty pleased with what we are doing as far as leveraging the existing capacities and capabilities, including human capabilities.

Dan Levy:

One, just wondering on the ICE business itself. To the extent that that EV uptake is a little lighter in the near term than what some have anticipated and ICE is a little heavier, should we just think of the benefit to you as purely incremental sales flowing through at normal incremental margin? Is there any offset we should be thinking about that?

Dan Levy:

Got it. And then as a follow-up, I wanted to just go to the question on sourcing that's been asked in the past. And I think one of the commentary that we heard from some of your OEM customers is that with a lighter EV outlook, this may change the way they are thinking about vertical integration within EVs, EV components, et cetera. Are you seeing any impact in your discussions on the automakers that previously may have been a bit more keen on vertical integration that are now realizing maybe they don't have a scale at this level of volumes that are more willing to engage with you as a partner on the EV powertrain components that they need?

Operator:

Your next question comes from James Picariello with BNP Paribas.

Kevin Nowlan:

We're not prepared to address a specific margin in 2025. I think we showed you, though, the long-term trajectory of what it could look like as you head out to 2030. We tend to think that we're going to operate into the mid-9s trending towards 10% margin as we look through our planning horizon and then being plus or minus that depending on where the ePropulsion markets actually go. But not prepared at this point to comment on '25.

Kevin Nowlan:

Yes. I mean, overall, as we've talked about in the past, we're really focused on the organic growth. And before, we were guiding to 12% to 15% effectively, and now we're at 12% to 14%. So we feel pretty good about that. The biggest driver of the drop in revenue and any of outgrowth math that you would do is really that $300 million drop in the eProducts revenue outlook. We have also factored in some element of the impact of the UAW strike that we've incurred to date and assume that, that doesn't recover through the end of the year. It's less than $100 million, but it's still an impact on the company and embedded in the numbers as well.

Joseph Spak:

Kevin, maybe just to follow up on that. That $100 million, that's a fourth quarter impact on the strike or a full year impact?

Joseph Spak:

Okay. And then I just want to circle back to sort of this whole slower eProducts ramp and the path to profitability. Like it seems like -- and you've communicated that a lot of your launches are in China, a lot of new business in China, where we really aren't seeing some of that slower growth. Obviously, there's some lower volume with some North American products. But I guess, I'm wondering why there would be such a meaningful impact to the profitability ramp, if that is the case. Or are you also sort of taking a more cautious view on some of the the pace of those Chinese and Asian ramps or -- and maybe some challenges given the quantity of the ramps and making sure you execute all those flawlessly?

Kevin Nowlan:

Joe, just to add to that. I mean, yes, as you look at -- we're still in the early days of growth from an electrification perspective at BorgWarner. And so those quarterly moves right now, until we get to more scale, have a significant impact. And as you look at right now through really 2025, maybe even into 2026, it's a big ramp-up phase for BorgWarner while we're still at a relatively modest level of revenue. And so some of those movements in launches and ramp-up timing can have a meaningful impact on the numbers in a quarter or for a particular year.

Kevin Nowlan:

In terms of the $300 million, you're saying?

Kevin Nowlan:

It's really across regions. I mean, we've gone back and, as Fred mentioned, taken a look program by program and looked at what we think the cadence is likely to be for some of those launches in light of some of the things that we're seeing in terms of near-term headwinds. And as we look at that and assess what we think the likely ramp up is, we think it probably puts us more on track towards that $5 billion level. But as Fred also indicated, the reason we're giving a range now as we've layered on an incremental risk to say what if there are further delays, particularly on the ePropulsion portfolio in terms of those launches getting delayed another X number of months. And that's what we've layered on to get to the $4.5 billion as a downside to that range.

Noah Kaye:

Just first, wondering to follow up on that one, if we can get color. Just on the product mix in terms of programs being delayed or pushed out, if we think about the product mix for '25 in the adjusted revenue number, does this still skew heavily towards power electronics -- does it skew even more so? Is power electronics less represented versus some of the other programs? I'm just trying to understand where in the portfolio you're expecting relatively strong sell-through.

Noah Kaye:

Okay. That's very helpful. And second, just to touch on your M&A outlook. How does the dynamic that you're describing today impact your appetite to do further M&A? What is sort of the assumed M&A contribution now to the '25 outlook? I think at Investor Day, you had indicated there would be some additional M&A to be completed to support the outlook. Do you take a pause there? Do you assess what you have in the current portfolio? Just trying to understand.

Patrick Nolan:

Thank you all for your questions today. If you have any additional follow-ups, feel free to reach out to me or any member of my team. With that, Leo, you can conclude today's call.

Operator:

Good morning. My name is Chelsea, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Frédéric Lissalde:

Thank you, Pat, and good day, everyone. We're very pleased to share our results for the second quarter 2023 and provide an overall company update, starting on Slide 5. With approximately $3.7 billion in sales, we delivered 22% organic growth in the quarter. Our margin performance was strong and positively impacted by the growth and by customer pricing. Our free cash flow usage in the quarter reflected our planned capital spending to support our eProduct growth as well as the working capital usage. Importantly, our Charging Forward progress continued on multiple fronts. We received several new product awards since our last earnings report as well as securing an additional long-term component supply agreement. In June, we unveiled Charging Forward 2027, which summarize the next steps in our accelerating eProducts portfolio. We also released our 2023 Sustainability Report, which highlighted the progress we have made towards meeting our environmental stewardship, social responsibility and governance objectives and outlined additional goals for 2023 and beyond. We announced the planned acquisition of the electric and hybrid segments of Eldor Corporation. And lastly, on July 3, we completed the spin-off of PHINIA. I would like to wish the PHINIA team good luck as they move forward as an independent company. Now let's turn to Slide 6. Summarizing Charging Forward 2027, which we unveiled at our Investor Day back in June. Charging Forward 2027 builds on the success that we've had with our initial Charging Forward strategy that we announced back in March 2021. Charging Forward 2027 has three pillars. The first pillar is to continue our eProducts growth. We're expecting more than $10 billion of eProduct revenue in 2027 compared to an estimated $2.3 billion to $2.4 billion in 2023, and an estimated $5.6 billion in 2025. This $10 billion target for eProduct was the sales of the overall company in 2019. So this gives you an idea of how purposefully we're moving. The second pillar is eProducts profitability. We continue to move towards breaking even on those products by the end of this year. On the Charging Forward 2027, we set a target of 7% adjusted operating margin in 2027 on our way to double-digit margin later in the decade. The third pillar relates to our foundational products that remain after the spin-off of PHINIA. Here, we want to maintain our strong top quartile margins and really maximize the value of those foundational products. These three pillars are simple, they are clear and measurable. As in the past, we will update you on our progress over time. On Slide 7, I would like to discuss the planned acquisition of the electric and hybrid segment of Eldor Corporation, which was announced in late June. We believe Eldor's portfolio of high-voltage boxes, DC/DC converters and onboard chargers will be a great complement to BorgWarner's ePropulsion portfolio, particularly as it relates to expanding in high-voltage power electronics beyond the inverters. Relative to our Charging Forward 2027 targets, we expect the acquisition to generate about EUR 250 million in additional 2027 sales, after synergies. The acquisition is as much about the portfolio and engineering capabilities as it is about short-term projected sales. We expect the Eldor acquisition to augment our existing resources with additional scale, capacity and capabilities with more than 100 engineers, two facilities and more than EUR 125 million of R&D investments that have been deployed by Eldor over the last five years. We estimate that power electronics outside of inverters is a $31 billion addressable market by 2030. The onboard charger market is more fragmented and is trending towards high voltage and combination boxes. Until this point, BorgWarner success in inverters has largely consumed our power electronics engineering resources. Eldor's experienced engineering team will now provide the base for BorgWarner to grow even faster in onboard chargers and other power electronics. We will build upon this strong base to accelerate our program pursuits. Next, on Slide 8. Let's look at the long-term agreement that we announced with onsemi during the quarter. The resiliency and flexibility of our supply base will become even more important as we rapidly grow our eProduct portfolio. Based on the growth of our power electronics products, we expect to purchase close to 200 million semiconductor dies annually by 2027. By the same year, our inverter business is expected to be 70% silicon carbide based with almost 50% of our inverters being 800 volts. This really highlights the need to partner with quality semiconductor suppliers. Over the last quarters, we've taken several steps to secure the long-term supply agreements necessary to support our growth. In late 2022, we announced a significant capacity corridor for silicon carbide supply with Wolfspeed. We're now expanding our strategic collaboration for silicon carbide with onsemi. As a result, with agreements to date, you can see the strong mix of semiconductor suppliers we now have in place to support our strong growth. Now let's look at some new product awards on Slide 9. First, BorgWarner has been selected by a leading Chinese OEM to supply its IDM for hybrid vehicles expected to start production in 2024. The provided IDM comprises dual inverter units dual eMotors and then eGear ensuring reliable durability. We're pleased to continue our collaboration with this leading Chinese OEM, further strengthening the partnership through supplying our IDM product. Next, BorgWarner has been selected by a major East Asian OEM to supply eMotor and inverter for the automaker's new electric vehicle platform. We're very pleased to continue our longstanding relationship with this major East Asian OEM. And finally, BorgWarner has secured a contract with a thermal and energy management solution supplier to deliver high-voltage coolant and heaters for use on a series of three electric vehicle platforms for a major OEM. Our heaters will be added to the suppliers' heating and cooling module and will be used to provide heat to the battery pack and cabin in BEV. The takeaways from today are this

Patrick Nolan :

Chelsea, we're ready to open up for questions.

Colin Langan :

Any color how should we think -- what does the second half seems to imply based on guidance a bit of moderation in margin? I think you're sort of running at 9.6% in the first half. And think to get to the midpoint of guidance should be more like 9.2% in the second half on which should be slightly higher sales. Any factors that are driving that weakness? Are you including some risk from the UAW strike in second half? Any color there?

Colin Langan :

Got it. And any UAW in the second half risk there? Or is that sort of not in the guidance?

Colin Langan :

Got it. And just lastly, you highlighted some slowing demand for at least one of your products in -- to one of your eProducts Obviously, there's some concerns from automakers about EV adoption slowing. And I think at your Investor Day, you talked sort of longer term sort of being derisked on the sort of sales versus margin. But how should we think about that near term? If EV starts to slow into already, didn't see the high adoption into next year, does that but pressure on your overall profitability? How should we think about the puts and takes on sort of potential for EV to slow and impact you?

Operator:

Your next question will come from John Murphy with Bank of America.

