Q4 2020 Borgwarner Inc Earnings Call
[music].
Good morning, My name is Sharon and I will be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2024th quarter and full year results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer.
And if you'd like to ask a question. During this time. So please let's start one on your telephone keypad. If you would like to withdraw your question press the pound from if you're using a speakerphone. Please pick up the handset before asking your question.
And I'd like to turn the call over to Patrick Nolan Vice President of Investor Relations. Mr. Nolan you may begin your conference.
Thank you Sharon.
Good morning, everyone and thank you for joining US today, we issued our earnings release. This morning is posted on our website Borgwarner dot 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. Please see the events section of our Investor Relations homepage for a full list.
Before we begin and due to a formula during this call. We may make forward looking statements, which involve risks and uncertainties as detailed in our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes of prior periods.
And when hirose on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
And you hear us say adjusted that means excluding non comparable items.
When you hear us say organic that means excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market.
And you hear us say market that means the change and light light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus this market.
Yes.
Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good morning, everyone. We're very pleased to share our results for 2020 and provide an overall company update starting on slide five.
I'm very proud with our stronger than expected top line and cash flow performance for the year.
With approximately $10 2 billion and sales we were down about 11% organically.
This compares to a market being down approximately 17%.
And while our growth was about 630 basis points for the year, which was ahead of our expectations going into the fourth quarter.
For the full year, we saw our growth and all major regions, we delivered close to 15% outgrowth in China, our European and North American operations, our growth were both in the low single digit range.
While our full year earnings per share declined year over year due to the impact of COVID-19, our decremental margin performance was in line with our expectations and.
Importantly, our margin performance was achieved while preserving R&D spending to support future growth.
We delivered very strong free cash flow of $743 million for the year.
This represents a record for free cash flow generation for the company.
This is a testament to the intense focus we've put on improving free cash flow generation over the last few years.
While managing the operation.
Operational challenges of 2020, we successfully completed the largest acquisition in the company's history and secured numerous business award for electrified vehicles over the course of the year.
Now, let's discuss some of those new business Awards.
First im happy to announce on slide six that we have secured and 800 volt electric motor and a world with a global commercial vehicle customer announcing in 2024.
This program will use full different variance of our latest AFP and motor design.
Using our 800 volt rated machine customers can significantly reduce challenging time and achieve a higher power density through the 800 volt architecture, enabling and even brighter future for.
And for electric trucks and buses.
I am very pleased with this program, we will continue to focus on the electrification opportunities and commercial vehicles. In addition to opportunities and our light vehicle market.
Next.
I would like to highlight another inverted win on slide seven.
We are partnering with a major European OEM to supply all 400 volt silicon carbide invert.
For the next generation beds that are expected to announce in 2022.
What I can't share the details of this program I can tell you that this is our second largest invert the program to date.
This illustrates our ongoing innovation and power electronics.
As we were leading the market trend to a grade from silicon to silicon carbide.
Enables lower energy losses and drives higher efficiency.
With the latest win them.
I would like to give you an update of our positioning in the European inverter market on slide eight.
We've had tremendous success establishing ourselves in this market.
When I think about borgwarner competitive advantages and power electronics.
And it's driven by first.
And the breadth of our product portfolio.
This allows us to be faster and more effective at bringing products to market.
Second.
Our ability to innovate we continue our innovations in part by our vertical integration strategy.
We have in house capabilities full power modules integrated circuit development and software.
I think that the last driver is our ability to leverage <unk>.
The electronic scale that we already have especially in our engine control unit business.
The result is that we have secured significant new business awards on the chart on the right side of this slide.
You will see the inverse of programs, we've secured with three large European Oes as you can see we expect that we'll be delivering around $1 1 million and voters in 'twenty and 'twenty five.
As a result of the successes we are achieving we're increasing our R&D spending in 2021 to support our continued innovation and new business Awards in our power electronics portfolio, Kevin will touch on that a little later.
Next I would like to give you an update on the Delphi technology integration on slide nine bottom line all is on track.
Starting with Q4 results the Delphi Technologies' contribution to both revenue and operating income was ahead of our expectations.
And I'm seeing good progress across all the former Delphi businesses.
The cost synergies related to the Delphi transaction and are tracking in line with our plan as Kevin will discuss later.
And the customer feedback remains very positive.
In addition to invert to wins that I just highlighted we won new businesses across the rest of the Delphi portfolio, including awards in GTA.
And the overall takeaway is that the integration is on track from all perspectives.
Before I wrap up on slide 10, we are announcing our plan to old and upcoming Investor day on March 23rd.
The event will be virtually broadcasting from the Borgwarner World headquarters in Auburn Hills, Michigan.
It will provide insights into our technologies and into the acceleration of our positioning in and electrified world.
Look forward to interacting with you during the event.
So let me summarize our 'twenty and 'twenty results and our outlook on slide 11.
2020 was an extremely challenging year.
In terms of the operating environment and we are.
