BorgWarner Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2023

There are 13 speakers on the call.

Operator

Morning. My name is Catherine, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2022 4th Quarter Results I would now like to turn the call over to Mr. Nolan, Vice President of Investor Relations. Mr.

Operator

Nolan, you may begin your conference.

Speaker 1

Good morning, everyone. This is Patrick Nolan. I apologize about the technical difficulties we've had this morning, but we're going to kick off today's call. Before we begin, I need to inform you that during this call, we may make forward looking statements, which involve risks and uncertainties with details of our same tags. Actual results may differ from significant recent matters discussed today.

Speaker 1

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 preparedness and purposes of prior periods. When we hear our say on a comparable basis and is excluding the impact with FX, net M and A and other non comparable items. We hear say adjusted that means excluding non comparable items. Please note that we've posted an earnings call presentation to the RFH website. We encourage you to follow along with these slides during our discussion.

Speaker 1

With that, I'd like to turn the call over to Sai.

Speaker 2

Thank you, Pat, and good morning, everyone. I have a bit of an allergic reaction this morning I'm expecting my speech, so Kevin will cover the prepared remarks. I'll stay with you and answer the questions. Kevin?

Speaker 3

Hi. 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 $15,800,000,000 in sales, we were up approximately 14% compared to our market, which It was up a little less than 4%.

Speaker 3

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 eR and 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 to 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.

Speaker 3

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.

Speaker 3

In mid December, BorgWarner announced its commitment to reduce its absolute Scope 3 emissions by at least 25% by 2,031 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 2,030 was formally submitted for validation to SBTI. These science based targets align with charging forward, our accelerated after electrification by aiming to achieve a net zero carbon emission future for all. We've made some meaningful progress in 2022 toward achieving our Scope 1 and 2 emissions targets as we have tied employee bonus opportunities across our global operations to reducing energy intensity while also promoting energy management 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, 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.

Speaker 3

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 standalone public company. For BorgWarner, we believe the intended separation accelerates our charging forward strategy and focuses all of our energy towards electrified propulsion.

Speaker 3

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.

Speaker 3

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 plates 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 in thermal management and the associated manufacturing processes positions the company to be an ideal pioneer of new developments for the battery cooling market.

Speaker 3

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 2 new 800 volt variants in 2025, 250 kilowatts for an all wheel drive crossover utility vehicle and a 3 50 kilowatt module for the OEM's 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.

Speaker 3

Starting first with organic electric vehicle sales growth. With the award secured as of this call, We now have pure bev programs that we estimate account for about $3,000,000,000 of book sales in 2025. Date 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 and A, we've now completed or announced 5 acquisitions since the start of charging forward: We believe those businesses will generate about $1,300,000,000 of EV related sales in 2025.

Speaker 3

This is higher than our previous outlook based on our revised projections for Akasaw, 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 3rd pillar of charging forward for which we set an original goal to complete About $3,500,000,000 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 $4,300,000,000 of pure electric vehicle sales in 2025 and we believe it puts us within striking distance of our $4,500,000,000 EV sales target for 2025.

Speaker 3

Now let's move into the financials, starting on Slide and 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 $3,600,000,000 You can see that the strengthening U. S. Dollars drove a year over year decrease in revenue of over 8% or approximately $307,000,000 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.

Speaker 3

The sum of all this was just over $4,100,000,000 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 4th quarter adjusted operating income was of $428,000,000 equating to a 10.4% margin. That compares to adjusted operating income of 398,000,000 or 10.9% from a year ago. On a comparable basis, excluding the impact of foreign exchange With respect to M and A, adjusted operating income increased $74,000,000 on $769,000,000 of higher sales.

Speaker 3

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 and D. In Q4, we increased these R and D investments by of $38,000,000 relative to last year. Our adjusted EPS improved by $0.20 in the 4th 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.

Speaker 3

And finally, free cash flow. We generated 6.70 $1,000,000 of positive free cash flow during Q4. The year over year increase was driven by 3 things: The improvement in operating income, the timing of collection of a meaningful amount of inflationary price recoveries from our customers and the non recurrence of a one time $130,000,000 warranty payment to a customer last year. Let's now turn to Slide 12, where you can see our perspective on global industry production for 2023. When you look at this slide, you can see that our market assumptions continue to contemplate the types of macro uncertainty we've been experiencing over the last few years.