Frédéric Lissalde:

What -- John, what I can tell you is that we see strong customer pool. We see a very steady drumbeat on product wins globally. And remember we both are on there and on hybrids and especially high-voltage plug-in hybrids, but I would agree with you. This emphases the importance of maintaining strong margin on our foundational business and that's the third pillar of Charging Forward 2027. So that's what I would tell you.

Frédéric Lissalde:

It's all about supply chain resiliency. We're happy with the Wolfspeed capacity corridor. Wolfspeed is our largest silicon carbide supplier and we are putting in place additional agreements. It's all about security and supply chain resiliency.

Noah Kaye :

I appreciate all the reconciliation details for the PHINIA spin. Can you just update us on where net leverage actually sits post-spin and how much dry powder you have in your view for M&A?

Noah Kaye :

And a follow-up to that, I mean, good commentary on Eldor and you've done quite a lot of M&A over the last new year change. But just give us a view of the pipeline now. And there have been some comments on this call and others around what the puts and takes of a slower-than-expected EV adoption rate might mean for industry. Curious to know how that might be impacting the pipeline in terms of potential candidates for acquisition?

Noah Kaye :

Okay. Maybe just one more. You mentioned the pace of battery production ramp. I mean again, very high growth. So not necessarily getting to the full level you expected. But can you help us characterize that? I don't believe Seneca expansion was factored in that, right? I mean that's not until next year. So what are the gating factors? Is it labor? Is it process equipment? Is it cathode or other materials? Just trying to understand the gating factors on production.

Operator:

Your next question will come from Emmanuel Rosner with Deutsche Bank.

Kevin Nowlan :

Yes. I mean the way we're looking at it is achieving that breakeven actually positive margin at the end of the fourth quarter is a solid jump off into 2024. I mean you might remember, we talked about it before. If you look at our quarter end Q4 2022, ePropulsion was actually slightly positive. But we know it was on the back largely of increased recoveries from an R&D perspective. And so at that moment, it wasn't really a sustained positive margin profile. As we get to the end of this year, and achieve that positive margin profile, it's more because of the scale that we're generating in the business and the conversion on that incremental revenue. So I think it positions us to have a 2024 that's also positive and growing from there.

Kevin Nowlan :

Yes. I mean we didn't move the upper end of the range. Obviously, we kept the $14.6 billion of revenue. So we didn't really move much there. We do have a little bit of incremental conversion coming on the increase at the bottom end of the range. But there's not a significant amount of movement to really comment on. So our 9.2% margin at the bottom end of the range held. I mean if you're looking at it from a pure operating income perspective, you got a little bit of incremental conversion and then you have a little bit of FX headwind that's impacting us as well.

Luke Junk :

Fréd, for starters, just be great to get your perspective on the competitive landscape power electronics outside of inverters. If you could just talk about the fragmentation you see right now and the level of synergy that you would expect or even that customers have told you with the fact that you're already a major player in inverter in bringing that to things like onboard charger and other related products.

Luke Junk :

Okay. And then for my follow-up, just wondering if you've commented or could comment on what the geographic mix of eProduct revenue looks like sitting here in 2023, I guess, I'm thinking of the downside risk, say, customer delays in North America, which showed up in the revision numbers this morning relative to China pushing higher in the back half of the year? How should we just think about that mix between, I guess, broadly North America, Europe and China in eProduct?

Operator:

Your next question will come from Dan Levy with Barclays.

Frédéric Lissalde:

Dan, you're right. At the midpoint, outgrowth is 1,000 basis points or 1,050 basis points. It's driven by eProduct, it's a significant driver for this outgrowth and actually, second half is even higher than the first half. 2021 was also above 1,000 basis points outgrowth and it's difficult to time it. Customer pricing plays also overall on a full year basis with 170 basis points. So this is what I would tell you, and eProducts plays a significant role in this, and you see that also first half to second half.

Kevin Nowlan :

I mean the foundational business is continuing to outperform overall as well. But the biggest driver of why the second half is so much stronger than the first half, if you do the math of what's underlying outgrowth, it's that $450 million to $550 million increase sequentially first half to second half and eProducts revenue. I mean keep in mind, we're making that -- that's what we're expecting when sequentially, if you're looking at it that way, markets are actually down globally during that period, but revenue in eProducts is up $450 million to $550 million. So it's a big driver of outgrowth.

Frédéric Lissalde:

I don't think we've disclosed that. But what we've disclosed is $1.3 billion of hybrid in 2025 on the e-side. And on the foundational side that would come on top. Most of the next-generation or current generation high-voltage plug-in hybrids that make a difference from meeting the regulatory environment especially in Europe and in China do carry turbos, do carry EGR and other products that we're making. So it is an important part, and we've always told you that the products that we retain play a key role into the growth of hybrids, especially high-voltage plug-in hybrids, which are part of the NEV environment in China also.

Frédéric Lissalde:

We play in all kinds of hybrids. We play more in high-voltage plug-in hybrids, which are making a bigger difference from should efficiency over a fuel efficiency standpoint. But we do play into what we can call range extenders, whatever you call those types of powertrain.

Rod Lache :

Wanted to ask maybe just two strategic questions. One is, a week ago, we saw a platform sharing agreement between Volkswagen and XPENG. I know that XPENG is a significant customer of yours. Stellantis on their earnings call also talked about countering the Chinese invasion of Europe with better utilization of low-cost country sourcing. And I was hoping you might just if it's relevant, just talk about whether this is significant for BorgWarner, whether you see this as a global or a local phenomenon, just the utilization of these Chinese -- lower-cost Chinese platforms and whether that actually has implications for you?

Rod Lache :

So just to clarify that, Fréd, these kinds of platform sharing agreements, does that represent an expansion of your existing business? Or is it does it have no effect on you? And is it kind of a global thing? Or is this more of a China local thing?

Rod Lache :

Okay. And then just maybe at a high level, just given all the focus on UAW discussions now. Just taking a step back, how are you thinking about the implications of higher labor costs for these OEMs? Do you see that as a net positive from an outsourcing perspective over time? Or is it kind of unclear because OEMs ultimately have to commit to greater union labor utilization.

Operator:

Our last question will come from James Picariello with BNP Paribas.

Kevin Nowlan :

Yes. With respect to the commodities impact in Q2, net when you take pricing, minus the net material inflation costs coming from the suppliers, it was a net positive of about $11 million in the quarter. And remember, that's because in Q2, we were recovering for Q1 as well because we had very little in the way of recoveries in Q1. So that's why it was a net positive number in Q2. And overall, the pricing element of that in Q2 was a little bit north of 2.5% of our revenues. So obviously had a meaningful impact on the quarter and contributed about 10 basis points to margin when you cut through that math. When you look on a full year basis, we expect pricing -- the pricing side of the equation to be somewhere between 1.5 points to 2 points of pricing all in year-over-year. And we expect the net impact on our P&L to be a 10 basis point to 20 basis point headwind in all in year-over-year. So that's the way to think about net material inflation cost impacts for us. In terms of the restructuring, there's nothing unusual as you look in the back half of the year. We're progressing along the trajectory of what we laid out in the June Investor Day and generating some of the savings each quarter this year associated with what we laid out on that slide

Frédéric Lissalde:

James. The first thing I would tell you is that we play as a global player. You've seen the impact that we have in China, in Europe, in North America. So we looked at the acceleration of EV and electrification overall on the global scale and on a global scale, we see momentum. Again, if you think this is going to be a straight line, I think it's a wrong assumption. And we're ready to flex. We are also ready to maintain strong margin on our foundational business, which is absolutely part of one of the 3 simple pillars of Charging Forward, and this is going to be important no matter what.

Patrick Nolan :

With that, I'd like to thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, Chelsea, you can go ahead and conclude today's call.

Operator:

Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Fred Lissalde:

Thank you, Pat, and good day, everyone. We’re very pleased to share our results for the first quarter 2023 and provide an overall company update, starting on slide 5. With approximately $4.2 billion in sales, we delivered double-digit organic growth in the quarter, and we outperformed the market in both Europe and North America. As we expected going into the quarter, our margin performance was negatively impacted by our planned eR&D investment, net inflationary costs and the impact of lower production in China. Our free cash flow usage in the quarter reflected our planned capital spending to support our eProduct growth as well as working capital usage and our normal annual payout of incentive compensation. Importantly, our challenging forward progress continued on multiple fronts. We secured multiple new eProduct awards since our last earnings report. We also announced multiple new eProduct capacity investments during the quarter. And as I will highlight, our battery pack expansion in Seneca, South Carolina shows our ability to utilize our foundational assets and people. Lastly, we continued to work towards the intended separation of PHINIA. Since our last call, we announced PHINIA’s name as well as the key leadership roles. Brady Ericson will serve as President and CEO, whilst Chris Gropp will serve as the CFO of PHINIA. Both Brady and Chris have been at BorgWarner for more than 20 years, and have served in numerous important roles across a variety of BorgWarner business units. Teams are progressing well through the various work streams. We now expect to complete the separation of PHINIA by the end of the third quarter. Now let’s look at some new eProduct awards on slide 6. First, BorgWarner has been selected to provide eMotors to a leading automotive manufacturer in China. The eMotors will be used in the Chinese automakers dedicated hybrid transmissions and range-extended electric vehicles with mass production expected to start in August 2023. We’re excited to supply this leading Chinese OEM with a new motor application, strengthening our partnership by providing them with the support needed to meet the growing challenges in new energy vehicles. Next, BorgWarner has partnered with the Pontiac, Michigan School District to provide direct current fast charges to support the district’s electric school buses. This program will utilize BorgWarner sequential charging technology that allows up to five dispensers to charge from a single power control system. This greatly reduces the initial investment and lowers installation costs while providing the ability to charge at DC fast charging levels. Next, BorgWarner has been selected by a global commercial vehicle manufacturer to provide eFans for battery electric trucks in both the North American and the European market with production expected to begin in 2025. For this project, BorgWarner will supply its complete eFan R10 system, which includes a fan, an eMotor and an integrated high-voltage inverter. Notably, the high-voltage inverter utilizes the expertise and capabilities of Drivetek, the company acquired in December of last year. Now, let’s look at the growth and expansion of our battery pack business on slide 7. BorgWarner has been selected by a global power technology company to supply battery packs for a series of electric buses with production beginning earlier this year. This battery pack contains state-of-the-art safety features including current overcharge protection, cell-level passive propagation resistance and electrical disconnect at the individual sale wire bonds that satisfy the industry’s strict electric vehicle battery safety standards. During the quarter, BorgWarner announced plan to expand its Seneca, South Carolina production facility by adding battery module Production to the facility. After this expansion, BorgWarner is expected to have annual U.S. battery module capacity of approximately 3 gigawatt hour. This investment will contribute to the growth of the Company’s battery module and pack production in the United States, focused on commercial vehicles, trucks and buses. Our battery pack business is exceeding our initial expectations. Last quarter, we increased our 2025 revenue outlook for this business to approximately $1 billion, five years ahead of our 2030 business case when we announced the AKASOL acquisition. We expect volume demand from our largest battery pack customers to continue to grow, and we have secured multiple new product awards for our battery pack business over the past two years. We’re also making the organic investments to support this growth. This year, we expect to invest approximately $100 million of CapEx to support this business growth, which is a big driver of the step-up in our CapEx outlook for 2023 versus last year. So in our opinion, the AKASOL acquisition from two years ago is poised to deliver well above our initial expectations. But now I’d like to turn our attention to how last year’s Santroll’s acquisition is performing on slide 8. Similar to our battery pack business, the revenue related to Santroll’s eMotor business has tracked ahead of the expectation we had at the time we announced the transaction. In 2024, we expect this business to generate approximately $250 million of eProduct revenue, about 40% higher than our original acquisition planning. If you recall, a key pillar of the transaction was for Santroll to improve our cost competitiveness through improved eMotor design and manufacturing capabilities. As a result of improvements that we are achieving, we expect this business to already approach BorgWarner’s average profitability levels by 2024. We expected this business to increase our speed to market and increase our scale in eMotors, and we are seeing just that in our bookings, which are shown on the right side of the slide. The takeaways from today are this