And the health and safety of our people first.
And even in this challenging environment, we delivered better than expected our growth and generated record free cash flow and our bookings on Bev all accelerating.
We closed on the Delphi transaction was successfully integrating the companies and we are on track to deliver the synergies as planned.
As we look ahead, we expect to deliver another record year of free cash flow and 2021, which enables us to continue to invest and the business to successfully position the company for the future.
The demand for our efficiency improving products is growing leading to a continued increase in our content per vehicle.
In fact.
And as Kevin will highlight when you look at our three years backlog.
And 45% of it is already coming from <unk> products.
And finally I am excited about our long term positioning as we look to capitalize on the profound industry shift towards electrification. We are winning we are ramping up R&D and focusing heavily on the acceleration of the company towards electrification.
With that I'll turn the call over to you Kevin.
Thank you Fred and good morning, everyone.
Before I review the financials in detail I'd like to provide an overview of the three key takeaways from our fourth quarter results.
First our revenue was ahead of our guidance driven by stronger than expected out growth and higher levels of sales from the Delphi technologies acquisition.
Second our margin performance was better than expected both in the legacy Borgwarner business and and the legacy Delphi business.
And third our free cash flow was very strong at $197 million and the quarter, which resulted in record free cash flow for the full year.
So, let's turn to slide 12.
As we look at our year over year revenue walk for Q4, you can see that foreign currencies increased revenue by about three 4% from a year ago.
Excluding this impact our organic sales were up more than 6% compared to a less and 2% increase and weighted average market production.
That means we delivered 460 basis points of outgrowth in the quarter, which breaks down as follows and.
And China, we outperform the light vehicle market by about 13%.
Strong DCT demand continues to be a key contributor to our sizable outgrowth in the region.
And Europe, our light vehicle organic revenue performed roughly in line with the market.
In North America, we underperformed the market by approximately 3% just as we expected primarily due to the impact of the changeover of the Ford F 150.
And finally, our commercial vehicle and off highway businesses drove about 50 basis points of our outgrowth in the quarter as our China business more than offset declining commercial vehicle revenue and other regions.
Now some of the strong outgrowth, we delivered in Q4 and for the full year, particularly in China was a pull forward of 2021 outgrowth.
That will have an impact on our expected 2021 year over year outgrowth, but on a cumulative two year basis, we're tracking right in line with our longer term expectations, So and the and we're pleased with the strong finish to 2020.
Moving past, our backlog and outgrowth you can see that the Delphi technologies acquisition added a little more than $1 1 billion to our fourth quarter revenue.
The sum of all of this was just over $3 $9 billion of revenue and Q4.
Now, let's look at our earnings and cash flow performance on slide 13.
Our fourth quarter, adjusted operating income was $448 million compared to $340 million and the fourth quarter of 2019.
This yielded and adjusted operating margin of 11, 4%, which was well ahead of our margin guidance of $8 eight to nine 6% for the quarter.
On a comparable basis adjusted operating income decreased $7 million on $159 million or higher sales remember, we delivered outsized margin performance, a 13, 3% and Q4 2019, which makes for a tough year over year comparable.
If you look at the legacy Borgwarner margin, excluding the impact of Delphi technologies, we delivered just over 12% for the quarter, which is consistent with the company's historical top quartile margin profile.
Then the Delphi technologies business added $109 million to adjusted operating income. This was well ahead of our expectations due to the higher than expected revenue and stronger underlying margins and the business.
Moving on to cash flow, we're proud of the fact that we generated $197 million of positive free cash flow during the fourth quarter.
As a result of that our full year 2020 free cash flow came in at $743 million, which was a record level for the company.
With those strong cash flow results and with our confidence and the business looking ahead to 2021, we repurchased $216 million of our shares during the fourth quarter.
Let's now turn to slide 14, where you can see our perspectives on global industry production for 2021.
First let me point out that our market assumptions now incorporate our view of the commercial vehicle and off highway markets, given our increasing exposure to those markets.
With that background and mine, we expect our global weighted light vehicle and commercial vehicle markets to increase and the range of 11% to 14% this year.
Looking at this by region, we're planning for North America to be up 22% to 25%.
And Europe, we expect our blended market increase of 11% to 14% and in China. We expect the overall market to be roughly flat year over year as growth and light vehicle production is offset by anticipated declines and the commercial vehicle market.
Now, let's talk about our full year financial outlook on slide 15.
Starting with our pro forma 2020 sales, which adds back the $2 6 billion of revenue from the first three quarters of Delphi technologies and 2020 as you know those revenues were not part of our P&L last year.
But in order to provide year over year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.
Building on that pro forma revenue base, you can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly one two to $1 5 billion.
Next we expect to drive market outgrowth for the full year of approximately 100 to 300 basis points.
Embedded in that outgrowth range is a roughly 200 basis point headwind from declining light duty diesel and.
And a 40 basis point headwind from an expectation of normalized market share and our China commercial vehicle business after considering outsized market share and 2020.
