BorgWarner Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2021

There are 12 speakers on the call.

Operator

Good morning. My name is Jerome, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2021 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

I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan. You may begin your conference.

Speaker 1

Thank you, Jerome. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, forgorno.com, on our homepage 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.

Speaker 1

Please see the Events section of our Investor Relations page of our full list. Before we begin, I need to inform you that during this call, we may make forward looking statements, which involve risks Board and Trustees and uncertainties as detailed in our 10 ks. Our actual results may differ significantly from the matters discussed today. The presentation. During today's presentation, we will highlight certain non GAAP measures in order to provide a clearer picture of how the core business performed And for comparison purposes with prior periods.

Speaker 1

When you hear us say on a comparable basis, that means excluding the impact of FX, When you hear us say organic, that means excluding the impact of FX and net M and A. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. Please note that we posted an earnings call presentation to the IR page of our website.

Speaker 1

We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Speaker 2

Thank you, Pat and good day everyone. First on Slide 5, I'm very proud of our strong performance in the quarter despite the ongoing component supply headwinds. With just under $3,800,000,000 in sales, our 2nd quarter revenue increased over 72% organically With strong incremental margins and free cash flow. As Kevin will discuss, we are increasing our full year guidance the as we believe higher outgrowth and synergies are offsetting commodity and other headwinds. That's for the short term execution.

Speaker 2

Now going forward, I'm very proud of our sustainability strategy highlighted in our report that our team just published. The acquisition of Akasol was completed in early June and I'm very positive about what I see. Great technology, great entrepreneurial spirit and mindset. Welcome Akastel to BorgWarner. And We secured multiple new product awards for electrified vehicles, which I speak about in a few moments.

Speaker 2

Starting with our overarching sustainability topic and our vision to a cleaner and more energy efficient world, I would like to highlight some key takeaways from our global sustainability report called Evolving for All on Slide 6. Evolving for all compiles into one document what is possible when nearly 50,000 people resolve to do the right things. It is a testament to our commitment to create an enterprise that is shaping the future of sustainable mobility. We are accelerating our clean mobility technologies. We're reducing our carbon footprint and are well on our way to achieving our stated goal of carbon neutrality by 2,035.

Speaker 2

The report also includes scope 3 emissions data to illustrate how our products are improving the world in which we all live. We're fostering a diverse and safe workplace and giving back to our communities and our pay equity analysis show's parity results. I'm extremely proud of our sustainability focus. Moving on to another pillar of charging forward, we have completed the takeover offer of Akastor the Board of Directors. Since then, we have increased our ownership stake to approximately 93% through additional share purchases.

Speaker 2

We have informed Akasil of our intention to progress towards the squeeze out process to achieve 100 percent ownership. To put in perspective, we expect Akasol to represent 20% to 25% the M and A portion of our charging forward project announced just 4 months ago. The Akastor also continues to secure additional new business awards. Last month, They announced an agreement to supply their battery systems to a major bus and commercial vehicle manufacturer from Belgium. Alcatel will supply the 2nd and third generation of their high energy battery systems for the customers' new all electric city bus starting in 2021.

Speaker 2

Now let's go to China and look at other recently announced new product awards for electrified vehicles on Slide 8. First, We announced new contracts to supply dual inverters for Great Wall Motor and another major Chinese OEM. The The dual inverters will be features on both hybrid electric vehicles and plug in electric vehicles for these customers. By combining different power electronic technologies into one compact package, our dual inverter provides unrivaled functionality. A single unit can control and drive 2 electric motors while delivering cost and weight reductions.

Speaker 2

These Advanced Inverter Awards showcase not only the product leadership we have in these domains, But also the trust and confidence we have built in our electrified applications with multiple OEMs globally. In addition to their mid term revenue opportunities, advanced hybrid programs such as these allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicles. Also downstream the battery, I would like to highlight another IDM award. The This new 3 in-one has a bigger size and output functionalities than the one already announced a few months ago with Hyundai. This one is also all BorgWarner made mechanical motors, vertically integrated electronics and software.

Speaker 2

We're partnering with a leading luxury new energy vehicle maker in China with SOP in 2023. Designed, developed and manufactured by BorgWarner, this IDM features our electric motor, our gearbox In our integrated power electronics, it operates at 400 volts and has a peak power of 2 50 kilowatts. Now adjacent to the battery packs, I would like to shed some light today on our high voltage coolant heaters on Slide 9. This product line is a great example of a best product developed organically by BorgWarner and now commercialized and manufactured at scale. It helps improve the battery operated range of our customer battery electric vehicles By controlling the battery temperature at an optimal level, while also increasing passenger comfort through the delivery of an ideal interior Climate.

Speaker 2

We recently expanded our existing business with the launch of a new program with Geely. The And as you can see by the chart on the slide, the business is expected to grow rapidly from 600,000 units in 2021 to 4,000,000 units by 2025. That's a 60% CAGR, six-zero. With multiple customer awards, we expect the high voltage coolant heaters to already account for $400,000,000 in revenue By 2025 or to put it in another way, we expect this product to account for close to 10% the of our planned EV revenue by 2025 under charging forward. This product line does not get as much attention as the more high profile product lines like IDM, inverters or motors, but still contributes meaningfully to our EV content.