Patrick Nolan:

Britney, we’re ready to open it up for questions.

Colin Langan:

It’s Colin. I just want to follow up on the comments. I’m not sure if I misheard. Did you say there’s -- you’re expecting $65 million of inflationary costs for the year. I thought the initial guidance was reflecting something that it would be not material for the year?

Colin Langan:

Got it. Okay. And it’s actually -- it’s not related to the steel price, its’ actually related to your supplier cost pressure coming through?

Colin Langan:

And what helps you keep your guidance, I guess, actually slightly up related to sales. But with the $65 million incremental headwind, what’s offsetting that?

Colin Langan:

And just lastly, Fuel Systems looked pretty weak in the quarter. Anything unusual going on in Q1? And should that sort of bounce back, or is that kind of stay at these kind of levels?

Operator:

Your next question comes from Noah Kaye with Oppenheimer.

Fred Lissalde:

No, I would say that -- yes, it’s not demand related. It’s -- if we get the chips, we’ll be at 1.8. If we don’t get enough chips, we’ll be at 1.5. So, it’s essentially linked to the ability to get what we need in order to deliver the demand.

Fred Lissalde:

Well, that’s what -- I mean, we have teams of people working really hard with our suppliers. And so far, so good, I would say. But we still have volatility. And as you know, the supply chain is -- has no buffer whatsoever. So, if you have a little blip somewhere, then it impacts us in our ability to ship. So, that’s why you have that band of revenue that is still open from 1.5 to 1.8.

Kevin Nowlan:

I think it’s a fair way to think about it. I mean, it’s what we’ve been suggesting all along is that as we start to get the scale and start to see the revenue ramp up, that revenue ramp up drives gross margin and the pace of that growth is outpacing the growth in R&D. You can see the R&D starting to flatten a little bit more relative to that growth. So, as we get beyond ‘23 and into ‘24 and beyond, we do expect to see that continued improvement in the margin trajectory linked to the continued growth in the eProduct-related revenue.

James Picariello:

So, the PHINIA spin is now targeted by -- to be completed by the end of the third quarter. Any thoughts or color on the timing of the CMD and the capital structure potentially for PHINIA?

Kevin Nowlan:

And so, as we get more honed in on a particular date, then we’ll be in a position to talk about when those investor days might be for both companies. And at that time, we’ll also talk about the capital structure of both businesses.

Kevin Nowlan:

On a year-over-year basis, it contributes about a point to our revenue. So that -- and net of that recovery, we end up with $65 million of headwind.

Emmanuel Rosner:

So just to clarify again the inflation headwind. So, are you expecting $65 million on a full year basis as a net number? And then, $28 million of that happened in the first quarter. Is that correct?

Emmanuel Rosner:

And I guess the general drivers of sort of improvement in sort of like total incremental margins from the first quarter to the rest of the year. So, you would have a higher proportion of recoveries, I guess, on that growth headwind -- inflation headwind, or what other drivers would you point to?

Emmanuel Rosner:

And this is tied to the timing of your launches?

Emmanuel Rosner:

And then, following up just on that disclosure. So eProducts expected to be about two-thirds of the net segment sales. I guess, what else is in ePropulsion?

Operator:

Your next question comes from John Murphy with Bank of America.

Kevin Nowlan:

Yes. I mean, I think your $1.3 billion is a little bit high when you’re doing the math on that because we’re guiding to overall the $2.5 billion to $2.8 billion of eProduct revenue. So, when you do a third of that, it’s going to be a little bit less than that number. But where you see the other pockets of eProducts related revenue are really the battery pack business, which is in the Drivetrain & Battery Systems segment. You have a lot of our thermal products, which is in the Air Management segment as well as the charging stations, which are in the Air Management segment as well. So, that’s really where you see the other components of the eProduct related portfolio. In terms of the trajectory, I think it’s right to think that what you see on slide 13 is the right template or a way to think about the progression of margin in any one of those eProduct businesses. They start off by generating losses when they don’t have much revenue scale because we’re making a lot of upfront investment, particularly in R&D and other start-up costs. And as we start to get the scale and we start to grow revenue to the point where the revenue growth outpaces the growth in R&D, we start to drive profitability. So when you look at the eProduct portfolio within ePropulsion, we’re already starting to get to that scale point. Some of the other businesses are simply at different points of maturity along the way. But as they get to the same levels of maturity as what we see in the ePropulsion, we expect the exact same type of trajectory.

Kevin Nowlan:

I mean, 2.6 divided by 3 gets you about $850 million to $900 million. So it’s...

Kevin Nowlan:

The expected net -- so the $2.5 billion to $2.7 billion, that’s the ePropulsion segment revenue, two-thirds of which is eProduct related. It also happens to correspond to being two-thirds of BorgWarner’s total eProduct revenue is also in this segment.

Kevin Nowlan:

Ballpark.

Kevin Nowlan:

I mean, from a cost perspective, we’ll talk about that more when we get to the investor days that we expect to have closer to the date of the spin. And when you think of the potential dissynergies we see from the transaction, one of them is just, as you’re alluding to, some of the incremental costs associated with establishing a corporate cost structure for a new public company, PHINIA. So we’ll give more details on that and the impact overall of that dissynergy, but as we look at it, the value creation opportunity of creating two separate companies, both focused on pursuing their independent strategies more than offsets the potential dissynergy associated with setting up the corporate cost structure for PHINIA.

Operator:

Your next question comes from Adam Jonas with Morgan Stanley.

Fred Lissalde:

First, I would say that what we’re doing with the plant in Seneca, which is our biggest plant in North America is a good proxy of what we’re doing to utilize the capital and the human capital that we have in our foundational products, putting berry back in there. If you look at e-heaters -- we announced more than 4 million e-heaters in 2025, we are using plant in Michigan and Portugal and China. For motors, IDMs, we’re using Wuhan and Tianjin and Korea and North America. Also in Mexico, we have a power [indiscernible] program where already about 300 engineers have gone through and they are, I would say, now very up to their task in the world of it. So we are focusing on utilizing both capital and human capital when we also make the transition from C to E. From a capital standpoint, R&D standpoint, we think that -- and Q1 is a good proxy, too. eR&D goes up, cR&D goes down, pretty much equally or proportionally. Capital is very, very limited. And what we do when -- and since quite some years, combustion businesses are quoted with the amortization of the full capital in the length of the program with volume closes. So I think we’re doing everything that is possible to limit debt risk.

Fred Lissalde:

Yes. Just to give you a high-level set of numbers. So this year, we’re guiding $2.3 billion to $2.6 billion of eProducts and in 2025, about $5.6 billion. And that’s 50% CAGR, just to give you a perspective on how fast we’re growing in this field. In China, our business is 70% with the local Chinese. It was actually the other way around 5, 6 years ago. But the vast majority of our business is with the Chinese OEMs. And out of that 70%, 50% of those are with the big guys, the top Chinese OEMs. I hope that helps.

Dan Levy:

I wanted to just start [Technical Difficulty] on incremental margins. So I appreciate the disclosure about ex the inflation in R&D would have been 19%. But just in light of an environment where some of the supply constraints seem to be dissipating and you’re coming off of relatively, I’d say, easier comps -- or more difficult situation a year ago. Is it possible that as the year progresses, ex-R&D, ex-inflation that that incremental margin goes higher?

Dan Levy:

Okay, understood. Thank you. And then as a follow-up, I wanted to just ask about silicon carbide. A, could you just remind us of your inverter backlog, how much of that is silicon carbide versus IGBT? And then, B, we heard a comment from Tesla at its investor day, plans to reduce silicon carbide content by three quarters. I’m just wondering, in the future, how you’re looking at the design of your inverters, whether you think that you can reduce silicon carbide content -- in general, what the direction is on silicon carbide?

Dan Levy:

And within the context of automakers trying to drive cost down to make EVs more affordable, is there -- are you seeing a push from automakers to sort of reduce the silicon carbide content to make the inverters more affordable?

Operator:

Your next question comes from Luke Junk with Baird.

Kevin Nowlan:

Yes. I mean, you should expect the gross margin percentage to be improving. If you cut through the math of what’s on that slide 13, it implies that there’s improvement in gross margin. And one of the main reasons you see that is we’re growing into the fixed assets as well because there’s depreciation in the gross margin that’s not fully up to scale yet. So, by the time you get to Q4, you would expect to see an improvement from that 15% level you’re calculating.

Fred Lissalde:

Yes. Luke, it is obvious that those negotiations take some time, like it did last year. We expect that it’s not going to take as much time as last year since we have a pretty robust framework that was used last year to negotiate the inflationary headwinds. And the negotiations are happening. We’re pretty pleased with the pace that it’s going. It’s just not happening in Q1. It’s going to take Q2, maybe early Q3 to get to where we want to be.

Mark Delaney:

First one, sticking on the semiconductor side. I was hoping to better understand the flexibility that BorgWarner has as you think about procurement and supporting your customers, either in terms of having multiple silicon carbide supply sources or being able to perhaps flex between IGBTs and silicon carbide? I ask in part because you guys have made public your announcement and Wolfspeed, I think a few weeks ago, they talked about a slower ramp-up of their the Mohawk Valley fab. So anything you can help us understand around your ability to perhaps derisk from one supplier?