Based on these assumptions, we expect our 2021 organic revenue to increase 12% to 17% relative to 2020 pro forma revenue.
And then adding a $355 million benefit from stronger foreign currencies were projecting total 2021 revenue to be and the range of $14 seven to $15 3 billion.
From a margin perspective, we expect our full year adjusted operating margin to be and a range of 10.0 to 10, 5% compared to a pro forma 2020, adjusted operating margin of eight 3%.
This contemplates the business delivering full year, incrementals and 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 $70 million to $80 million of incremental benefit in 2021.
That puts us right on track to achieve 50% of our total expected cost synergies in 2021, just as we've previously told you to expect.
One more point on our margin outlook.
It's important to note that this outlook is inclusive of a planned increase in R&D spending to 5% of revenue to continue to drive the growth, we're seeing and electrification opportunities that's fully baked into the guidance.
So based on this revenue and margin outlook, we're expecting full year adjusted EPS of $3 85 to $4 25 per diluted share.
And finally, we have line of sight to delivering free cash flow of $800 million to $900 million.
A significant increase over our record year in 2020.
That's our 2021 outlook.
Let's turn to slide 16 to review our medium term growth outlook.
As I mentioned earlier, we expect light vehicle diesel to be a headwind to our outgrowth in 2021.
The largest portion of this headwind comes from the legacy Delphi portfolio and.
As you can see on the left side of this slide we expect the impact within this business to be approximately $140 million and 2021. However.
However, you can also see that this headwind is expected to lessen each year as we head towards 2024.
This is what we saw and due diligence, which simply means that it is in line with our original planning assumptions.
Now, let's move to the right side of the slide where we profile our multiyear backlog.
As you know our backlog is a net backlog, which means it reflects increases in revenue net of decreases in revenue. So the diesel headwinds from the left side are incorporated into this net backlog.
And what you can see is that even with this headwind we still expect to deliver 100 to 300 basis points of outgrowth in 2021.
Then as you look ahead to 2022 to 2024, we expect a combined net new business backlog inclusive of aftermarket growth to be approximately $2 8 billion.
Importantly, we believe this 2022 to 2024 backlog supports our previously communicated mid term outgrowth for the combined company in the mid 4% range.
And there is one more critical point to note about this backlog.
About 45% of this net backlog is driven by our E products, 45%.
We're winning business and positioning the company for continued growth in this area.
So let me summarize my financial remarks.
Overall, we had a really solid year, despite the headwinds resulting from COVID-19.
We delivered 630 basis points of market outgrowth and $743 million of free cash flow not only did these results significantly exceeded our most recent guidance. They also exceeded the guidance that we provided in January of last year prior to the pandemic.
Now as we head into the new year, we're focused on leveraging our financial strength to drive continued long term profitable growth and the business.
In 2021 and that means we'll be keenly focused on delivering on our near term financial commitments.
Successfully integrating the Delphi acquisition and continuing to make the necessary investments to win electrification business that will secure our growth and financial strength long into the future.
With that I'd like to turn the call back over to Pat.
Thank you Kevin.
Sharon Ray and open it up for questions.
At this time I would like to remind everyone. If you would like to ask a question press star one on your telephone keypad and you are using a speakerphone. Please pick up again and that's before asking your question and the interest of line. Please limit yourself to one question and one follow up question, we'll pause for just a moment to compile the Q&A roster.
First question comes from Chris Mcnally with Evercore.
Thanks, guys.
Morning.
Fred if I could ask two questions on Evs.
The first is around around market share really appreciate the color on the three big and Berta wins.
With unit attached and I know you can't give explicit numbers, but sort of if we work into what that means on a on a market share basis, assuming you have some and.
And some Asian wings, as well you could be getting roughly a 20% share of the outsource.
Business.
Would just love some color about the competitive environment, because that would probably put you in and the top three external suppliers.
And obviously theres a lot of players here and not only and burgers and.
We obviously have.
Heavily competitive and.
And source for motors and drivetrain. So if you could just talk about the.
And the conflict and the competitive environment for.
EBIT right now.
Chris.
And as the leader in this field and I feel really good about the progress I see I feel really good about the momentum.
I feel really good about the fact that.
The technology that.
We've got with Delphi is really strong high voltage silicon carbide driving efficiency and.
I feel really good about the combination.
We bring final sales trends and customer intimacy and and we are booking business and.
And so.
And the positioning is strong the customer feedback is positive.
And of <unk>, where the companies right now and more to come.
Okay, that's great and we receive a lot of questions about your sort of the legacy Oems right now.
And maybe three European Oems and that cash versus this.
And this nextgen.
Startups and could you talk about just what it what is it like to win business on the startups are you seeing them at a similar proportionate in source versus outsource.
And just because it's such a new environment for everyone and Paul.
Yes.
And we.
Working with with both right both the legacy Oems you called them and you new startups.