Speaker 2

So let me summarize our Q2 results and our outlook. The Q2 results were strong, particularly considering the supply challenges currently impacting the industry. We delivered strong top line growth and we believe we're tracking well towards our full year margin and free cash flow objectives. The We're increasing our full year revenue and adjusted earnings per share guidance. As we look beyond these near term results, Board of Directors.

Speaker 2

I'm extremely excited

Speaker 3

about our long term positioning.

Speaker 2

We are continuing to secure new business for electric vehicles to support our long term revenue targets and I'm pleased to see awards both on the components and on a system level. BorgWarner continues to develop clean and energy efficient solutions like our IDM family of products. And lastly, we're focusing on a disciplined inorganic investment approach like the acquisition of Akastor the With that, I'll turn the call over to Kevin.

Speaker 4

Thank you, Fred, and good morning, everyone. The Given the number of financial topics we have to get through this morning, I'm going to dive right into the details. So let's turn to Slide 10. As we look at our year over year revenue walk for Q2, we begin with pro form a 2020 revenue of just under $2,100,000,000 which includes $628,000,000 of revenue from Delphi Technologies. Foreign currencies increased revenue by about 11% from a year ago.

Speaker 4

The Then our organic growth year over year was more than 72% compared to a 64% increase in weighted average market production. The significant year over year changes in industry production and the varying levels of supply disruptions among our customers Make it difficult to draw conclusions from the quarterly outgrowth figures. Nonetheless, we were pleased with our performance in the quarter. Looking at our regional performance. In Europe, we outperformed by double digits, driven by growth in small gasoline turbochargers, VCT and fuel injection.

Speaker 4

In China, we also outperformed the market by double digits, driven by growth in DCT, all wheel drive and fuel injection. And in North America, we underperformed the market primarily due to customer exposure. The The sum of all this was just under $3,800,000,000 of revenue in Q2.

Speaker 5

Now let's look at our earnings and

Speaker 4

cash flow performance on Slide 11. Our 2nd quarter the Board of Directors. Adjusted operating income was $401,000,000 compared to a pro form a loss of $52,000,000 in the Q2 of 2020. The Excluding the impact of foreign exchange, adjusted operating income increased $423,000,000 on about $1,500,000,000 of higher sales. That translates to strong incremental margin of over 28%, driven by conversion on higher volumes, restructuring savings and Delphi related synergies in excess of purchase price amortization.

Speaker 4

We were particularly pleased with this performance Q2 given elevated supplier and commodity costs that we experienced during the quarter. Moving on to cash flow. We're proud of the fact that we generated $133,000,000 of positive free cash flow during the Q2, which was achieved despite an investment in inventory to help us better manage the challenging production environment. Let's now turn to Slide 12, where you can see our perspective on global industry the production for 2021. As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 8.5% to 11%, which is down from our previous assumption of a 9% to 12% increase.

Speaker 4

This reduction from our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production, which is reducing our expectations for North American and European Industry Growth. We do expect light vehicle industry production to improve the Q3 of 2019. Sequentially in the 3rd and 4th quarters relative to Q2 as we believe the impact of the semiconductor shortages will be lower in second half of the year than what we saw last quarter. However, given lower commercial vehicle production in the second half And the varying impact of ongoing supply constraints on our mix of customers, we're not expecting Q3 and Q4 revenues to return to Q1 levels. Now let's talk about our full year financial outlook on Slide 13.

Speaker 4

You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $965,000,000 to $1,200,000,000 Next, we expect to drive market outgrowth for the full year of approximately 500 to 600 basis points, Which is a meaningful step up from our previous guidance of 300 to 500 basis points. Based on these assumptions, We expect our 2021 organic revenue to increase about 14% to 17% relative to 2020 pro form a revenue. The Then adding a $520,000,000 benefit from stronger foreign currencies and $75,000,000 of revenue related to the acquisition of Akasol, the We're projecting total 2021 revenue to be in the range of $15,200,000,000 to $15,600,000,000 From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.2% to 10.5% compared to a pro form a 2020 margin of 8.3%. This contemplates the business delivering full year incrementals in the low 20% range Before the impact of Delphi related cost synergies and purchase price accounting. From a cost synergy perspective, Our margin guidance includes $100,000,000 to $105,000,000 of incremental benefit in 2021, which is higher than our previous guidance of $70,000,000 to $80,000,000 the As I'll discuss in more detail momentarily, the cost synergies are simply being realized faster than we previously expected.

Speaker 4

The Partially offsetting this favorability are 2 things. First, the acquisition of Akasol is expected to reduce full year margins by 10 basis points. And second, we're anticipating a net negative impact from commodities in the range of $70,000,000 to $90,000,000 which is worse than we previously expected. But even with these two headwinds, We're holding our margin roughly in line with our prior guidance. Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $4.15 to $4.40 per diluted share, which is an increase from our prior guidance of $4 to $4.35 per diluted share.