Mark Delaney:

Very helpful context. And another was just on the design-in environment. And you guys have had for a number of quarters some good traction designing in your EV powertrain products. Given how competitive the EV market is for OEMs in terms of the prices in the market, I’m curious, are you seeing any incremental interest from OEMs turning to BorgWarner for some of your powertrain products perhaps as a way for them to be more efficient in the near term using BorgWarner as opposed to maybe trying to do some of their own work in-house? Thanks.

Patrick Nolan:

With that, I’d like to thank you all for your great questions today. Britney, go ahead and conclude today’s call.

Patrick Nolan:

This is Patrick Nolan. I apologize about the technical difficulties we've had this morning, but we're in a kickoff today's call. So we have issued our press release earlier this morning. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations home page. Before we begin, I to inform in joining this call, we may make forward-looking statements which involves risks and uncertainties as detailed in our 10-K. 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 period. When you hear us say on a comparable basis, that is excluding the impact of FX, net M&A and other noncomparable items. And here say adjusted that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We also refer to our growth compared to on market. when he say market, that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure. Please note that we've posted an 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.

Kevin Nowlan:

All right. Thanks, Fred, and good morning, everyone. We're pleased to share our results for 2022 and provide an overall company update, starting on Slide 5. We continue to be very proud of the strength of our sales relative to the overall industry. With about $15.8 billion in sales, we were up approximately 14% compared to our market, which was up a little less than 4%. Importantly, our BEV-related sales contributed meaningfully to this growth. We're also pleased with our solid margin performance, which we delivered despite the significant production volatility and inflationary headwinds that we faced during 2022. This performance was achieved while continuing to significantly increase our R&D investment to support the continued growth in our e-product portfolio. We also delivered record free cash flow which allowed us to continue to make inorganic investments that support our future while at the same time returning cash to our shareholders. Beyond our near-term results, we continue to drive our long-term positioning during the quarter. We took several leading steps in our sustainability efforts. I'll detail those more in just a moment. We made a significant advancement in charging forward with the announcement of the planned separation of the Fuel Systems and Aftermarket segments. And we also secured multiple new electrification program awards since our last earnings report. Next, on Slide 6, I'd like to give you more color with respect to our progress in our SBTi targets. In mid-December, BorgWarner announced its commitment to reduce its absolute Scope 3 emissions by at least 25% by 2031 from a 2021 baseline. The Scope 3 target along with our previously announced target to achieve 85% absolute Scope 1 and Scope 2 emissions reductions by 2030 was formally submitted for validation to SBTi. These science-based targets align with charging forward or accelerated path through electrification by aiming to achieve a net 0 carbon emission future for all. We've made some meaningful progress in 2022 toward achieving our Scope 1 and 2 emissions targets as we had tied employee bonus opportunities across our global operations to reducing energy intensity while also promoting energy management certification and the procurement of renewable energy. To meet the Scope 3 target, BorgWarner intends to focus its efforts on a number of actions including transitioning the product portfolio to electrification, increasing content of recyclable remanufactured material, reducing product weight and driving sustainable raw material selection. We'll also be working with our supply base to do the same. Next, on Slide 7, I'd like to summarize the planned separation of our fuel systems and aftermarket segments, which we refer to as NewCo. We announced this planned separation in December as we believe that now is the right time to separate these businesses and unlock shareholder value. For NewCo, we've driven significant margin improvement over the last couple of years despite the challenging industry environment. From a product leadership standpoint, we solidified NewCo's position in the commercial vehicle segment, including with hydrogen injection in the passenger car segment with our cutting-edge GDI technologies and in the aftermarket business. We believe these things position NewCo well for success as a stand-alone public company. For BorgWarner, we believe the intended separation accelerates our Charging Forward strategy and focuses all of our energy towards electrified propulsion. It enhances all of our management attention, our focus and our flexibility to pursue attractive EV investments and supports our vision of a clean, energy-efficient world. The intended separation will allow each company to pursue its own strategies with an overarching focus on maximizing the value opportunity for our shareholders. The teams are progressing well through the various work streams and we plan to provide updates as appropriate. We continue to expect the intended separation to close in late 2023. Now let's look at some new electrification awards on Slide 8. First, BorgWarner will supply a major German vehicle manufacturer with innovative battery cooling plates for the OEM's next-generation electric vehicles in Europe and the United States. This is our first award for this new organically developed product with an expected launch in 2025. Compared to alternative solutions, the BorgWarner cooling places provide greater cooling capacity within a smaller installation space as well as reduced weight and cost. We believe that as a global market leader in exhaust gas recirculation cooler technology BorgWarner's expertise and thermal management and the associated manufacturing processes positions the company to be an ideal pioneer of new developments for the battery cooling market. On the right side of the slide, you can see that we're announcing a sizable expansion of our silicon carbide inverter business with a top global OEM with an 800-volt award. After partnering with this car manufacturing on a 400-volt inverter product, we're now being sourced to launch two new 800-volt variants in 2025, 250 kilowatts for an all-wheel drive crossover utility vehicle and a 350-kilowatt module for the OEMs performance vehicles. This expanded business strengthens our position as one of the strategic inverter suppliers for this long-standing customer as that customer transitions to the next phase of its BEV strategy. As you can see, we've made further progress toward our charging forward objectives. So let's look at what this means in our progress report on Slide 9. Starting first with organic electric vehicle sales growth. With the awards secured as of this call, we now have pure BEV programs that we estimate accounts for about $3 billion of booked sales in 2025. Of note, this estimate reflects about a $150 million headwind versus our prior disclosure, stemming from an update to reflect the FX rates underlying our 2023 guidance. This FX headwind was partially offset by the new business wins I discussed on the prior slide. Turning to M&A. We've now completed or announced 5 acquisitions since the start of Charging Forward; Akasol, Santroll, Rhombus, SSE and Drivetek. Based on our due diligence, we believe those businesses will generate about $1.3 billion of EV-related sales in 2025. This is higher than our previous outlook based on our revised projections for Akasol, which is seeing a faster ramp-up in sales than we initially anticipated. But we're not done here. We continue to expect that we'll execute additional acquisitions and are actively engaged with a handful of potential targets that we think will enhance various parts of our EV portfolio. And finally, the planned separation of NewCo will address the third pillar of charging forward for which we set an original goal to complete about $3.5 billion in dispositions by 2025. With all that we've accomplished in the last couple of years, we believe we're already on track to achieve about $4.3 billion of pure electric vehicle sales in 2025 and we believe it puts us within striking distance of our $4.5 billion EV sales target for 2025. Now let's move into the financials, starting on Slide 10 for a look at our year-over-year revenue walk for Q4. After adjusting for the disposition of our Water Valley facility, last year's Q4 revenue was just over $3.6 billion. You can see that the strengthening US dollar drove a year-over-year decrease in revenue of over 8% or approximately $307 million. Then you can see the increase in our organic revenue about 21% year-over-year. That compares to a less than 1% increase in weighted average market production, which means we delivered another quarter of strong outperformance. The sum of all this was just over $4.1 billion of revenue in Q4, a strong finish to the year. Turning to Slide 11. You can see our earnings and cash flow performance for the quarter. Our fourth quarter adjusted operating income was $428 million, equating to a 10.4% margin. That compares to adjusted operating income of $398 million or 10.9% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of M&A, adjusted operating income increased $74 million on $769 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 15% on our additional sales. But this conversion was partially offset by our planned increase in e-products R&D. In Q4, we increased these R&D investments by $38 million relative to last year. Our adjusted EPS improved by $0.20 in the fourth quarter driven by the improvement in our adjusted operating income and a nearly 400 basis points lower year-over-year tax rate. That lower tax rate was driven by a favorable mix of earnings across taxing jurisdictions, qualifying for more favorable tax rates in certain jurisdictions and the impact of ongoing tax structuring initiatives, all of which we believe should contribute to a lower tax rate going forward than what we've experienced over the last few years. And finally, free cash flow. We generated $670 million plus of positive free cash flow during Q4. The year-over-year increase was driven by 3 things

Operator:

[Operator Instructions] And we'll take our first question from Colin Langan with Wells Fargo. Your line is open.

Kevin Nowlan:

Yes. I think our expectation right now is that we're going to continue to manage inflationary levels at the way we exited 2022. So to the extent that we continue to see elevated levels of inflation from the supply base, we would expect to continue to maintain the pricing in place with our customers on a go-forward basis to mitigate that. So that's really what's underlying the guidance.

Kevin Nowlan:

I think we're expecting that we're going to enter the year and the focus of the negotiations last year was really about how we are 2022, and then we essentially align with the customer base that we would look ahead to 2023 as we were entering the new year and see what types of pricing levels were appropriate to continue to mitigate those impacts. And so as you can imagine, we'll have those discussions here as we enter the new year about the pricing and cost environment.

Frederic Lissalde:

Yes, Colin, the outgrowth next year is -- you're right around midpoint of 8%, and we're very proud of that. About 2/3 of it is be products and other products for plug-in hybrids. So next year, we'll be between $1.5 billion to $1.8 billion of fuel BEV revenue which is approaching 10% of our revenue. I'm very proud about this acceleration.

Frederic Lissalde:

Not at all. This confirms that we are on track, marching towards our target of $4.5 billion of fuel BEV revenue in 2025. And you see a 2x increase this year versus prior year, and that's pretty much part of the plan.

Emmanuel Rosner:

I was hoping you could give us a little bit more color around the year-over-year walk and puts and takes in terms of your margin outlook. And as you mentioned yourself, the at midpoint, it's basically just slightly better than flat sort of like operating margin despite what seems to be incredibly strong organic growth and I guess growth overall. I understand the R&D, so that going up a bit, but anything else going on? And then can you just maybe talk about R&D overall? Like are you offsetting some of that R&D increase by cutting back on R&D? Or is that sort of like how much the full R&D will be going up by?

Frederic Lissalde:

R&D side, as Kevin mentioned, we expect to be up again this year year-over-year. We're also looking at a lot of R&D efficiency on the combustion side. And I think we expect that long -- midterm the R&D is going to stay between 5% and 5.5% of revenue, working in not constraining the growth but also making sure that we're doing the right thing on the foundation and products.