We have actually.
<unk> been pretty successful.
Towards those two customers and market segments.
Obviously in our business.
And the business of long term relationships.
And and that that solid foundation that we have.
And on the solid customer intimacy that we have across the world and search.
And the certainly matters.
And if I could just squeeze in one last one on the profitability ramp up.
EV I mean, clearly there is a lower margin on any new business and a new backlog, but I guess, everyone is very curious about since this is a much longer and much more aggressive ramp on Evs can you talk about how as with EV bits and starts to really flow flow through 2022 on.
How much it may be sort of degradation to margins or a rule of thumb for when.
Business may actually reach corporate level of profitability.
Yes, Chris this is Kevin and I'd say keep.
Keep in mind as we've talked about in the past, we stay focused whether it's a legacy.
<unk> combustion business or it's in our new EV portfolios that we drive toward a return on invested capital target consistently across those types of businesses, but obviously as we are and ramp up mode for a business like our EV portfolio, we're investing a lot more in the front end and we're not at steady state yet from a revenue perspective, so those ROIC targets are over the.
The life of the program, but the cost tends to come and at the front and particularly from an R&D perspective, and so just as you saw we talked about today ramping up our R&D to 5%. Some of that is contemplating its really contemplating the increased investments, we're making and that EV portfolio as we're securing new business wins, so that does become a headwind.
To margin in the near term on a on a discrete basis, but overall, we're managing that within our portfolio and you can see that and our margin guide I mean, the 10.0 to 10, 5% contemplates that increase and in R&D and you see our backlog is getting skewed more and more towards E products, which is great we feel great about.
That and we still remain on track for our 2023 margin target with all that considered of delivering over 11% operating margin.
It's obviously and our business, we're investing and it creates a little pressure on margins, but we're managing that across the portfolio and right on track to delivered with our long term margin targets.
Great. Thanks, guys.
Thanks James.
Question comes from John Murphy with Bank of America.
Good morning, guys.
First question on the change in segmentation and I'm just curious as you look at the new four segments.
Now that you've carved off our identified fuel injection and aftermarket as separate segments are.
Are those maybe more separable and potentially could be up for sale over time as they might be much slower growth and the other two segments.
Yes, I guess, that's not how we're thinking about I mean, we look at those businesses, they're businesses that from an accounting perspective needed to be reported separately and thats part of the reason that they reported that way and our focus is really on <unk>.
Growing the profitability of those two portfolios as you look at the <unk> business as Fred talked about and his remarks, we're seeing wins and GTI and we see some real growth prospects and that business along.
And with the leading positions that that business already has I think as we look at it we see opportunity to improve the profit profitability of that portfolio and that's really the focus there and from an aftermarket perspective.
Feel good about the margin progress that we saw and that business and the fourth quarter and we would expect to continue to drive margin performance and that business. So that's really how we look at those right now.
Okay, and then just a follow up Kevin if we think about.
I just wonder if you can give us some color on what you think about what's going on the trip disruption and what it means.
Shortage and the disruption and production as a result of that should we think about any kind of lost sales and a 20%.
Decremental and then also just on the outlook and insecure aynsley.
Humble and and the performance and the fourth quarter, because the F 150, being down really really matters.
How do you think about sort of the bounce back up as that gets up and running and.
And the impact of mix and the excellent safety and maybe more generally and the industry remains quite positive through 2021.
John.
We see is certainly from kind of disruption mostly in the first half.
The second half.
And recoveries is currently unknown.
We have put in the low end of our guidance John is and net production impact.
Greater than 1 million vehicle and Thats reflected in the low end of the guide for the full year.
That's helpful and then on the mix, particularly around the F 150.
Whats your question on the mix.
No.
And he was a benefit for most of the industry and the fourth quarter and through most of 2020, but obviously you got.
Digging a bit with the F 150, being down and the fourth quarter. So your performance was probably even better than it looked I'm. Just curious as you think about mix going forward into 2021 guidance.
How.
And how strong is mix going to remain and particularly with the ramp back up and the F 150, how big a benefit will that day.
Yes, I mean, the F 150 will definitely help us from just an overall revenue outgrowth perspective.
It is the reason that we underperformed and North America in the fourth quarter I want to say it was probably around the $25 million to $30 million type of revenue impact on us. So we would expect obviously that headwind to abate.
And not become not be an overhang on our growth as we look ahead to 2021.
Great. Thank you very much.
Next question comes from James Picariello with Keybanc capital.
Hey, good morning, guys.
Good morning, just on Delphi upside and the quarter.
The primary drivers of that relative to your outlook and.
And because cost synergies and purchase accounting, obviously came in as expected as expected just curious what drove that and then can you dimension at all whats baked in for the full year guide related to sales sides inorganic contribution.
Yes on the fourth quarter I mean, we are pleased with the results that came in from Delphi, both from a top line perspective and from a margin perspective, and then the biggest upside that we saw in terms of revenue being up effectively from the midpoint of our guide by about $145 million really came and the fuel injection and the legacy powertrain products.