Speaker 4

And finally, we continue to expect that we'll deliver free cash flow in the $800,000,000 to $900,000,000 range for the full year. This is flat with our prior guidance as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income. This would still represent record free cash flow generation for the company. That's our 2021 outlook. Let's turn to Slide 14 for an update on the financial impact of the Delphi Technologies acquisition.

Speaker 4

The As I alluded to earlier, the cost synergies related to the transaction are being realized more quickly than we previously expected. The The primary driver is faster execution of headcount reductions related to our planned SG and A cost synergies. In fact, at this point, we've completed more than 95% of the headcount reductions associated with our synergy plan. The As a result, we now expect 2021 cost synergies to be $100,000,000 to $105,000,000 which means that cumulatively, We expect to have achieved synergies of $115,000,000 to $120,000,000 by the end of the year. But to be clear, this is an acceleration of the timing of our synergies as opposed to an overall increase in our performance.

Speaker 4

Therefore, our total cost synergy target of $175,000,000 In addition to higher cost synergies, Delphi's revenue contribution in 2021 is also tracking ahead of our original expectations. As a result of these two factors, the accretion the 2020 one adjusted EPS from the Delphi acquisition is now expected to be positive $0.20 to $0.30 the versus our expectation at closing of a dilutive impact of approximately $0.15 This is a great result And a testament to the work being done by the integration teams across the company. And as we look beyond 2021, It's important to note that the revenue synergies associated with the transaction are also progressing very well. We're pleased with the systems awards that we've generated through combining our electric vehicle capabilities, including the IDM award in China that Fred mentioned earlier. We've been able to secure these and other components awards as a result of leveraging Delphi's technology leadership Boardwalk with Boardwalkarner's commercial relationships, operational capabilities and financial strength.

Speaker 4

The Let's turn to Slide 15 for a summary of the financial impact of the Acasol acquisition. As you can see, We expect ACOSAULT to contribute 2021 sales of $75,000,000 to BorgWarner's second half results. The Then we would expect those sales to grow significantly over the next few years, with 2024 sales still expected to be in the $500,000,000 range. The This growth is supported by Actasol's previously reported backlog. From an EPS perspective, We expect Acasol to have a roughly breakeven impact on the total company in 2021, excluding the impact of purchase price amortization.

Speaker 4

Then as the business grows sequentially each year, we do expect to see conversion on the incremental revenue, which we expect to drive accretion of the $0.12 by 2024 also excluding the impact of purchase price amortization. We're pleased with the transaction And the medium to long term benefits it's expected to deliver. So let me summarize my financial remarks. Overall, we had another solid quarter despite the industry challenges. We meaningfully outperformed the market, delivered a 10.7 percent operating margin and generated $133,000,000 of free cash flow.

Speaker 4

And then coming off that Q2 performance, we've increased our full year revenue and earnings guidance even while moderating our industry production assumptions And considering higher commodity costs. Looking beyond our near term results, we believe the faster accretion from the Delphi Technologies acquisition And the completion of the Akasol acquisition illustrate our ability to execute the inorganic actions that are part of our Project Charging Forward initiative. The The electrification wins discussed by Fred also highlight some of our progress toward the organic portion of our plan. Ultimately, it's the pillars of near term execution, securing future profitable growth and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders. With that, I'd like to turn the call back over to Pat.

Speaker 1

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

Operator

To Your first question comes from Chris McNally with Evercore. Your line is open.

Speaker 6

Great. Thanks so much everyone. Wanted to maybe talk a little bit about the second half assumption. Just based on your guidance, you had a very strong first half, dollars 850,000,000 of EBITDA. The guidance in the second half implies something lower in the $750,000,000 to $800,000,000 range, which would obviously be the down sequentially, but also down year over year versus the pro form a that you provided on up revenue.

Speaker 6

So if you could just provide some of the puts and takes there. That would be really helpful.

Speaker 4

Yes. I think maybe to make it simpler, why don't I speak relative to the midpoint of the range. The But as you think first half to second half, I think when you exclude the impact of Akasol, which is $75,000,000 Revenue sequentially, first half to second half is down a couple of $100,000,000 So obviously, we have lost conversion on that revenue. But then on top of that, as you're going first half to second half, you've got the net commodity headwinds, which are an incremental $20,000,000 to $40,000,000 in the second half. Our R and D on a net basis is stepping up in the second half, another $25,000,000 to $30,000,000 and those things are being partially offset by about $20,000,000 to $25,000,000 of incremental synergies.