Kevin Nowlan:

A couple of things on the on the question about R&D, they were really only guiding at the moment to the eProducts-elated R&D, which we are seeing an increase in investment that we're choosing to make of $60 million to $70 million. the overall R&D budget, I'll say, the foundational R&D is just being managed in totality with the way that we manage the profitability of those foundational businesses. As it relates to EV, the trajectory of profitability. As you see the growth that we're generating this year and the incremental margin that we're generating on that revenue growth this year, 2/3 of which comes from our eProduct portfolio you can see that the growth in contribution margin is effectively outpacing the growth in the eProducts related to R&D, which means that 2023, we are seeing improving profitability coming from that portfolio in totality, and continue to believe that we're on track that as we exit 23 and added to the beginning of '24, that portfolio is approaching breakeven.

James Picariello:

Good morning, everyone. Just back to the growth over market, I thought in 2022, there was almost like a 4-point benefit from commodity recovery bedded within your revenue growth. So I do just want to clarify that the 2023 high single-digit 8 points of outgrowth, that, that does not include any ongoing commodity recovery, cost recovery type benefit?

James Picariello:

Okay. Understood. And then just back to the EV profitability time frame. Any -- given the $60 million to $70 million R&D step-up, I think previously, you guys have talked about maybe late '23, early '24 in terms of achieving breakeven for the business. What does that time frame look like now given better visibility on the R&D commitments you have?

James Picariello:

Got it. And just any clarity on what the SpinCo's targeted net leverage could be? I know you've previously communicated a lot have a healthy cap structure. Just curious if there's a finer point on that.

Operator:

And your next question comes from Rod Lache with Wolfe Research.

Kevin Nowlan:

I think -- I mean, the way to think about it, we exited 2022 at a level of pricing from the supply base and pricing with the customers that we think is likely going to continue at or around that level heading into 2023. And that's effectively what's underlying the guide.

Kevin Nowlan:

I think the spillover effect is what I mentioned with respect to my comments about the potential volatility in margins in Q1, as we exited -- as we negotiated with our customers in 2022, the focus was really on how we make sure that we're recovering a fair share of the inflationary impacts we were seeing in 2022. And as we head into 2023, we would discuss with our customers and our suppliers, the extent to which some of those pricing increases need to continue to offset the inflationary environment. And so we could see a little bit of choppiness in Q1 as we go through some of those discussions. But overall, our outlook for the full year is that we don't expect to see a material impact from the net pricing environment on a year-over-year basis relative to '22.

Kevin Nowlan:

Yes. That's fair to say, Rod. I mean, what we've disclosed to date is that the biggest impact we see is really on the material cost inflation side and the net impact on our P&L on material costs from last year, the cost net of recoveries from customers was about $90 million of headwind. But obviously, we have other productivity issues that we're managing through from a labor, freight and other things.

John Murphy:

I just wanted to follow up on something you had in your other investment banks outside of the response you showed here. I mean, it shows like the content per vehicle opportunity all on EVs through 2025 and what you've developed through your acquisitions. But I'm just curious, as we're looking at a big chunk of the business still being ICE. Just curious if you had a view of how you think about the content provision on an ICE vehicle developing through 2025 and 2030 in million similar ways as you showed the EV content per vehicle?

John Murphy:

Okay. And also, I mean it looks like in the slides, you're kind of indicating the breakeven on an operating basis and EV's occurring sometime between '23 and '24, roughly just in the slide that you showed. When do you think that the returns on that business start to become -- return on invested capital starts to become sort of adequate? is it looks like it's '24, '25, '26 that you kind of highlighting the margins might get closer to "normal". I mean when do you think the return on invested capital is sort of an adequate level for you?

Kevin Nowlan:

No. I think that's the key point. We price all of these programs so that on a stand-alone basis, they're profitable, as we've mentioned in the past, that what makes the e-business a little bit different than some of our other businesses, our foundational businesses today is that to drive the revenue growth in these product categories, we have to invest a lot in upfront, eProducts-related R&D. And so that provides an overhang to the in-year margins any given year. And you see that this year, even in our '23 guide. We have good levels of conversion that we're pretty happy with. But we're continuing to invest another $60 million to $70 million to support new business wins 3, 4 and 5 years out. And so as long as we continue to see the prospects for growth in this business, we're going to continue to invest in the eProducts related to R&D to make sure that we have long-term viable business here. And again, as long as those programs are all individually meeting our ROIC targets on a stand-alone basis, we're very happy to continue to invest in that R&D.

Frederic Lissalde:

John, our product leadership and scale in the foundational product is very, very strong. And I would say the margin will remain top quartile and strong as you've seen in the past. Also, don't forget that the foundational products that we have an impact on our EV growth and one of the announcements that we made this morning around the battery cooling plates is a great example of that. We're leveraging product foundational know-how with cooler applications in the world of combustion. We are leveraging processes, know-how around brazing around leakage control from our proving technology into the battery cooling plate. So this is a great example of losing foundational know-how to create a new organically developed product for the EV world.

Frederic Lissalde:

John, we are approaching breakeven. Is it end of '23? Is it beginning '24? I mean it's tough to say. But it is absolutely clear that now the turning point both from a revenue and a path to breakeven, that's absolutely pretty visible.

Luke Junk:

Fred or Kevin, it'd be great to just get your perspective on what you're seeing industry-wide in terms of the push and pull between 400-volt and 800-volt architectures. Do you think the consensus, if you will, is moving more towards 800-volt? And just curious with what happened with the customer award that you mentioned today? Does that animate this industry-wide dynamic at all?

Luke Junk:

Good. Appreciate that. And then for my follow-up, I was just hoping you could comment on the Wolfspeed partnership that you announced in November, specifically around your ability compete incrementally and ensure supply for and after that partnership? And most importantly, to what extent you think your supply chain position now could be advantaged versus peers in silicon carbide?

Operator:

And our next question will come from Adam Jonas with Morgan Stanley.

Frederic Lissalde:

Yes. So first, what I would say that, first, in the commercial vehicle side, where we are really active from a battery pack manufacturer standpoint, we see cylindrical as the mainstream. In pass car, where we won that business with a major German OEM, we have different technologies that will be in the marketplace. What we've created here is focused on cylindrical. I've got to comment on the applicability to other technologies. But to answer your question simply on CV, which is cylindrical cooling mainstream and on the different views. Again, different technologies will be hitting the market, and they all have their pros and cons.

Frederic Lissalde:

The only thing that I would add, I mean, those battery cooling plates for those types of battery architecture, are generating a pretty significant market opportunity, and we estimate that market opportunity to be around $3.5 billion in 2028 already. So it's not as significant.

Frederic Lissalde:

No. I would say to the contrary, I see accelerate program, a tremendous focus on management, both sides, OE and Tier 1 to launch. And also, as I mentioned in prior calls, when we book a program a few months after, we're talking about capacity increase. What we see, though, is that also from the customer side, what we see is that they want partner with someone who can be impactful on the east side but also on the foundational side so that we pivot together.

Noah Kaye:

I'll stick with the battery theme for a minute here. So just given BEV is driving the majority of the organic growth outlook for this year, you mentioned battery is a significant contributor this quarter. And then you also called out higher growth expectations at Akasol, I guess, over the medium term? And just help us understand what's driving your increased expectations for your own battery business? Is it just higher sell-through on the commercial EV side? Or are you picking up share gains in new platforms?

Noah Kaye:

Okay. And then just a follow-up. I'm curious how much of your 2023 CapEx might be allocated to battery manufacturing in the U.S. And how the 45x production tax price that might benefit you if you're making any investments.

Noah Kaye:

Just waiting for treasury guidance to get full clarification?

Operator:

We have time for one final question, and that question comes from Mark Delaney with Goldman Sachs.

Frederic Lissalde:

The semiconductor availability is still alive, unfortunately. And I would say, to answer your question, it's more capped from a supply availability standpoint and from a demand standpoint in 2023.

Frederic Lissalde:

No, we've obviously talk to almost all our customers, and they understand. And we're actually happy to see those two strong companies being able to execute their own respective strategy and be happy with all with the announced spin-off. There's no noise from that are nil.

Operator:

That does conclude the BorgWarner 2022 fourth quarter results conference call. You may now disconnect.

Operator:

Good morning. My name is Shelby, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2022 Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Frederic Lissalde:

Thank you, Pat, and good day, everyone. We're pleased to share our results for the third quarter 2022, and provide an overall company update, starting on slide five. I continue to be impressed with the strength of our revenue relative to the overall industry; with about $4.1 billion in sales, we were up over 29% organically. This is approximately 7% better than the year-over-year growth in industry production. This outperformance was in part supported by the execution of the pricing actions with our customers around the world. From a margin perspective, our performance was very strong in the quarter, and also benefited from our customer pricing. While navigating the near-term industry environment, we continued to take steps to drive our long-term positioning during this quarter. Year-to-date, we have repurchased $240 million of stock. During the third quarter, we announced the acquisition of the charging business of SSE, in China. And we secured new electrification program awards. Next, on slide six, I would like to discuss the acquisition of the charging business of SSE, which we announced last month. SSE will add a China presence to our existing European and North American footprint. So, we have now established global charging capability upon which to build. The SSE acquisition is expected to close in early 2023, so there will be no revenue impact in 2022. However, we now expect our total DC fast charging-related annual revenue to be in a range of $225 million to $275 million by 2025. Our charging strategy can be summarized in four points. One, our initial focus will be on high-value DC fast charging hardware enabling software and services. Two, our objective is to establish product leadership and competitiveness in this category. We will improve the chargers' quality that is key to enabling electric mobility. Also, over 50% of the different material in a DC fast charger is in components where BorgWarner has existing expertise and global scale. Three, we plan to leverage BorgWarner's regional sales capabilities and government interaction. And four, we want to explore potential sales synergies with our CV customers, and especially the customers buying our battery packs. As we look ahead, we believe you will see further success as we continue to strengthen our capabilities in the charging area. Now, let's look at some new electrification awards, on slide seven. First, BorgWarner will supply its integrated drive module to a leading Chinese automotive manufacturer. This marks the first time that we have supplied our iDM on a hybrid P4. And this is also the first time that this manufacturer has awarded this system to an external supplier. Importantly, this iDM is substantially similar to the iDM used in future EV-specific application which will drive additional scale benefits for this product. Second, BorgWarner will supply electric motors for the E-Axles of a European commercial vehicle OEM. This E-Axel is designed to equip new electric light commercial trucks ranging up to 7.5 tons. Production is expected to begin in early 2023. It will use our very modular HVH250 motors, and we can supply them in various stack length and winding configuration, either as fully assembled motors or as rotor/stator assemblies. Lastly, BorgWarner has been granted a production increase supply its 800 volt silicon carbide inventors for a premium European OEM. The initial order has now been significantly increased. The suitability of our product has been further endorsed by this uplift. Our power loss reducing silicon carbide inverter technology is helping our customer reach its strategic goals of a high-energy efficient drive train with exceptional electric driving range. Importantly, the increase of volumes to previously awarded programs is more and more becoming the new normal for many of our EV products. As you can see, we have made progress on key aspects of our Charging Forward strategy. So, let's look at what this means in the progress report, on slide eight, starting first with organic electric vehicle revenue growth. With the awards secured as of this goal, we now have electric vehicle programs that we believe will account for about $3.1 billion of booked revenue in 2025. Turning to M&A, we have now completed or announced four acquisitions since the start of Charging Forward, AKASOL, Santroll, Rhombus, and SSE. Based on our due diligence, we believe those businesses will generate $900 million of additional EV-related revenue in 2025. We're not done here though. We expect to take additional M&A steps and are actively engaged with several potential targets which could enhance various part of our EV portfolio. So, we are already on track to achieve about $4 billion of electric vehicle revenue by 2025 based on new business awards and actions announced to date. This is a great achievement by the BorgWarner teams, and a significant milestone for the company. And we believe it puts us well on our way towards our $4.5 billion EV revenue target for 2025. So, let me summarize our third quarter results and our outlook. Overall, our third quarter performance was strong. We delivered strong organic growth. We also made key progress in the quarter on the pricing actions with multiple customers. As Kevin will detail shortly, we have increased the low-end of our full-year 2022 outlook for both organic growth and margins based on our performance year-to-date, and our full-year EPS guide has also increased. Looking beyond this year, I'm very proud of the steady progress on Charging Forward, and extremely excited that we're now on track to achieve $4 billion in pure electric vehicle revenue by 2025. It is clear to me that our EV business is accelerating, but I expect more to come. We intend to carry on booking more new business across our vast portfolio. We expect to utilize our strong cash generation to acquire great assets, to become even strong as the world continues to accelerate towards electrification. And I look forward to sharing with you additional progress in the future. With that, let me turn the call over to Kevin.