Speaker 3

With that background in mind, we expect our global weighted light and commercial vehicle markets to be flat to up 3% this year. Looking at this by region, we're planning for our weighted North American markets to be up about 2% to 5%. In Europe, we expect our blended market to be up 1% to down 2% year over year. And in China, we expect the overall market to be roughly flat to up Now let's take a look at our full year outlook on Slide 13. First, it's important to note that our guidance assumes an expected full year headwind from weaker foreign currencies of 2 of $5,000,000 2nd, as I previously mentioned, we expect our end markets to be flat to up 3% for the year, which contributes to the organic net sales change you see on the slide.

Speaker 3

But more important than that slight growth in end markets, We expect our revenue to continue to grow well in excess of industry production, driven by new business launches and higher electric vehicle revenue. In fact, in 2023, we're expecting to deliver between $1,500,000,000 $1,800,000,000 in EV revenue, which is up significantly from the $870,000,000 we generated in 2022. Finally, the Santrell and Lambeth acquisitions are expected to add approximately $35,000,000 to 2023 revenue. Based on these assumptions, We're projecting total 2023 revenue in the range of $16,700,000,000 to $17,500,000,000 which equates to organic growth of approximately 7 Switching to margin, we expect our full year adjusted operating margin to be in the range of 10.0 compared to our 2022 margin of 10.1%. We do expect some variation in the margin level across the quarters in 2023.

Speaker 3

Specifically, we believe that Q1 is likely to be the weakest reported margin during the year as we work with our customers and suppliers on finalizing the extent to which Inflationary pricing actions negotiated in 2022 carry over into 2023. In the end, our current expectations that the year over year impact of inflationary pressures on full year margins is likely to be negligible. However, we could see some negative impact in Q1. As it relates to R and D, our full year 2023 guidance anticipates a $60,000,000 to $70,000,000 increase in e products related R and D investment. With our continued success securing new electrified business wins, We're continuing to lean forward and invest more in R and D to support our e products portfolio.

Speaker 3

But importantly, as you see on the slide, The year over year increase in 2023 is expected to be lower than the year over year increase in 2022. Excluding the impact of this increase in new products related R and D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid teens, which we view as a solid conversion given the amount of product launches and ramp ups occurring this year. Based on this revenue and margin outlook, we're expecting full year adjusted EPS of $4.50 to $5 per diluted share. This EPS guidance contemplates 2 slight headwinds relative to 2022. First, we expect an effective tax rate of approximately 25 percent, up a couple of percentage points relative to last year.

Speaker 3

However, that rate remains far lower than what we've experienced in recent years and we think it's a rate that's likely to be sustainable on a go forward basis. Checking our EPS guidance assumes a $0.13 per share negative impact coming from higher net pension expense as a result of higher discount rates. Turning to free cash flow, we expect it will deliver free cash flow in the range of $550,000,000 to $650,000,000 for the full year. This cash flow outlook includes a one time cash cost of approximately $150,000,000 related to the intended spin off of our fuel systems and aftermarket arising from outside advisor fees, cash tax payments to facilitate the separation and IT costs to create a standalone IT environment for Neuco. Excluding these one time costs, our cash flow guidance would be $700,000,000 to $800,000,000 which is only slightly lower than the record free cash flow of $846,000,000 we generated in 2022.

Speaker 3

That's our 2023 outlook. So let me summarize this morning's remarks. Overall, we delivered strong performance in 20 We maintained our adjusted operating margins above 10% by delivering incremental margins on our higher sales and successfully completing commercial negotiations with our customers, while also investing $150,000,000 more in R and D to support the future growth of our e business. And finally, we delivered a record year of free cash flow. As we continue to successfully manage the present, We were also continuing to successfully deliver on the future by making significant progress on our charging forward plan.

Speaker 3

Now Now as we look ahead to 2023, we'll be keenly focused on continuing to manage the present by sustaining strong high single digit revenue outperformance Compared to industry volumes and driving conversion on this revenue growth, successfully executing the intended spin off of our fuel systems and aftermarket conference and continuing to make disciplined investments, both organic and inorganic that will help secure our growth and financial strength long into the future. With that, I'd like to turn the call back over to Pat.