Speaker 4

So that's kind of the walk as you look first half to second half. I think the thing, if you look year over year, if you're talking second half of this year versus our pro form a second half of last year, I think one of the things you have to keep in mind is part of the revenue walk is AKASOL of $75,000,000 And foreign exchange, which is a little bit over $100,000,000 So $200,000,000 of our revenue improvement comes with virtually no margin Because FX converts to basically our operating income and Acasol actually because of purchase price amortization is dilutive this year about $10,000,000 The net is No conversion on that incremental $200,000,000 which means what? It means then on the revenue that's left, there's actually the downside conversion at the midpoint of our guide, Plus those other things I spoke of the commodity costs R and D being up, but synergies being a little bit of an offset. So hopefully that helps.

Speaker 6

The That's great detail. Thanks so much. And then if we go talk to the secular side of the business and you announced several the EV wins in the quarter. Of note, the 3 on high voltage that obviously are of more significant value, the Q Inverters and the 1 IDM. Could you talk about just relative I know you can give a hard number, but the relative size to the wins.

Speaker 6

Are we talking about 100 of 1,000,000 in terms of backlog addition where these are 100,000 per year type vehicles? Or is it something that we expect that a little bit smaller?

Speaker 2

I think the volumes are meaningful. The And what we've seen also is each time we book a business in this field, volume is expectation is going up and up. So those are 2 great programs for us. And from an IDM perspective, as you've seen, it's we're building a modular portfolio. It's a different power output, different power level and so very happy about that and hitting the market with great products.

Speaker 6

The Great. Thanks so much.

Operator

Your next question comes from Luke Jonk with Baird. Your line is open.

Speaker 7

Yes, good morning. First question, I want to ask if there's any additional color that you could share in the scope of the IDM word that you disclosed today. Should we think about this as an award on a single vehicle or could it potentially cut across platform at the customer?

Speaker 2

So right now the IDM is a power level. So Within that power level, it cuts across the vehicles that the customer wants to tailor for that power level. So that's the color I can give you. It starts with the platform and we'll cut across At the 250 kilowatt power level.

Speaker 7

Okay. That's helpful. Thank you. And then bigger picture, one of the focuses here is that you'd highlighted at your Investor Day in March was IDMs in Asia in general. Seeing here 5, 6 months later, you've now booked a couple of these awards and we're still not even a year out from the close of the Delphi deal.

Speaker 7

Is it fair to say that the level of interest in Asia Is consistent with or maybe even a little better than you had anticipated in March?

Speaker 2

It's in line with what we expected. The And this is currently where the music is played the loudest from an EV acceleration standpoint. This is where we're going to gain scale early, very happy about that. And the technologies that we bring the market and the competitiveness that we're bringing to the market with in house transmission motor electronic software is very, very well received.

Operator

Your next question comes from Brian Johnson Barclays. Your line is open.

Speaker 4

Brian, are you there?

Operator

Brian Johnson from Barclays. Your line

Speaker 1

Rome, I think we can go to the next question.

Operator

Okay. Your next question comes from Joseph Spak the RBC Capital Markets. Your line is open.

Speaker 8

Thank you very much. And Thanks for that first half or second half walk. That was helpful. I guess just on the commodities, if I'm following along, it Seems like on a year over year basis, you're talking about another $55 or so 1,000,000 headwind to the back half. I just want to confirm that.

Speaker 8

And also if you could just sort of remind us of your policy here, because I thought over time, You tend to get some recoveries there. So as we begin to think about the bridge into 2022, the Does this sort of headwind remain? Or do you start to get some of those recoveries on the raw materials?

Speaker 4

Yes. I think you've got the number right. As you look at the second the recoveries. Now obviously, there are some timing lags as it relates to recoveries, but the bulk of those recoveries are expected to be in our results the as we progress through the year. And so that number that we're talking about, the 45% to 65% in the back half of the year on a year over year basis is net of the recoveries the Already, but there might be a little bit of a tailwind heading into the Q1 of next year.

Speaker 8

So I mean if we so If these commodity levels hold, then it's fair to assume at an absolute level there's still a headwind in the first half of next year, even if maybe it's mitigated somewhat by some of the recovery timing?

Speaker 4

Yes, a little bit. So certainly, because the The headwinds as we go first half to second half are definitely more negative, call it $20,000,000 to $40,000,000 And as that carries over to the extent the over into Q1 of next year. That would be an incremental headwind on a year over year basis relative to Q1 of this year. But of course, there's lots of moving pieces as we head into the beginning of the year. We know next year in 2023, we got another $55,000,000 to $60,000,000 of synergies to recoup from the Delphi transaction.

Speaker 4

We've got the legacy BorgWarner restructuring actions we announced 18 months ago. And you remember, we said those actions were to mitigate unknown risks. These are the types of risks exactly that was geared toward. Things that were unforeseen at the time and that's another $25 plus 1,000,000 of tailwind next year. The legacy Delphi Restructuring Actions Project Pioneer, which is incremental tailwind next year and then any conversion on our continued outgrowth.

Speaker 4

So There's a lot of puts and takes as we head towards next year, but incrementally if commodity levels held, there would be an incremental headwind heading into next Q1 versus this year's Q1.