Portfolio and so we're pleased with that performance because that also actually helps from a margin perspective, because those are two of the stronger portions of the business from a margin.
Contribution perspective, so that's a big driver of what caused us to generate some upside I would say also it's probably fair to say, where we were one month into the owning Delphi and just starting to really get our hands around some of the topline and bottom line drivers and the business and so we did make some cautious assumptions as we gave Q4 guidance.
With respect to the Delphi portfolio and and those proved to be too conservative at the end of the day.
Does that conservatism carry through to this year and.
<unk> to the.
Accretion framework that you laid out.
A few months ago.
Yes, I think.
With respect to 2021, and we feel really good about our ability to deliver on the guidance that we're giving with the outgrowth of 100 to 300 basis points and totality, which basically assumes that Delphi outgrowth is flat to actually slightly negative because of that diesel headwind.
So we feel good about our ability to deliver on that outgrowth for the year to deliver on that improving margin profile of that 10 to 10, 5% in totality for the company and delivering strong cash flow and in terms of what that means for us as we look to 2021 and even beyond we think we're right on track to deliver the greater than 11% operate.
Margin as we progress towards 2023.
Okay got it and then just just to clarify the 45% of your $2 $8 billion backlog tied to products that and that excludes hybrid correct. That's just battery electric and then so the free cash flow strength, clearly apparent and the guide.
And you're already repurchased $250 million this past quarter I mean, how should we be thinking about the buyback effort for this year. Thanks.
Yes.
So it includes a little bit on hybrid.
When it comes to high voltage plug in hybrids that are new energy vehicle onto the new energy vehicle and credits and China.
That's a very small portion of the 45% Kevin do you want to take that.
Yeah and in terms of I mean, as we look ahead to capital allocation priorities in 2021, I would tell you that we are actively exploring several M&A opportunities that we think accelerate our position and growth and electrification and I would say that as a priority for us as we look into 2021 from there we'll assess our buyback.
Capacity through the course of the year based on how those M&A opportunities materialize, but our focus is definitely shifting towards more aggressively deploying capital to support growth initiatives and positioning and electrification you can see that both and our R&D investments stepping up to 5% this year and Youll see it as we continue to pursue M&A opportunities.
With that supplement some of the $1 billion buyback target.
I'm, sorry say that again.
With the with the potential M&A that would supplement the $1 billion targeted buybacks.
Or will it doesn't it doesn't and supplement that's just it's how we look at deploying the $800 million to $900 million of free cash flow. This year that we expect to generate in 2021, our priority is going to be really focused on some of these M&A opportunities that improve our positioning and growth and electrification in terms of the $1 billion program. We remain committed to the program as <unk>.
You can see by the evidence of what we did and our Q4 repurchase activity, but as it relates to how we're looking ahead here in 'twenty, one and beyond we are definitely focused on exploring some of these key M&A opportunities that we're pursuing.
Understood. Thanks.
And the interest of time, please limit yourself to one question and one follow up question next question comes from Rod Lache with Wolfe Research.
Good morning, everybody.
<unk> had.
Yeah and wanted to first ask you about the backlog.
Data that you show on slide 16.
Have you historically included the aftermarket in that backlog forecast.
And I know that last year you had.
Over four year period, two and half to $2 6 billion.
Respectively now three two to three four I was hoping you can give us some of the pluses and minuses.
And you look out.
As far as how.
How much Delphi contributed what backlog contributed and what kind of headwind you've got from combustion technologies.
Yes, I guess that I mean, the backlog is always included all of our revenue relative to the measurement of our market performance and so as you look at this as well. It's included on the same basis I mean, it's a much smaller piece of the backlog than the rest of it on the OE side, primarily because our folks.
And the aftermarket business, Susan isn't necessarily driving rapid growth its making sure we sustained strong levels of profitability.
Okay, and how much how much of Delphi contribute to this backlog.
We don't have that broken down I think we're trying to get away from the idea of Delphi versus not Delphi, but overall when you look at this four 5%.
Outgrowth is what's effectively implied by this 2022 to 2024 backlog, which I would tell you is directionally consistent with what we provided a year ago. When we talked about four 5% from mid 4% outgrowth across the combined portfolio, which had the legacy borgwarner more and that 5% ZIP code and the legacy Dell.
<unk> with some of those near term headwinds and diesel more and that 3% I'd say, we're not breaking the way anymore, but directionally I would say that's a fair way to think about it but as you look ahead Delphi is probably a little bit more of that backlog because now we are looking at 22% to 24 as opposed to 'twenty one to 'twenty, three where there was a little bit more of that diesel headwind.
Okay, and just secondly.
You did north of 11% margin and the quarter and I'm wondering if that says anything about your longer term 2023 target of 11% I think that you'd be annualizing at more than 15, and $5 billion or so that you annualize that and Q4. So this is that starting to look conservative.