Speaker 1

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

Speaker 4

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

Speaker 1

Just want to follow-up

Speaker 5

on the comments on inflationary costs. I think you said the guidance implies a negligible impact. I mean, so far, it seems like other suppliers have Kind of guided to pretty large headwinds, particularly around labor. Any color on the underlying growth impact that you're expecting that you'll need to get And any color why you're not seeing as big of a factor as other suppliers, it's just the business structure or some other benefits?

Speaker 3

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.

Speaker 5

And based on your comments, it sounds like you're really Just renegotiating what you've gotten last year? Are you seeing more increases in these costs this year too or no?

Speaker 3

I think we're expecting that we're going to enter the year much the Same way we exited last year and the focus of the negotiations last year was really about how we address the inflationary environment in 2022 And then we essentially aligned 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 And so as you can imagine, we'll have those discussions here as we enter the new year about the pricing and cost

Speaker 5

environment. Got it. And your outlook based on your market guidance, it looks like it's about 8% over market. And I believe that you used to historically talk about more 4 to 5. So what's driving the strong growth over market this year?

Speaker 5

Is that sustainable? How should we think about it going forward?

Speaker 2

Yes, Collyn, the outgrowth next year is you're right around 8% and very proud of that. About 2 third of it is bev products and other products for plug in hybrids. So next year will be between 1.5 $1,800,000,000 of pure revenue, which is approaching 10% of our revenue. Very proud about this acceleration.

Speaker 5

And is there anything one time in nature in the growth for this year?

Speaker 2

Not at all. This confirms that we are on track, marching towards Our target of €4,500,000,000 of fuel based revenue in 2025. And you see a 2x increase this year versus prior year, and that's Pretty much part of the plan.

Speaker 5

Got it. All right. Thanks for taking my questions.

Speaker 4

And we'll take our next question from Emmanuel Rosner with Deutsche Bank. Your line is open.

Speaker 3

Thank you very much.

Speaker 2

Well, so maybe you could give us

Speaker 6

a little bit more color around the year over year walk and puts and takes in terms of your margin outlook. 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 ER and D piece are going up a bit, Anything else going on? And then can you just maybe talk about R and D overall, like are you offsetting some of that ER and D increase by Cutting back on IX R and D or is that sort of like how much the full R and D will be going up by?

Speaker 3

Yes, I mean the walk going from 2022 to 2023 is fairly simple. It's really as we look at that organic net sales change, we're converting on that effectively in the mid teens, caught in that 15%, 15% range. But then we're also investing incrementally in e products related R and D of about $60,000,000 to $70,000,000 on a year over year basis, which is what brings the overall conversion down and shows only then a slight improvement in our margin profile on a year over year basis. But we're pretty pleased with that mid teens conversion Given that the bulk of the revenue growth we're seeing in 2023 is really related to product launches and ramp up, not recovery in end markets. And so with some of the startup costs We're pretty pleased with that performance.

Speaker 3

Fred, did you want to comment on the Yes.

Speaker 2

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

Speaker 3

Okay. And then following up

Speaker 6

on this, Dan. So is this year within this range as well, the total R and D 5% to 5.5%. And I guess in the past, you've sort of like spoken about the tail end of 2023 as sort of like being this turning point where So, your EV business is essentially breakeven or getting profitable basically fully loaded as you have enough revenue scale to Match the size of this E R

Speaker 2

and D. Is that still

Speaker 6

the case or would these additional investment that push out the timeline a bit?

Speaker 3

A couple of things on the question about R and D. I think we're really only guiding at the moment to the e products related R and D, which we We are seeing an increase in investment that we're choosing to make of $60,000,000 to $70,000,000 The overall R and D budget, I'll say the foundational R and D is just being managed in Volatility 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 thirds of which comes from our e product portfolio, you can see that the growth in contribution margin is effectively outpacing the growth in e products related to R and 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 2023 and head into the beginning of 2024, that portfolio is approaching breakeven.

Speaker 6

Sounds good. Thank you very much.

Speaker 4

And our next question will come from James Picariello with BNP Paribas. Your line is open.

Speaker 5

Hi, good morning,

Speaker 3

everyone. Just back to the growth over market. I thought in 2022, there was almost like 4 point benefit from commodity recovery embedded 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, That's correct. I mean pricing is not a net tailwind in that Effectively that organic growth number, as you look at the 2023 guide.