Patrick Nolan:

Thank you, Kevin. Shelby, we are ready to open it up for questions.

John Murphy:

Good morning, guys, and thanks for the time this morning. A first question just around what's going on with customers on recoveries and settlements, and pricing, which is all kind of being put together in the same basket in discussions often from suppliers and automakers. But I'm just curious, as you're going through the process of getting recoveries, is some of this one-time in nature or do you think there's kind of a little bit of a paradigm shift here in what's going on with pricing with some of your customers or pass-throughs in the indexing? I'm just trying to understand if this is true-ups or is this a change in attitude going forward? And I think we've heard from some of the automakers, they didn't realize how much the volatility was impacting the suppliers, which is intriguing because they're in the middle of it. But they -- and some of this stuff was a result of making up for some of the inefficiencies around volatility. And then as schedules normalize, maybe these recoveries might not be as great going forward. So, what is your take on this?

Kevin Nowlan:

And maybe, John, I'll just jump in and add on the one-time nature of certain elements of recoveries that we generated in the quarter. Included in that 10.8% margin that we posted was about a 40 basis point margin benefit arising from retroactive pricing recoveries partially offset by retroactive supplier costs. So, there was a little bit of a tailwind in the quarter, about 40 basis points coming from that in our margin.

Kevin Nowlan:

That's the net of the two.

Frederic Lissalde:

Yes, John. First, I would say that I'm very proud at where we are, 18 months into Charging Forward we're already 45% on our way into a five-year plan, so very proud of that. From an M&A perspective, what we are focusing on is building capabilities, product leadership, and scale from grid to wheel in this, that's the target. And so, we're not chasing a number, we're chasing that type of mindset really.

Operator:

Your next question comes from Noah Kaye with Oppenheimer.

Kevin Nowlan:

Yes, I'll start. As it relates to 2023, as we look at 2022 and the recoveries and the costs that we've been incurring, if -- we don't have an expectation that we're going to ultimately fully offset all the costs that come into the P&L. We've been negotiating recoveries to defer a portion of those cost increases, a substantial portion, but not entirely. So, we're bearing some of that cost. So, as you look ahead to 2023, I wouldn't necessarily look there -- at there being a tailwind for our margin because we don't ultimately expect to offset all the cost increase that we're incurring in 2022.

Kevin Nowlan:

Yes, I mean to the extent that those -- that the inflationary impacts continue as we head into 2023, and that pricing needs to stay in place to defray the continued inflationary costs, if that's where it goes, then we would expect to continue to generate that top line benefit within our revenue. If you just take a step back, if you look at our outgrowth for the year, we're delivering about 9% outgrowth underlying our guidance, a little bit north of 9%. And just under 4% of that is coming from these -- the customer pricing recoveries associated with material inflation costs, which means then we have five points or so of outgrowth coming from everything else. But that's the way to think about what's happening in 2022. And then you can make assumptions about how you expect the inflationary environment to play out in '23, and how that nearly 4% pricing would carry over.

Kevin Nowlan:

They have. I think, last quarter, we were expecting that the contribution to our outgrowth from the pricing recoveries was closer to 3%. I think now we're suggesting in our guidance that the full-year impact of those pricing recoveries is a little bit under 4%. And that's part of the reason that you see in my remarks, that the net impact that we're now expect on a year from material cost inflation is down from our prior guide, it's $110 million to $120 million, which is a $35 million improvement from what we guided to last quarter. And it's being driven by improved customer pricing actions.

Frederic Lissalde:

Right. It's very active. We are engaged with a certain number of companies as targets, still focusing on the same things, again scale on products from grid to wheel, product leadership which -- and I mean by that, essentially, around efficiency of moving electrons across that grid to wheel, and potentially new products too in the field of EV. So, it's pretty active.

Operator:

Your next question comes from Colin Langan with Wells Fargo.

Kevin Nowlan:

Well, I think it depends when you look at the guide. I mean, if you look at the top end of our guide, one of the things to keep in mind is we took industry production down, and so that has an impact on organic growth in the high end of our guidance range. And then at the low end of our guidance range, as you look at Q4, that it's actually not being offset, it's really flowing through that $35 million benefit, which is why we raised the bottom end from 9.8% to 10%.

Kevin Nowlan:

Yes, sequentially going into Q4, we do have an almost $90 million FX headwind Q3 to Q4. So, that is a big piece of what's impacting revenue. And then the range of outlook that we have going from basically with underlying our $15.4 billion to $15.7 billion revenue guide is at the lower end and at the midpoint some pressure on organic growth. Sequentially that is.

Kevin Nowlan:

We didn't break that out in terms of Q3 and Q4. But because of the nature of some the retroactive recoveries on a net basis that we generated in Q3, it really mitigated the impact on Q3 relative to the other quarters that we have seen. So, in Q3 we had a negative $8 million impact. I think as we looked at Q4, it's on a year-over-year basis a little bit larger because we don't expect the same size of retroactive-related benefits of what we got in Q3.

Operator:

Your next question comes from Chris McNally with Evercore.

Frederic Lissalde:

Chris, I think the team has done a formidable job right after the closing of the Delphi transaction to turn this business around. Should look back the fuel system margins that we took the business at and what it is now, it's been pretty good both on the fuel system side and aftermarket as well.

Kevin Nowlan:

Yes, I mean I think it's hard to compare on quarter-to-quarter this year because there has been such volatility. Q2 obviously we were pretty significantly impacted by the combination of revenue being relatively low as well as material cost inflation and the recoveries haven't entirely been kicking in yet. As you go to Q3, you see obviously we delivered over $4 billion of revenue in the quarter and a strong level of customer recoveries. And so, you are seeing a lot of swings quarter to quarter right now in this volatile environment. And that's really pushing through the segments as well. So, I think that's why you look in Q2 going to Q3 you saw air management up quite a bit. You saw fuel systems up quite a bit as well. And I think it's really function of what we are seeing from both the revenue and cost recovery perspective.

Frederic Lissalde:

So, the way we compute those EV wins is we look at the individual businesses, the volume that we are booking the business at. We sometime apply some market intelligence adjustments and that's how we are monitoring the 2025 organic revenue bookings. As far as your second question around Europe, I would say overall EV is accelerating. And we can see that in the marketplace. We can see that with the intensity with which we are discussing with our customers and we can see that with our business too. And that also applies for Europe, and very happy to see our growth in EV being across the three continents and also across a pretty sizable product portfolio.

Operator:

Your next question comes from Luke Junk with Baird.

Frederic Lissalde:

Yes, it is. I won't quantify that. But it's sizable and I would say that this is not a one-off. There is a lot of discussions with uplifting volumes. And I would say that, one thing that it's important is that the scale that we have in electronics and in power electronics, in both purchasing and manufacturing, electronics and power electronics, allows us to offer our customers specific supply chains that are not are not intertwined. And so and so, I think this is a very, very good success for us. It enforces the fact that we have great products, great efficiency, and also that resiliency of our supply chain is something that our customers have trust in.

Frederic Lissalde:

Yes, no, for sure our motors can go above seven and a half tons. And this came from the customer's specification on all this can go much higher than that. And yes, the answer to your second question is absolutely yes. Scale matters in CV for product leadership, but also competitiveness. This is a strategy that has been applied for one or for many, many years, where we have numerous products that cut across fast car, and commercial vehicle. We learn from both segments, and we can offer our commerce commercial vehicle customers, products that one fit for their function, but also our competitive because we have that scale.

Frederic Lissalde:

Thank you.

Gavin Kennedy:

Hi, team. This is Gavin Kennedy on for David Kelley. First question, can you just remind us of your disposition strategy? I believe prior expectations were for $3.5 billion in targeted dispositions by 2025?

Gavin Kennedy:

Got it? That makes sense. And then as a follow up switching gears, you raise your DC fast charging expectations to $225 million to $275 million by 2025, which is good to see. Can you give us any commentary on margins today, and expectations for margins going forward as these charging businesses scale? Thank you.

Gavin Kennedy:

Great. Thanks, everyone.

James Picariello:

I guess I wanted to ask about AKASOL noted as a growth driver in Europe. And while we first ask about the revenue trajectory, maybe just any color relative to the targets that you laid out for AKASOL then also as it relates to IRA in the battery, the battery pack assembly credit, is there an opportunity for AKASOL to benefit at least from the 10 kilowatt hour, 10 megawatt per kilowatt hour portion of that subsidy in the U.S.?