And if you could just repeat did you say that inorganic or strategic actions might include divestitures as well or.
Simply looking at more acquisitions.
Yes, I guess on the when you look at the Q4 performance. We're obviously really pleased with the fact that we delivered a 11, 4% now that's an annualized revenue of $15 $7 billion. So obviously higher than the run rate that we're walking into here and 2021, where the midpoint of our guidance 15, and actually $300 million and thats, even driven by currency. So.
Q4 is really about $1 billion higher annualized revenue.
And where 2021 is ex foreign currency, but I think directionally, you're looking at it the right way, we feel that between the and incremental synergies that we expect to deliver even beyond 2021, which is another $85 million with the additional margin improvement that we're driving and certain portions of the legacy Delphi businesses in particular.
And with the revenue growth inclusive of that backlog, we just highlighted and our ability to convert on that we feel very comfortable with our ability to deliver on that greater than 11% margin in 2023.
And then on the.
The other question you asked around M&A I was actually speaking more to the acquisition side, but we do have and active portfolio management process and I would say, we're spending a lot of time thinking about that as we look ahead, because I think you should expect that that'll be a more active part of what we're looking at on a go forward basis, but my comments really were focused on some M&A activity.
<unk> opportunities that we're looking at that could utilize cash flow that we're generating this year understood. Thank you.
Next question comes from Dan Levy with credit Suisse.
Hey, good morning, everyone.
Thanks for taking the question.
At first.
Wanted to ask on Delphi and <unk> had.
And the Delphi result, I believe the margin and they just posted in the quarter was.
The best.
Quarterly operating margin for Delphi and 2018, maybe you could just walk us through some of the moving pieces that drove the Republic margin and Delphi with its restructuring paying off is it good mix and any color would be helpful. On from the Delphi piece, which obviously came in much better not only versus what you were talking about.
But.
Versus what we've seen.
And in recent years.
Yes, I mean I think the first thing you look at when you look at the Q4 performance, which was in the upper 9% margin range for that as a standalone business and keep in mind Q4 was a really strong revenue quarter going back to the highest levels relative to maybe a couple of years ago, So $1 1 billion and in the quarter on an.
<unk> basis, almost $4 $5 billion. So that's a pretty strong level of revenue and part of the upside that the business was seeing there came in some of the portions of the portfolio that have had historically stronger margins.
So I think that's an important piece to keep in mind that said I think the restructuring actions that the company had been taking both pre closing and that we're continuing on a post closing basis will continue to support that margin profile, but remember, we're continuing to offset that headwind thats coming from that legacy diesel business and you'll see from my slides that.
In 2021, and that's expected to be about $140 million revenue decline and that comes with some outsized margin because it's a strong margin.
Performing piece of the portfolio and Thats, where the restructuring actions that were continuing to execute that legacy project pioneer are helping to mitigate the impact of those headwinds, but overall when you look at it with strong margin and getting some tailwind from some of the cost performance actions that the business has been executing over the last couple of years.
Okay. Thanks, and then just another follow up on the Delphi and you've had now Delphi.
Under your roof.
Maybe you could just give us an update.
And similarly.
And I was the line of questions from from.
And the prior folks and.
And update on your restructuring programs you have your own core restructuring program. This is being won and in parallel with Delphi is restructuring program pioneer.
Yes.
How long before we could see maybe incremental restructuring actions that contemplate maybe.
And you've talked about Theres, an ongoing portfolio process, but more on head count and footprint.
Et cetera, I mean, how long before I guess, we start to really see I guess, a steady state borgwarner with everything.
Everything fully cleaned up.
You bet.
Alright, and so.
What I would say is restructuring and as part of what we do.
And we always wanted to do that and the pollution and the strength we did restructuring we're on track.
<unk> did pioneer.
We are continuing that we are on track and on top of that we have the synergies and also we are on track.
Hi.
And and potential for us.
Additional actions or.
Yes, I think we are really focused on completing the actions that were already in the midst on the restructuring program that we announced about a year ago on the legacy Borgwarner side is going well and we have more actions that we're executing on as we go through 'twenty, one and 'twenty. Two so we're focused on executing that project pioneer still has some more work to do.
Dominantly in 2021, and we're going to continue to execute that program through 'twenty, one and a little bit into 'twenty. Two and then we have the cost synergies that we're executing on so we have a lot on our plate right now already that we're really focused on delivering on and we would expect those to be completed over the next couple of years and then we'll take stock of where we are and if there's anything else we need to do at that point.
Okay. Thank you.
Next question comes from Emmanuel Rosner with Deutsche Bank.
Hi, Good morning, I was hoping to.
Follow up with a couple of questions on again on the backlog and maybe taking it from a different angle, what im trying to and the spend is really.
What pieces are growing certificate at what pace and what.
Piece of the business share.
And they're either slowing down and there is fading.
Last year's backlog, which was and the Borgwarner standalone basis.