Speaker 3

Okay. Understood. And then just back to the EV profitability timeframe, any Given the $60,000,000 to $70,000,000 R and D step up, I think previously you guys had talked about maybe late 'twenty three, early 'twenty four in terms of achieving breakeven for the business. What does that timeframe look like now given better visibility on

Speaker 7

the R and D commitments you have?

Speaker 3

I I think as I was just mentioning to Emmanuel, it's essentially unchanged. I mean, we think last year and heading into the beginning of this year was really the inflection point of the business from an electrification standpoint. We lean forward pretty significantly last year with $150 plus 1,000,000 step up in e products related R and D. And now as we head into 2023 and you're seeing all that EV related revenue growth coming through and the contribution coming on that revenue growth, That contribution margin growth this year is outpacing the growth in e products R and D and continues to put us on pace, as I mentioned to Emmanuel, for to be approaching breakeven as we exit 'twenty three and enter the beginning of 2024. Got it.

Speaker 3

And just any clarity on what the SpinCo's Targeted net leverage for me. I know you previously communicated a lot of healthy cap structure. Just curious if there's a finer point on that. Thank you. I'm not going to provide any more color on that at this point.

Speaker 3

And we're still on target to execute the spin in late 2023. And as we approach The spin off date get closer to that, you should expect that both companies are going to hold Investor Days at which point in time we'll provide more clarity around the financial outlook and capital structures of both But the overall concept is as it relates to both NewCo and BorgWarner on a go forward basis that we're going to continue to maintain moderate levels of leverage In a way that supports the ability of both companies to execute their respective strategies.

Speaker 8

Thanks.

Speaker 4

And our next question comes from Rod Lachey with Wolfe Research. Your line is open.

Speaker 9

Good Good morning, everybody. Fred, hope you feel better. Kevin, I think I have a few questions for you. First of all, is it correct that I guess I'm understanding that you reflected already a significant amount of additional inflation in your numbers in 2023, But you are not assuming any real recovery in terms of incremental pricing on that. And that if you do achieve incremental recovery, that would Actually be accretive to your revenue forecast and your earnings forecast.

Speaker 9

Am I understanding that right?

Speaker 3

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 It's likely you're going to continue at or around that level heading into 2023. And that's effectively what's underlying the guide.

Speaker 9

Okay. So in other words, you've already had this from the beginning of the year. There's no like spillover effect from negotiations that you had benefited from over the course of the year or in the middle of the year last year?

Speaker 3

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, their focus was really on how we make sure that we're recovering a fair share of the inflationary impacts we were seeing in 2020 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 2022.

Speaker 9

Understood. Can you maybe clarify what the magnitude of the inflationary burden is for you that is already embedded in your numbers and you're Seemingly offsetting, in part through additional productivity. And is it correct that the scope of That inflationary burden is beyond parts and materials like it's extending to things like energy, labor and other factors at this point.

Speaker 3

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 And the net impact on our P and L on material costs from last year, the cost net of recoveries from customers was about $90,000,000 of headwind. But obviously, we have other productivity issues that we're managing through from a labor freight and other things.

Speaker 6

Thank you.

Speaker 4

And our next question comes from John Murphy with Bank of America. Your line is open.

Speaker 8

Good morning, guys. I just wanted to follow-up on something you had in your other investor deck outside of the slides you showed here. I mean, you showed like the content per vehicle opportunity on EVs through 2025 and what you've developed through your acquisitions. So I'm just curious, I mean, as we're looking at a big chunk of the business, you're still being ICE. I'm just curious if you had a view of Yes.

Speaker 8

And you think about the content provision on an ICE vehicle developing through 2025 and 2030 unit in the unit similar ways that you showed the EV

Speaker 2

conference. Yes. I would say if you look at 2023, The ICE products, whether in pure combustion powertrain or in hybrid powertrain Our positive contributor to the outgrowth. So we see still a lot of

Speaker 8

Okay. And also, I mean, it looks like in the slide, you're kind of indicating that breakeven on an operating basis in EV starts Occurring sometime between 'twenty three and 'twenty four, 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. I mean, is it it looks like it's 2024, 2025, 26 that you highlighting the margins might get closer to normal. When do you think the return on invested capital hits

Speaker 2

So John, maybe I start and turn it over to Kevin. The EV products that we are booking announcing are going through the same ROIC threshold as appropriation request processes than any other products. And so the ROIC program by program is there. There is no doubt about that. Not from a timing standpoint, I'll turn it over to Kevin.