Speaker 8

Okay. And then the second question is just, Fred, maybe this is a question we've been getting a lot investors, right. So at your Analyst Day earlier this year, I think you sort of put up a slide that showed you thought 80% of inverters would be Outsourced. It seems like during the quarter, whether it was Renault or Ford or some others, like there's been more and more announcements of the automakers trying to do power electronics themselves. And so it seems like it would seem like maybe that The figure is incrementally more challenged.

Speaker 8

I'm curious whether your view has changed there or is this just a definitional issue, meaning like By in sourcing, you mean like the OEMs actually make it, but in reality, in some of these cases, like the OEMs might help with design, but they won't necessarily build.

Speaker 2

Yes. I think in Inverter, I believe we are in a very, very strong position. And we've already announced more than 1,100,000 units by 2025 in Europe. If you do the math, it's a significant share of the overall European inverter volume for BEST and since then More booking has happened. We don't see too much change.

Speaker 2

I think and it's due to three reasons. We're successful in this field For three reasons. First, it's our product leadership. The different voltage 400, 800, the silicon carbide, we continue to innovate with cost and weight reduction with more efficiencies. 2 is we have scale and I absolutely believe that this continues to be a strength.

Speaker 2

And we are leveraging the whole electronics business that we have. The And last but not least, I think we also have a high degree of vertical integration in house capabilities, integrated circuit development, software, power the Jules and maybe more in the future. I think this is a very competitive business. You have to have the best efficiency at the best cost. You have to have scale.

Speaker 2

I'm very confident that we are the In a very good position to grab a significant portion of what will be outsourced and we're not seeing a change from about 80%

Operator

Your next question comes from Colin O'Lanen with Wells Fargo. Your line is open.

Speaker 9

Great. Thanks for taking my question. You've done a pretty good job here. You keep cutting your sort of production assumption and yet you keep raising your sales guidance. I mean, what is driving that much better than expected growth over market?

Speaker 9

Does mix have anything to do with that with the commercial maybe holding in better?

Speaker 2

So I think we outgrew the market in Q2. We underperformed in North America due to customer exposures and We over performed Europe and China double digit driven pretty much by all products. There is not one product that drives more than the other. Now in Q2, I must admit there was a lot of moving pieces. And we're not looking at our growth Per quarter that is too finite.

Speaker 2

So but we're very happy with the way our top line is evolving this year and very happy to be able to beat and raise in the short term. Also very focused in the long term. We are investing R and D in order to support the programs that have been booked and very happy with where we are both short term on the margin and cash flow and also the activities from the long term booking. And I want to take the example, people focus a lot on downstream the battery. But the example of that high voltage coolant heater, I think it's a great example where BorgWarner can develop in house and really solve a problem of battery electric vehicle.

Speaker 2

Battery electric vehicle required innovation solutions for 2 critical functions that is thermal and cabin heating. And the solution that we gave to the market is taking a lot of traction. The presentation. You won't be surprised we have our own integrated electronics and software and we are leveraging the heating technologies that we have from other BorgWarner product lines. So very happy about where we are both organic and inorganic in the long term.

Speaker 9

Got it. And any color on the commercial market? I kind of thought that was holding in better, but if I look at your guidance from Q1 to Q2, So your outlook is it's getting it actually came down. So did that actually hold up better in the quarter? Does it get a lot worse in the second half now?

Speaker 9

The Because I know that's a pretty high margin business. And I think with the Delphi deal, it's a larger chunk of your business now.

Speaker 4

Yes. I mean, one of the big things is that the China, we would expect to see headwinds as we look at the back half of the year from a year over year production the And that obviously has an impact on us and our overall outlook.

Speaker 9

Okay. And is that help? Okay. So it's the second half getting weaker. Okay.

Speaker 9

Thanks for taking my question.

Speaker 4

Yes. 2nd half is weaker on a year over year basis definitely and China is a big driver of that.

Speaker 9

Got it.

Operator

And your next question comes from Dan Levy with Credit Suisse. Your line is open.

Speaker 5

The Hi, good morning. Thank you for taking the question. Just want to follow-up the on Colin's question there just on the outgrowth. Can you maybe unpack some of the items that you DSAW in the Q2 that drove the outgrowth between the DCT and turbo and GDI. Just maybe a little more color on what exactly was driving that.

Speaker 5

And as we're thinking about, especially in Europe, the push to bev. Is there any shift in where GDI and turbo sits in automakers pushing toward their CO2 targets.

Speaker 2

Yes. And as I mentioned before, we outgrew Europe and China double digit driven by a lot of factors. But you're right, the Gas Turbos, VCTs and GDI in Europe also all wheel drives. And so this is driven by also don't forget that in any hybrid powertrain architecture. You've got a good gasoline engine with turbos and GDI and other elements.

Speaker 2

The And don't forget that hybrid powertrain, especially in Europe, but also in China, and the business that we booked with the dual inverter is a good example. It's ramping up very, very fast. And that is giving us on the e side the scale and launch expertise that are translatable into the world of bev. The And on the combustion side, it just pulls our products that drive efficient combustion engines. So I I think it's that particular reason.