For the outer year, three year period, with $2 $1 billion, which was about $700 million a year now youre.
Talking still about about seven hanging mainly and the year to pointed been in four years, but obviously in the meantime light vehicle production has gone and works in terms of the outlook, but you also integrated Delphi with them and so could you. Please give us a sense of within your backlog, how do you sort of shake out with a similar level of I guess revenue.
Outgrows, what other puts and takes within that.
I would say in general.
The backlog is in line with what we discussed over the past quarter leading to.
And our growth just south of 500 basis points I'm very very happy with the fact that as I as we've discussed before 45% of that backlog is on <unk> products.
And.
And the rest the rest is all wheel drive and.
No Bose and it'll be the emissions, but 45% pure <unk>.
Those products that go in and high voltage and.
And China, which which.
Which would you small within that 45. This is this is.
This is a very very good performance.
I think it speaks volume to our ability to win on E.
And it speaks volume to our ability to deliver to deliver growth and this and this and this growing.
And <unk> segments.
Leading to.
Additional content per vehicle and this and this.
<unk> segment so.
Pretty I feel pretty pretty good about where we are and.
And just one thing to correct there and many of the $2 8 billion. We display is a three year number just a it's 2022 to 2024.
Okay.
That makes sense and.
And then I guess, one way you used to.
Thank you Don as well the backlog with.
Maybe ice versus hybrid versus evs.
I guess across technology. So would you would you have a similar breakdown for your current background.
Okay.
So.
And we don't.
And again 45 percentage and E. Okay, and the rest the rest is <unk>.
Either in your and H.
45% of the backlog.
And that translate into banks.
And then on a net basis you if you're if you're referring to how we've broken it out a little bit of electrification, including hybrid.
And over 100% of that net backlog on a net basis is coming from hybrid and electric but we're really starting to focus more and more as we talked to you about the products to make sure you have visibility on the <unk> products that are really truly applicable to the battery electric vehicles and that's that's the point of this 45% of the backlog that we're really focused on.
But over a 100% of the net backlog is effectively hybrid and electric vehicles.
Okay, Great and then as a follow up the R&D.
Need towards electrification going to 5% of revenue do you view this as a sort.
And of new steady state or multiyear stated or is it sort of deca and initial larger investments.
Yes.
We expect as we look ahead that our R&D is going to be at that level, 5%, maybe even a little bit higher than that five to low fives as we look out over the next couple of years and still in line with our ability to deliver on our margin targets. As we look ahead to 2023. So I think you should think from a planning perspective because of the momentum that we have and the wins that we're <unk>.
And the marketplace and electrification that we're going to continue to invest more aggressively probably in that five day, even upwards of five 5% range over the coming years.
Great. Thank you.
Next question comes from Noah Kaye with Oppenheimer.
Thanks, Good morning, I'm glad we got to touch a little bit already on cash flow because free cash flow performance was very strong and the guide is actually very strong compared to consensus. So can we talk a little bit about the capex component of that.
Four 5% of sales I guess.
Near the low end of the historical range. After you can share of Capex and.
2020.
Can you give us a little bit of color on what drives this relatively low capex level are there are there fewer product launches this year.
And when if at all would you see that reverting back towards sort of a five or five and 9% level.
As you look at us over the last few years I mean, I know, we've talked about being in that five 5% range or even progressing toward 5% I think you can see over the last few years, we've actually been more and that mid to high 4% range and as we really scrubbed, our planning and looked at that on a go forward basis, I think we're probably going to be in that five percentage range on a go.
Forward basis, this share a little bit lighter, but it's actually pretty comparable to the types of capex investment we've been investing over the last few years.
So I think for this year you can see it's kind of in the four and a half maybe it'll trend up a little bit higher towards the upper end of that guidance range, we'll see but I think as you think about planning ahead for the coming years, probably and that 5% ZIP code is the right way to think about us.
Thanks, very much and then maybe a follow up question on on the M&A landscape and opportunity and really what youre looking for here and I think.
The company has talked in the past and particularly after announcing Delphi about pretty unmatched capabilities around.
Integration and and and.
Our broad portfolio for power.
Powertrain electrification so at this point.
As you look at M&A needs.
And more about competencies or about scale and.
Help us understand what the priorities might be.
So no.
And then if I very happy with that and then if I was them to gain scale and power electronics electronics software.
Predominantly and now we can think of that and the combination is on track you heard me, saying that the team is really strong now.
And now it's time with this new base with this with this new portfolio and technology breadth.
And Brent it's time to accelerate and.
As I mentioned the strategy will be share.
At Investor Day.
We're not looking for we don't want to disturb the Delphi integration.
And we will focus into technologies, we will focus and two technologies that allows us to be.
Stronger in.
And all the elements that electrons go and the battery electric vehicle.
Being Pascal commercial vehicle, that's that's that would be that would be the target around technology.
And and.
And the Delphi integration is a key focus and we're not going to disturb that.