Speaker 3

No, I

Speaker 1

mean, I think that's

Speaker 3

the key point. We price all of these programs so that on a standalone 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 e products related R and D. And so that provides an overhang to the in year margins any given year. And you see that this year even in our 2023 guide, We have good levels of conversion that we're pretty happy with, but we're continuing to invest another $60,000,000 to $70,000,000 to support new business wins 3, 4, 5 years out.

Speaker 3

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 e products related R and 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 standalone basis, We're very happy to continue to invest in that ER and D.

Speaker 8

And maybe just lastly, I mean to kind of put this all together, I mean it looks like The margins on the ICE business in 'twenty three will be 12% to 13%, maybe even better. If we think about the aggregate margins being in the 10% range, I mean, do you think we're at a point where Those ICE margins may improve even a bit over time and that this transition is kind of hitting sort of a low point on margins and returns in 'twenty three or do you think that's still in front of us? Because I mean, that's part that you show on the EV business Getting to breakeven sometime between 'twenty three and 'twenty four roughly kind of indications that we may be hitting this low point and that as we get through get into 'twenty four, Things may actually sort of on an average basis start to improve. I know we're kind of looking far out, but people are just trying to really understand what this transition

Speaker 2

Jonelle, our product leadership And scale in the foundational products is very, very strong. And I would say the margin will remain top Well, tighter and strong as you've seen in the past. Also, Don't forget that the foundational products that we have, have an impact to on our EV growth. And one of the announcements that we made This morning around the debt recruiting place is a great example of that. We're leveraging product foundational know how with We are leveraging processes now around brazing, around leakage control of our cooling technology into the battery cooling space.

Speaker 2

So this is a great example of using foundational know how to create a new organically developed product for the EV World.

Speaker 8

Okay. But I mean, is it fair to say to me given the call. Going into the markets right now and just transition to just kind of being the last year where you might be losing money based on what you're showing On an operating basis that we may be looking at a sort of a point in time or 'twenty three, I think it's hard to say, but in the transition conceptually

Speaker 2

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

Speaker 2

Okay.

Speaker 8

That's exactly right. Thank you so much, guys.

Speaker 3

Conference.

Speaker 4

And we'll take our next question from Luke Junk with Baird. Your line is open.

Speaker 10

Good morning. Thanks for taking the questions. To start, Fred or Kevin, it'd be great if just get your perspective What you're seeing industry wide in terms of the push and pull between 400 volt and 800 volt architectures, do you think that consensus, if you will, is So this, 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?

Speaker 2

Look, the 2 voltages will leave and have a space in the market. 800 volts Leads to a few efficiency improvements, but also comes with additional features and costs. And We believe that depending on the end application, the vehicle type and the price point that OE wants And both technologies will remain active. And What we're doing at BorgWarner is really focusing on the modular design of those inverters So that we have building blocks depending on level of voltage reads or silicon, silicon carbide or level of outputs So that we are using a modular approach that will be pretty agnostic to the voltages.

Speaker 10

Good. Appreciate that. And then for my follow-up, I was just hoping you could Before and after that partnership and most importantly to what extent you think your supply chain position now How could be advantaged versus peers in silicon carbide? Thank you.

Speaker 2

So very happy with the fact that we've secured A corridor of supply that is pretty significant and can meet our expectations going forward and our fast growth. Two points. 1, this supply agreement is not exclusive, Meaning we can work with other silicon carbide supplier, should we want, But also if our OEM want us to work with other silicon carbide suppliers, the door is absolutely open too. So I I think we secured a significant capacity corridor, but we also have the ability to be flexible to decide who we work with down the road.

Speaker 10

Okay. I'll leave it there. Thank you.

Speaker 4

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

Speaker 7

Hey, thanks everybody. And Fred, hope you're feeling better, buddy. I hope you're feeling better. I noticed on Slide 8, the cooling plates, it's kind of so beautifully nestling that 4,680 Cylindrical Cell. I'm curious what you're thinking about pouch And prismatic versus cylindrical, because it seems like given some reports around GM maybe not doing their 4th plan or Possibly changing form factor and Tesla ramping up 4,680 and getting others to make it, that that might be Become more of an industry standard even though there's still a lot of form factors.