Kevin Nowlan:

Yes, I mean, we think there's a real opportunity for us to benefit from the IRA as we continue to invest to increase our capacity and manufacturing capability in the U.S. So, we'll continue to look at the opportunities afforded by the Inflation Reduction Act and see what opportunities are afforded to us. But we think there's a real opportunity there.

Kevin Nowlan:

Yes, there is one facility in the U.S. right now in Michigan. And we're looking at extending the U.S. footprint, actually, as we speak.

Frederic Lissalde:

I'm not sure I have that granularity for you, James, at this point. Maybe Pat can follow-up with you offline? I don't know if that's going right for the Chinese country.

Operator:

Your next question comes from Emmanuel Rosner with Deutsche Bank.

Kevin Nowlan:

Were you saying both outgrowth and margin, Emmanuel, is that what you said or just -- [multiple speakers]…

Kevin Nowlan:

Revenue and margin going Q3 to Q4, I think as you look -- let me start with revenue. As you go from Q3 to Q4 and you look at the range, the $300 million range we're providing on revenue. At the upper-end of that range we have -- you see revenue a little bit down, and that's really driven entirely by foreign exchange, it's about a $90 million headwind going sequentially from Q3 to Q4. If you look at the low end of the range, we're still assuming about that $90 million foreign exchange related headwind, but then there's about $280 million sequential headwind in organic growth. So, that's the way to think about revenue going Q3 to Q4. When you look at margin, you've got to start by looking at Q3, that 10.8%. And remember my comments earlier, there's about 40 basis points of that margin coming from the net benefit of retroactive customer pricing recoveries net of the retroactive supplier cost increases. So, that's about a 40 basis point tailwind in Q3. So, as you then adjust Q3 and look ahead to Q4, say Q4 at the high end of our guide is relatively flat, maybe slightly up from that adjusted level. And if you look at the low end of our guide, which is around 9.5% or so in Q4, it's really jumping off that adjusted Q3 level, and then recognizing that we have downside conversion on that, roughly, $280 million organic decline sequentially. And that's how you really get to the math of it.

Kevin Nowlan:

I'm sorry the -- that what's really driving the sequential is the production assumptions that are underlying the guide. And we saw at the low end of the range, you can see that production is down sequentially going from Q3 to Q4.

Kevin Nowlan:

Yes, so if you're looking at like IHS as an example, our Q4, at the low end of the range, is almost a million units below IHS from a light vehicle perspective, globally.

Kevin Nowlan:

Yes, I mean you can obviously see we've been deploying cash really for -- in a couple different ways over the course of 2022. We've been executing on our acquisition strategy, as we've communicated, as part of Charging Forward with the deals that we've done to date, this year. And we've also been repurchasing stock as well, $100 million in the quarter, which means it's $240 million year-to-date. And so, we've been pleased with deploying cash to support both of those objectives. While we continue to assess the right moments to be opportunistic in buying back our stock, I'd say, as you look ahead, I want to continue to emphasis what we've been emphasizing in prior quarters, that investing in attractive electrification opportunities, including M&A, is really the near-term priority for our uses of capital. That's what we're going to focus it as a priority.

Operator:

We have time for one final question, and that question comes from Joe Spak with RBC Capital Markets.

Frederic Lissalde:

Yes, Joe, first, the expansion in the U.S. is definitely driven by programs secured with the customers that we've -- that the customers that we've had when we acquired AKASOL, plus new customers that we've announced over the past quarters. Kevin, do you want to take this?

Joe Spak:

Would you consider inverters for solar applications or it's sort of a different competency?

Joe Spak:

Okay. And then, I guess, finally, you've talked about the sort of overall enterprise-level R&D and highlight, I guess, some of the changes there. I was wondering though if -- I mean, it seems to me, but correct me if I'm wrong, that like that sort of predominantly centered in that E-Propulsion & Drivetrain segment. And I was wondering if you could give us a sense of like how much of a basis point drag has that additional or step-up investment weighed specifically in that segment?

Joe Spak:

And that R&D, Kevin, is really -- it's sort of engineering ahead of launch or is it sort of some more like truly like research-type for future product, like how should we think about how quickly you guys start to get a return on that investment?

Joe Spak:

Okay, thank you so much.

Operator:

That does conclude the BorgWarner 2022 Third Quarter Results Conference Call. You may now disconnect.

Operator:

Good morning. My name is Chelsea, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2022 Second Quarter Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Frederic Lissalde:

Thank you, Pat, and good day, everyone. We're pleased to share our results for the second quarter 2022 and provide an overall company update, starting on Slide 5. I continue to be impressed with the strength of our revenue relative to the overall industry. With approximately $3.8 billion in sales, we were up about 7% organically despite global production being down slightly and we outperformed in North America and Europe. From a margin perspective, our performance was negatively impacted by a planned increase in eProducts R&D investment, net material headwinds and sudden production shutdowns in China during this quarter. That said, we were able to partially mitigate these impacts through overall cost performance and progress on executing customer pricing actions with a number of key customers. You will see that our guidance implies a sequential improvement in margin into the second half of 2022, which is driven by volume improvements and our expectation of continued success in executing our customer pricing actions. We are pleased with the progress we made in Q2 on this front. However, there are still some other ongoing customer discussions that we expect to resolve in the back half of the year. We expect that the successful execution of these actions will position our financials more strongly heading into 2023. While navigating the near-term industry environment, we also took step to drive our long-term positioning during the quarter. First, we completed the acquisition of Rhombus Energy Solutions. In addition to deploying capital to fund our M&A investment, we opportunistically repurchased $100 million of stock. And lastly, we secured multiple new electrification program awards. Next, I would like to highlight our recent ESG report on Slide 6. In June, we released our 2022 Sustainability Report called Charging Forward Together. I am proud of the work of BorgWarner employees around the globe, delivering on our vision of a clean, energy-efficient world and embodying our beliefs of inclusion, integrity, excellence, responsibility and collaboration. And this comes across in the report. Together, we are accelerating the world's transition to eMobility by empowering everyone to drive sustainably leave -- by leaving cleaner, healthier and safer lives. Our Charging Forward target to generate 45% of our revenue from electric vehicles by 2030 is consistent with our environmental goals. We remain committed to cover neutrality in Scopes 1 and 2 by 2035. In addition, we have now introduced a target to reduce our greenhouse gas emissions by 85% by 2030. We have formalized our commitment to diversity, equity and inclusion with measurable targets. We continue to advance towards our vision and build our future each day with the industry's top talent. Our employees are changing the world's mobility. I invite you to read more in our 2022 Sustainability Report on our website and join us on this journey. Next, I would like to highlight our eProducts portfolio for hybrids on Slide 7. Over the last quarter, we've been asked about the amount of revenue we were generating from these products on advanced hybrids. And as you can see on this slide, it's actually quite sizable. We have a wide range of eHybrid products that are helping our customers bridge to EVs. To name a few, these include inductors, motors, advanced and efficient drive modules and high-voltage cooling heaters. The hybrid products help provide the bridge to EVs for many OEMs by pairing efficient gasoline engines with electric drivetrains. In many instances, and as I have mentioned before several times, the technical profiles of these products are very similar to the same eProducts used in a full electric vehicle. This is what allows us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicle. As you can see from the chart, we expect our eHybrid sales to be close to $1.1 billion by 2025. And this does not include our highly efficient combustion product that will also be used on many of these same hybrid vehicles. So this is a substantial revenue opportunity for BorgWarner and one that really reinforces our product leadership in electrification, which goes beyond pure battery electric vehicles. Now let's look at some pure BEV awards on Slide 8. First, I'm happy to announce that we have secured 2 additional high-voltage coolant heater programs. One is for global OEM and the other is for an emerging electric vehicle brands in China. By offering consistent temperature distribution inside the battery pack and itself, BorgWarner's high-voltage coolant heaters can be used for improving battery energy performance. They also allow comfortable cabin temperature to be generated in a short time, improving passenger experience. This is a great internally developed product success story at BorgWarner and one where we've quickly established product leadership. Second, BorgWarner has been selected to deliver battery systems for a European commercial vehicle OEM. This battery system will be utilized in the company's first range of heavy-duty electric trucks expected to announce in 2024. For this exciting new project, our customer will benefit from the latest generation of our ultra-high energy battery system which provides a 50% increase in energy density over its predecessor. This upgrade increases vehicle range significantly, making it a great solution for long-distance electrified commercial transportation. Lastly, I'm excited to share that the first units of the new BorgWarner fast-charging station, Iperion-120, have been installed in Italy. We've been working on the organic development of charging capabilities at BorgWarner since 2017. And I'm really pleased to see our investments in this space starting to bear fruit. We will look to accelerate our success in stationary charging with some inorganic investments as well which I will discuss on the next slide. This quarter's award activity once again highlighted a wide range of products and our grid 2-wheel capabilities. Next, on Slide 9, I would like to discuss the acquisition of Rhombus Energy Solutions, which we announced this morning. We plan to accelerate charging business with particular focus on high-value DC fast-challenging hardware and enabling software. We believe that we can leverage the local knowledge and footprint of Rhombus to complement our existing BorgWarner charging capability to accelerate organic growth. Specifically, Rhombus will add North America [indiscernible] we plan to leverage BorgWarner synergies across product quality, engineering, supply chain, manufacturing and global sales. We also see potential synergies with battery system customers. In terms of revenue, we expect Rhombus to add approximately $10 million to our 2022 revenue over the next 2 quarters. We expect our combined DC fast-charging business to approach $175 million to $200 million in revenue by 2025. As a supplier to the auto and commercial vehicle market, we are not only delivering innovative products for electric drivetrain but we also care about supporting certain key elements of the infrastructure for electric mobility, especially charging. And as we look ahead, we believe you will see further success as we continue to strengthen our capabilities in this area. As you can see, we've made progress on key aspects of our Charging Forward strategy. So let's look at what this means in the progress report on Slide 10. Starting first with organic electric vehicle revenue growth. With the awards secured as of this call, we now have electric vehicle programs that we believe account for about $2.9 billion of booked revenue in 2025. This is a great achievement by the BorgWarner teams. Turning to M&A. We have now completed 3 acquisitions since the start of Charging Forward

Patrick Nolan:

Thank you, Kevin. Chelsea, we're ready to open up for questions.

John Murphy:

Just wanted to ask a first question on Slide 10. Fred, as you look at this, you're outperforming on organic EV sales and not yet underperforming on the M&A. But as you look at these 2 bars together, could you consider, if you keep outperforming on organic that you might not need to do the M&A that you have targeted here and you look at this as sort of a total target as opposed to one that's specifically split between organic and M&A?