Speaker 2

I don't have the color about how much is turbo versus VCT or GDI or all wheel drive, But I'm pretty sure Pat can follow-up offline with you.

Speaker 5

Okay. And then the line of sight for the remainder of the year as far as the GDI and turbo in Europe. Is that something that it's still playing a role in driving CO2 targets?

Speaker 2

Absolutely, it does. Absolutely, it does. It does the In reducing the CO2 and emissions of combustion engines, It does because it is an enabler of hybrid powertrains. And as you've seen, this is helping carmakers in Europe, especially to meet the CO2 target. So absolutely, it does help.

Speaker 5

The Great. Thanks. And then as a follow-up, I just wanted to follow-up on last quarter's announcement, which we got a little more color in June, the IDM award with Hyundai. The So you have an A segment car here and it's putting in IDM content that's probably if I had to guess it's the $1,000 give or take. And if you can maybe comment on the content.

Speaker 5

But the question is, usually an A segment car is going to be to a much tighter content cost. There's much lower budget for content. So what does that tell us about going into B or C segment platforms. Does that tell you that there is better potential to scale that up to B or C segment? Or is there something unique about an A segment vehicle that make them more likely to approach you on an IDM as opposed to doing it in house.

Speaker 2

The So last quarter, we announced the IDM award on Class A, so small. Small doesn't mean simple, but small. This quarter we're announcing a different type of IDM, the bigger with about twice the output power than the one from Hyundai. And as I mentioned in the last call, we're building IDM modular portfolio. And this is a great example of launching 2 different power level all BorgWarner made in Asia.

Speaker 2

Combined with the IDMs that we are currently producing as an integrator. You see that we are starting seeing a path of integrating with the other motors or even other inverters if the customer wishes to do that. A path for different power levels and different sizes of IDM all board 1MA transmission motor power electronic software and vertically integrated the on the ASICs and so on and a path with components. And as we mentioned In past calls, we're very happy to sell inverters to customers who want to make IDM in house. So you're saying the strategy of developing and commercializing a portfolio of IDMs globally that is seeing daylight.

Speaker 5

The Great. Thank you. Welcome.

Operator

Your next question comes from Noah Kaye Gudupenheimer. Your line is open.

Speaker 6

Thanks. Good morning. Appreciate you taking the questions. I guess first, the congrats on closing Actasol. Just wanted to understand what margins roughly are you assuming for Actasol by 2024 depreciation estimates you provided, excluding amortization.

Speaker 6

And then more strategically, how do you see AKASOL to maintaining competitive differentiation in battery packs over time.

Speaker 4

Yes. With respect to the margin, we're not closing of margin outlook at this point in time, but I think you can probably do some math underlying our EPS and get a sense as to what the pretax the revenue that we're expecting by the year 2024. But at this point, again, not going to disclose any margin profiles other than we think it's going to be a profitable business over time.

Speaker 2

The As far as technology technological edge at Akastor, a few things, Noah. First, the They're currently producing their Gen 2. They're launching their Gen 3 later this year and being able to launch generation and improve efficiency and power density the Regularly is key. Now they're part of soon they'll be fully, fully part of BorgWarner. And you can imagine that we will be working with them and linking them with the battery management system and software that we have currently in production Coming from X Delphi Technologies, we certainly are going to link them also to the high voltage coolant heaters.

Speaker 2

Those elements are heating the coolant for the batteries. And I expect that we're going to find innovation the And products that are going to be generating value for our customers and for BorgWarner going forward.

Speaker 6

The Very helpful. Thanks. And then just around R and D to clarify, the new guide is $725,000,000 of spend that compares to 5% previously. So, A, just to understand, are you actually bumping up R and D levels to the from prior guidance. So is that driven by EV programs?

Speaker 6

Kind of where is the focus? Just help us understand.

Speaker 4

Yes, I'll take that. A couple of things worth noting around the R and D guide. First thing is that when you look at our Q2 results and when you get to go through our 10 Q. You'll see that our net R and D sequentially was down in the Q2 versus the Q1, But it's because we actually had higher customer recoveries from engineering perspective than we had anticipated and then we had in Q1 by about $20,000,000 If you look at our gross R and D going from Q1 to Q2, it was actually up sequentially, but the net was down. And so what that means is that's the We've actually brought down our implied full year R and D from what was about $740,000,000 implicitly at the beginning of the year to about $725,000,000 as our current guide.

Speaker 4

And so that's really being driven by the higher than anticipated customer recoveries that we generated in the Q2. As you look at it as a percent, the reason we gave a dollar guide as opposed to a percentage guide The percentage is coming down. And the reason the percentage in 2021 is coming down is because revenue is going up. So it's not because we're cutting our R and D spend. We had better recoveries, but our R and D spend is actually still $725,000,000 But with revenue coming going up, the R and D as a percent of sales is actually now 4.6% to 4.8%, which just looks like a lower percentage, the It's implying lower spend, but it really isn't the case.