Speaker 7

I was curious whether you're witnessing a bit of a Gravitational shift or momentum, not just from Tesla to 4,680, but others as well. Is that possibly What's going on? Because I thought that the argument was pouch and prismatic was more energy dense. But are some of your products like your cooling You played able to get around that with the cylinders and get the better energy density with the cylinder versus a pouch?

Speaker 2

Yes. So first, what I would say that, 1st, in the commercial vehicle side, where we are really active from a battery pack Manufacturing standpoint, we see cylindrical as the mainstream. In PASCAR, 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.

Speaker 2

Not going to comment on the applicability to other technologies. But to answer your question simply on CV, we see synergy talk going mainstream. And on TV, there are different views. But again, different technologies will be The market and they all have their pros and cons. Okay.

Speaker 7

Fred, appreciate that. And just

Speaker 2

The only thing that I would add, I mean, is that 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 $3,500,000,000 in 20.28 already. So it's not as significant.

Speaker 7

Got it, Fred. Thanks. Just a follow-up. The world's really changed, continues to change in terms of cost of capital, Price cuts, etcetera. And your electrification portfolio gives you a really long dated view into the forward.

Speaker 7

Are you seeing any hesitation or maybe pushing out of the commitment from OEMs on EV investment at the margin. I know they're still committed, but I didn't know if there was a rate of change that might have you might have picked up on when you're forward over the last quarter or so.

Speaker 2

No. I would say to the contrary, I The acceleration of those programs, 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 A few months after, we were already talking about capacity increase. What we see though is that Also, from the customer side, what we see is that they want to partner with someone who can We expect full on the e side, but also on the foundational side, so that we

Speaker 4

Our next question comes from Noah Kaye with Oppenheimer. Your line is open.

Speaker 1

Thanks. I'll stick with

Speaker 11

the battery theme for a minute here. Just given that is driving majority of the organic growth outlook for this year, you mentioned battery as a significant contributor this quarter and then you also called out Higher growth expectations at Akafol, I guess over the medium term. And if you could 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

Speaker 2

So it's simple. We have multiple customer awards plus Higher volume from our core customers, and that's leading to Akasor moving slightly from under slightly $300,000,000 last year to about $1,000,000,000 in 2025. And the impact that you see this year is part of the glide path. And very pleased with our inverted growth too and also very pleased on our motor and other wins across the So on that, yes, it's about $1,000,000,000 already in 2025.

Speaker 11

Okay. And then just to 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 credit might benefit you if you're making any investments?

Speaker 3

Yes, I mean, because of the acceleration we're seeing in the revenue in Akasaw, as Fred mentioned, even up through 25, we are accelerating some of the investments that we're both in Europe and North America related to that business. And then we're also seeing part of the increase in capital expenditure on a year over year basis related to our other electrification businesses on So definitely a contributor. And as it relates to North America, we're looking at the tax credits and how those might apply to us from a production standpoint as we go through 'twenty three and beyond.

Speaker 11

Just waiting for Treasury guidance to get full clarification?

Speaker 3

I mean there's some of that making sure that we understand any clarifications that need to be had, but we're pursuing the credits that we that are available to us based on the production that we are executing here in the United States.

Speaker 11

Thank you.

Speaker 4

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

Speaker 12

Yes. Good morning. Thank you very much for taking my question. When you speak to your auto OEM customers, what do you think the gating factor is to light vehicle production volumes in 2023 and to what extent is volume gated by supply as opposed to demand?

Speaker 2

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

Speaker 12

Have responded to the announced separation of the business. You spoke about all the great momentum BorgWarner is having on the product side. I'm wondering though, have you seen any change in customer engagement to design in Neuco products with the announced separation?

Speaker 2

No, we've obviously talked to almost all our customers, And they understand. And they're actually happy to see those 2 strong companies being able to execute their own respective strategy. Conference. And they're happy with the announcement spin off. There's no noise from that at all.

Speaker 2

Thanks so much.

Speaker 1

Matt, I'd like to thank you all for your questions today. Again, we apologize for the technical difficulties earlier in the call. If you have any additional follow ups, feel free to

Speaker 4

That does conclude the BorgWarner 2022 4th quarter results conference call. You may now disconnect.

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Earnings Conference Call
BorgWarner Q4 2022
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