John Murphy:

Okay. If I could ask a follow-up just on the pricing and commercial settlements that you're getting from your customers to help out with cost inflation. I'm just curious how those are being structured because we're looking at what might be peak cost inflation on raws and other input costs and the automakers are playing ball right now. But if we saw some easing in this inflation or God forbid, an actual reversal. Would that benefit go to them the way things are being structured right now? Or would you be able to capture some of that benefit as spreads would open up again?

John Murphy:

So it does sound like there could be a period where if raws actually reversed as volumes are going up, you may actually be able to capture it for some period of time, and there could be a real upward pressure on margins for a period of time. Is that a fair statement that there is some lag that would go on there?

Operator:

Our next question will come from Emmanuel Rosner with Deutsche Bank.

Kevin Nowlan:

Yes. I think the right way to think about it big picture, 50,000-foot level, is as you look at the first half versus second half, the material cost headwinds that we're expecting kind of on a year-over-year basis when you look at both the commodity side of the equation and the other inflationary costs coming through from our suppliers and the recoveries we're getting, it's somewhat of a push first half to second half in terms of the total magnitude on a year-over-year basis. . And same with eR&D. As you think about going from first half to second half, I think I would put it in a bit similar ZIP code. It's not a substantial headwind going from one half of the year to the next, which means what? It means what's happening is as we continue to drive those pricing recoveries with our customers to mitigate the impact of what we're seeing coming through inflation, it supports our ability to allow the incremental volume to drive conversion. And that's effectively what's happening. Volume is stepping up in the back half of the year. We're getting the incremental conversion on that, that we would ordinarily expect, and we're managing the rest of the cost structure similar to how we're managing the first half of the year.

Kevin Nowlan:

Yes. I think what it implies -- I'm not sure -- I mean it's somewhere in that high single digit to maybe low double-digit ZIP code when you look at the second half of the year, depending if you're at the low end or the high end of our guidance. But on an overall basis, 9% or so for the full year.

Kevin Nowlan:

Yes. I think what we're trying to do is we negotiate the price recoveries with our customers along with the inflationary impacts we're seeing from the supply base is get to the point where we have a stable jump-off point using the second half margin profile as we head into 2023. That's really our objective. And so we go into 2023, and we can have hopefully, a more normalized year from a conversion standpoint. But obviously, we're going to need inflationary pressures to cooperate with us and not create more noise as we head into next year.

David Kelley:

Maybe starting with the Rhombus acquisition, meaningful revenue step up to 2025, obviously, a lot of charging infrastructure to build out here in North America. So can you talk about the visibility to their build pipeline, maybe segments where they're winning and the kind of the makeup of that revenue trajectory?

David Kelley:

Okay. Got it. And then your core charging expertise in Europe is more light vehicles, North America is more in the commercial space. So can you just elaborate on the leverageability of the 2 businesses? Do you expect to go after the light vehicle charging market in North America?

Operator:

Your next question comes from Colin Langan with Wells Fargo.

Frederic Lissalde:

I think going forward, you will see a focus on efficiency for those combustion products and also cost competitiveness, i.e., what we call product leadership at BorgWarner. And if you are a top buyer at one of the key OEMs that you need for suppliers for one commodity in combustion, maybe not. And so similarly, I think you're going to see -- we think you're going to see some consolidation in the supplier panel in some of those key OEMs. And again, I think in this case, competitiveness forefront of product leadership from an efficiency standpoint and scale will be important to support our customers around the globe with maybe fewer suppliers for that combustion market.

Kevin Nowlan:

Yes. And it is. I think it's fair to assume that given the current market environment, our disposition projects right now are temporarily on hold. I mean simply put, and you're alluding to it, Colin, the debt financing markets are not open to finance transactions in this nature right now. But that's okay. We're not a desperate seller here. These are cash flow-generating businesses that we're happy to hold for the time being. And then when the debt financing markets do reopen, which they eventually will, then we'll resume our disposition processes. But I think it's fair to think right now, it's just not practical to execute those transactions. And so again, we'll continue to drive the performance of those businesses and generate the cash flow to continue to support our investment strategies.

Rod Lache:

I believe on the inflation side, you mentioned $60 million in Q1 and then $25 million in Q2. So if I'm understanding this correctly, there's another $65 million in the second half. I just was hoping maybe you can tell me if that's about right and just based on just the pricing negotiations, how much benefit kind of spills over into 2023 on a net basis? And then secondly, you mentioned the e-R&D increase, was the overall R&D up similarly? Or did you reduce the other R&D?

Rod Lache:

Okay. And then just secondly, on the M&A side. Obviously, just in light of the challenges in divestitures, I was hoping you might be able to just pass along just high-level thoughts on scenarios. So what would the impact be on kind of mid-decade targets if you wound up holding on to some of those businesses that you were considering selling instead of divesting of them? And then just lastly, really quickly, any kind of high-level thoughts on what the competitive moats are for Rhombus.

Frederic Lissalde:

What's your question, Rod, on...

Frederic Lissalde:

Okay. Yes, we know that market, we've been in that market organically since quite some time, and we're selling products in Europe. The market is growing dramatically. And in the regions that we're now addressing with BorgWarner footprint, it's around $9 billion in 2030. It's still very fragmented, and I think we shall expect consolidation in this field, too. Again, I think technology is important, and Rhombus is one of the first one with bidirectional charging with U.S.-certified technologies in this field, which we really like. And hopefully help them grow with these products. We feel -- we think that this market will need a strong local presence but also a very strong back office in purchasing in technology, in low-volume manufacturing. We also are very used to low-volume manufacturing with our commercial vehicle products around the world. And we also see quite some pull from our customers related to CV trucks and buses who want to offer complete solutions for their customers and we can be an enabler for them to be able to do that.

Noah Kaye:

Maybe just a follow-up here. I think -- first of all, it's good to see you get deeper into the EV charging space, good growth opportunity. You've already got in-house some very high-quality domain expertise around efficient power conversion, right, and utilizing advanced materials and how electrons going to flow into an EV or an electrified powertrain. And then there's really, as we think about charging kind of the software side of it and the efficient dispatch of the charging at certain points in time and reading signals from the grid. So is what -- from a technology perspective, is what Rhombus brings more the latter or more the former or a combination thereof in terms of augmenting your core competence around power electronics?

Noah Kaye:

Okay. Helpful. And then a financial question, I guess, perhaps for Kevin. What's implied in the free cash flow outlook in terms of working capital in the back half? You guys have been paying your bills pretty timely and receivables and inventories have built here in the first half of the year. So where do you expect that to trend in the back half?

Operator:

Our next question will come from James Picariello with BNP Paribas Exane Research.

Frederic Lissalde:

So today, I would say that it is still very regional. It will still require some regional specificities as far as certification is concerned, as far as sales channel, as far as government contacts are concerned. But when the business ramps up like any businesses related to quite significant electronics and power electronics content, scale will matter and scale always matter. As far as the TAM, I think, Pat, maybe you -- go ahead, Kevin.

James Picariello:

Okay. And then China, the China normalization and ICE programs called out in the quarter, to what extent is this just tied to weaker commercial truck production? Is this a dynamic that's expected to sustain in the back half? And just how are we thinking about China [indiscernible].

Operator:

Our next question comes from Luke Junk with Baird.

Frederic Lissalde:

I think there is a lot of momentum into the EV-related request and request for quotes and quotation globally. What we also see is an accelerated demand for capacity increase on what we have launched and also funny enough, what we have not launched yet, but where there is higher demand in the coming years. Overall, I see only acceleration in the EV booking and request for quotation second half versus first half.

Kevin Nowlan:

Yes. I think generally speaking, if you think about the types of companies we look to acquire, they have -- they look generically like one of 2 companies, either one, a company that has a little bit more mature income statement. Or two, one that's in the infancy of its growth trajectory and still doesn't have much in the way of a P&L. Those businesses that have a more mature income statement are much more exposed to the current market environment and the inflationary environment that we're seeing. And that creates a lot more uncertainty and due diligence about the ability to recover on some of those -- from customers, the pricing inflation issues that, that business is seeing, which sometimes can create a bid-ask spread between a buyer and seller until there's clarity and resolution around those topics. So those types of companies are a little bit harder to transact on in the current environment. And we saw that like we talked about last quarter, where we walked away from a particular transaction, we simply couldn't close the gap on some of those issues. When you look at companies that are earlier in their growth trajectory, they're really focused on developing their technology, driving new business wins that come into the P&L and, say, '24, '25, '26, those are the types of companies that we're more apt to execute on in the near term given the environment. And that's a lot like Santroll, a lot like Rhombus, companies that have more of a profile of that. And on the margin, it's helped by the fact that because of the challenging capital markets, there -- it tends to be it's more limited options for those companies to secure capital to fund their growth objectives, whereas we have the ability to provide that kind of funding. So the strategic capital that we can bring to bear actually gives us a bit of an advantage in working with companies like that in this type of an environment.

Joseph Spak:

Sorry, I just want to go back to charging, which I guess is the theme of the day, but you did have the installation in Italy and now the Rhombus acquisition. And you talked about how this is still a pretty fragmented segment. You talked about the importance of scale. I mean should we expect that this will be -- continue to be an area you look to build capabilities? Or do you think between what you have organically and what you're getting via this acquisition, that's enough to sort of really begin to scale in the 2 theaters, you mentioned North America and Europe? And also maybe if you could add like how much of the $3.7 billion do you expect to come from charging?

Joseph Spak:

Okay. And then secondarily, I'm just curious, Fred, if you could tell us sort of almost in real time what your conversations are like with your -- particularly with your European customers, and everyone's sort of had been concerned about energy shortages may be a little bit lesser than sort of at the peak, but how they are sort of planning for the balance of the year here, how you are preparing? And are you seeing any evidence of maybe moving some production into the third quarter or maybe fewer summer shutdowns to get ahead of what could be a more difficult winter?

Operator:

We have time for one final question, and that question comes from Mark Delaney with Goldman Sachs.

Kevin Nowlan:

Yes. I think at this point, we're -- we haven't really updated that guidance, but I think it's fair to say it's in the same ZIP code as to where we were from a breakeven perspective. But there's a couple of key variables to keep an eye on. One is, as we continue to invest more in eProducts-related R&D that can become a headwind to that near-term breakeven. But on the other hand, as our EV revenue grows like we're seeing now $850 million, our expectation for the full year 2022, that gives us incremental contribution, which is a tailwind. So those are the 2 key variables to keep an eye on and how both of those items grow. But I think directionally, there's no real significant change in our outlook even though we're not going to provide a specific update today.