Speaker 4

So as we look to the full year, that's what the $725,000,000 represents about a $15,000,000 reduction, the But really driven by the recoveries. And then as we think ahead to next year and beyond, we continue to expect that we're going to be driving R and D spend in that 5 plus percent range on a go forward basis.

Speaker 1

The Jerome, ready for the next question.

Operator

Your next question comes from David Kelley with Jefferies. Your line is open.

Speaker 6

Hi, guys. This is Gavin Kennedy on for David. Two things on my end. First, You mentioned that North America customer mix was a headwind in 2Q. Just was curious what Board Warner is seeing as far as visibility to customer schedules in North America through year end?

Speaker 2

What we're saying is a better mix And recovery coming into Q3 and Q4 from the Q2 level And still very volatile, especially because of the semiconductor supply issues. That's what we're currently seeing, Kevin.

Speaker 6

The Okay. That's helpful. And then switching gears, at your Investor Day, you mentioned $3,000,000,000 to $4,000,000,000 in targeted legacy ICE the dispositions by 2025 and about, call it, dollars 1,000,000,000 in the next year or so. Can you comment on how disposition conversations are going, particularly given the volatile current environment, and any additional commentary you can give us on what products you might be focused on these dispositions, that'd be helpful.

Speaker 4

Yes, I mean, it's in progress. Just as you noted, the $1,000,000,000 or so we expected to execute the over a 12 to 18 month timeframe from what we announced at Investor Day, which means as we get to the end of Q3, we to the to complete that full $1,000,000,000 or so. And we're in progress right now. As we talked about, we're really focused on disposing product lines or businesses That don't meet the long term financial objectives of our portfolio, which means they lack 1 of 3 things. They either lack product leadership, they lack medium to long term growth prospects the They lack strong margin and cash flow generating ability.

Speaker 4

And so if a product line or a business doesn't tick all three of those boxes, it's a candidate for disposition. So at this point, we're actively moving forward in line with what we talked about at our Investor Day. And we think we're on track to deliver that $1,000,000,000 or so of dispositions, I call it mid to late 2022 consistent with the timeframe that we laid out back at Investor Day. And then we continue to expect $3,000,000,000 to $4,000,000,000 by the end of 2025.

Speaker 1

The Great. Thank you, everyone.

Operator

Your next question comes from Brian Johnson with Barclays. Pure line is open.

Speaker 10

Thank you. And I apologize if this was covered in the opening, but I kind of doubt it. The When you look at the 800 volt market, I was struck at the Chicago Auto Show by the Hyundai 800 volt systems and of course the advantages. The Small question is, can you confirm if you're on that or not? But the bigger question is, 800 volts started in the high the performance market with the Porsche.

Speaker 10

Now we see it in Hyundais. I know your new the Hi. Your new EV motor runs on 800 volts for commercial. So my question is, do you see 800 volt as a big trend, 1? 2, is the inverter product line you got from DelphiTech uniquely positioned in that market relative competitors?

Speaker 10

And 3, are there synergies then between your 800 volt converter capability, your e motor capability and where Akasol the Could Go and is axolotl capable of doing 800 volt packs?

Speaker 2

So the answer to your first question is $800 a big trend and is it going down in Vehicle size, the answer is yes. Why? Because it increases the power density and decreases the charging time. Are we well equipped? Absolutely.

Speaker 2

The answer is absolutely yes. We are going to be one of the first one launching very soon 800 volts, silicon carbine the At high volume, this is a competitive advantage that we have to master high voltage silicon carbide the And also a master 800 volts made in house power module, which is the heart of the inverter. Synergies. Absolutely, I was talking about high voltage coolant heaters. We will start in 2024, 800 volt high voltage coolant heater.

Speaker 2

And yes, there are synergies across the different product portfolio that we have running at 800 volts, Brian.

Speaker 10

And can Actasol do 800 volt packs?

Speaker 2

The I need to check that. My answer is Yes, but I have I need to go back to you on this one particularly.

Speaker 10

Okay. Thank you.

Operator

And your next question comes from Emmanuel Rosner from Deutsche Bank. Your line is open.

Speaker 11

Yes, thank you and good morning, everybody.

Speaker 3

Good morning. Good morning.

Speaker 11

The first question is about your Gross of the market outlook. It's good to see you boosting the outlook for the full year. Can you talk in a little bit more detail around what you're expecting for the second half of the year? Obviously, the You mentioned mix improving and customer mix in particular. But then obviously, you had pretty solid growth of the market already in the Q2 and then the full year, you had 500 to 600 basis points.

Speaker 11

So how would you see this play out in the second half? And then just looking a little bit more forward, How should we think about mix going forward? Does this then represent a headwind in 2022? Does this acceleration in growth over market make you rethink your framework for growth over market?

Speaker 4

Yes. I mean, a couple of things. When you look at the first half Year to date, we're somewhere between 650, 700 basis points of cumulative outgrowth for the first first half. And so as we look at the second half of the year, we don't think we'll be operating at quite that pace. We think we're probably in the 4 to 5 50 basis points for that second half.

Speaker 4

The first half we benefited from some mix. We probably benefited from some production of vehicles that weren't ultimately in the production numbers of the OEs. So there's Probably some level of giveback that's implied in our numbers in the second half, which is why you see a lower year over year and implicitly the down sequentially going from the first half to second half. But overall, feel good about our ability to deliver 500 basis points to 600 basis points for the full year. In terms of what that translates to for future years, not prepared to give any update on that.

Speaker 4

I mean, we feel good about the backlog we've disclosed previously looking out 2022 to 2024. The And we'll probably give an update on that as we get into the beginning of next year.

Speaker 11

Okay, thanks. And then Second question on IDM. Just diving a little bit deeper here, can you just give us a sense of how to think about the range of content per vehicle and how would you see your either volume or revenue and margin profile of that line of business the evolve over the next few years. So sort of like a midterm outlook and how you would see IDM go from here?

Speaker 2

Average content per vehicle is going to range from about $1,000 for the smaller versions And time 3 or 4 for much higher sizes. The I'm not going to comment on volumes. I'm not allowed to comment on volumes. I'm only I think that gives you some color on the content per vehicle.

Speaker 4

The And then on the margin side of the equation, I think as we've talked about before, any new product programs, whether they're a combustion based product or an EV product the We look at on our return on invested capital basis. And given that we're predominantly from a manufacturing perspective in the assembly business,

Speaker 11

the What that

Speaker 4

means is the capital intensity of our programs, including the IDM, tend to be similar to our other product lines. And so as we to the Q1 of 2019. We're pleased to drive to deliver consistent ROIC across our product portfolio and we have relatively consistent capital intensity. It means the margin profile on any discrete program, looks substantially similar to the margin programs of other business that we approved throughout the company, whether it's EB or not.

Speaker 11

And that would be from day 1 or is there a target date around this?

Speaker 4

Well, that's the life of a program. So when you look at our EV programs, generally speaking, they tend to have much more R and D intensity, which tends to be upfront. So as we're growing in EVs, what happens is we have a lot more R and D hitting the P and L upfront and then you generate the contribution margins over time and the blend of all that hits our ROIC targets over the life of the program. But that what that means as you're in ramp up mode across EV, Your R and D is much higher proportionally relative to the conversion you're generating on the incremental revenue because the revenue is still coming in the future. The So the EV portfolio in total has a more depressed margin while you're in growth mode.

Speaker 4

But that's not because of the underlying the fundamentals of the business, it's because we're growing and investing in R and D to support the contribution margins that we'll generate over the coming years as we start to generate the revenue.

Speaker 2

The Two things I would add Emmanuel. First is that everything that Kevin has said is the additional R and D that we do for EVs already in our margin profile, right. And 2, we're currently spending 30% of R and D in EV When our revenue is 3% to 5% like the market is quite frankly, so that shows you how deliberate we are in the The path towards electrification.

Speaker 11

Yes, definitely. I appreciate it. Thanks.

Operator

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

Speaker 3

open. Yes, good morning and thanks very much for taking the question. First, I wanted to talk on Delphi and Reflecting back when that was announced part of the industrial logic was that Delphi would give the company a broader set of technologies including for EVs. I know some of that's with IDM, but more holistically. So now that you've had that asset for a longer period of time, you have a few wins with IDM.

Speaker 3

Can you give more clarity on your win rates and to what extent you're converting on that broader set of solutions to the extent that you had been anticipating?

Speaker 4

So,

Speaker 2

yes, we only 6 months after the close, we booked IDMs, the Which is very important, but it's not limited to those systems. We also booked a lot of inverters that we think Could be booked only with that combination. We are also accelerating on battery management system, the software of battery management system. So From a top line synergy perspective, we're absolutely on track with what we expected coming into the Delphi acquisition.

Speaker 3

Got it. That's helpful. And then you talked already a little bit about the supply chain situation and your views on the second half versus the first half, but maybe you can talk a little bit more on the longer term implications from the supply shortages. Some of the OEMs have said that they want to change how they're going to procure supply and work more directly with some of the semiconductor companies. And how do you think that may impact a Tier 1 like BorgWarner the in terms of how you may partner both with your customers and suppliers and some of the implications around margins and working capital.

Speaker 3

Thanks.

Speaker 4

So,

Speaker 2

we are not seeing that trend at least in the products that we focus on. But what that thing is what that semiconductor issue has told us is that it is extremely important to partner upstream and downstream, up stream with our customers and downstream with our semiconductor suppliers. The second thing that has the I think is that scale matters. And it is easier to Get going when you have scaled and not. And I think those two lessons we're going to keep very close to our mind when we move forward in the next years.

Speaker 1

The Thank you all for your great questions today. If you have any other follow-up questions, Feel free to reach out to me directly. Jerome, you can go ahead and close-up the call.

Operator

All right. That conclude the BorgWarner 2021 Second Quarter Results Conference Call. You may now disconnect.

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Earnings Conference Call
BorgWarner Q2 2021
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