Free cash flow.
And those two things the two questions are linked to each other free cash flow is strong and enabler of us being able to do what I, just said and our focus on free cash flow since about three or four years ago.
Ben it's been the right thing to do with that strategy in mind.
Very helpful and looking forward to more details at the analyst day.
Thank you.
Next question comes from Ryan Brinkman with Jpmorgan.
Alright, Thanks for taking my question.
And the announcement of the 800 volt electric motor for commercial vehicles can you talk about the four different variants and they have different use cases, what kind of commercial vehicles, where the motor be used in and and how are you thinking about the potential for other commercial vehicle Oems to potentially use this motor.
Are you able to provide.
And overview of the different products that you supply into or could supply into commercial vehicles to facilitate electrification. So theres. This motor I think theres some thermal management, but are your silicon carbide inverters or other products for the light vehicle industry also applicable for the commercial industry.
All the products that we do for pass car are available for commercial vehicle.
And the different variants are going to be used for different power power demands and functional demand from our customers.
It is it is it is a family of products and that can be translated into other types of commercial vehicle demand.
Couple of those motors, we have motor control.
You know that we are also into the commercial vehicle battery pack.
Area and so we are.
This market segment is really important for us the electrification of those vehicles.
We'll also with thing be profound and.
And we were ready.
Okay. Thanks, and I see you are incorporating in your guidance global light and commercial vehicle production up 11% to 14% in 'twenty, one weighted for your geographies, which is seemingly more conservative at the midpoint versus Ihs's mid January and expectation for plus 14% for light vehicles globally, but at the same time, maybe a bit more optimistic.
And some supplier peers have assumed given the semiconductor shortage issue, which I thought I heard you quantified about 1 million units are you able to tell us what your outlook is for global light vehicle production that rolls up into that 11% to 14% across.
And commercial end markets weighted for your geographies and I'd be interested to know too. If you expect any direct exposure to the semiconductor issue I don't know and your power electronics or and if your other components or if youre just looking at it from more of our indirect impact from lower customer and production at this point.
Yeah, Ryan with respect to the specific market assumptions that we're using and the breakdown by geography and of light vehicle commercial vehicle and in total we actually included a slide and our backup.
Slide 21, and the appendix materials to help you have that visibility so our global weighted light vehicle market range is 12, 5% to 15, 5%.
Growth in 2021, which that's the portion for light vehicle commercial vehicle global weighted is three 5% six 5% that blend gets you to the 11% to 14%.
I see Super helpful. Thank you and on the semiconductor issue do you think it's just indirect or any direct exposure.
So we have direct exposure since we are delivering a vast amount of electronics.
Systems and subsystems.
We've been jumping through hoops over the past two to three months to keep every every everything going so far so good I would say from a direct exposure.
And overall, we are including in the low end of our guide and impact of slightly more than $1 million.
A vehicle for the full year.
That's the exposure that.
And that we.
We see on the low end of the guide being direct or indirect.
Very helpful. Thanks, a lot.
Next question comes from Luke junk with Baird.
And good morning wanted to ask first about the <unk> customer conversations so I assume based on the time line that you've put out and you've probably completed most of those meetings at this point and I was just wondering if theres any additional color you can provide and the tone of those conversations versus your expectations.
<unk> going into the process you said the customer feedback is very positive and I'm. Just wondering if you could expand on that.
Yes, it's very positive.
So.
Yes, we've covered more than 75% of <unk>.
All customers.
And on the planet being <unk> and CV.
And I see three.
The three areas of synergies first when Delphi brings technology that we didn't have for example, silicon carbide Borgwarner is booking.
When borgwarner brings financial strength and customer intimacy.
Hum, which is which is an example of one of the one of the.
Product that I alluded to in my prepared remarks, Borgwarner is booking and the last combination that exist are product combination.
System combination and obviously this will take a little bit more.
More time, but borgwarner will be booking.
Great and then if I could ask another customer related question.
Specifically regarding U S emission standards and now that the buy and administration and it's been in place for a month, we're seeing sort of the last autumn makers back away from their support for the Trump Air emissions rules and I'm. Just wondering has that changed yet at least your conversations around turbo Chargers GTI et cetera are specific to the U S.
Yes.
We're not saying, we're not seeing any impact to two or to our discussion.
Through our discussion with our North American customers.
And from a from a product portfolio perspective from a technology perspective.
And we are ready to accelerate.
And at the pace at the pace they would like to accelerate we already.
With with Great technology is leading to very very good efficiency gains and battery electric vehicles.
Great and I'll leave it there thank you.
Next question comes from Joseph Spak with RBC capital markets.
Thanks, Good morning, everyone, one more maybe crack.
At the backlog I think previously you talked about 3% combustion outgrowth and 10% on hybrid and 17% on electric what does.
That looks like now under under the new backlog, recognizing theres a bunch of moving pieces.
Customer plans and hybrids, but also the integration of Delphi.
For today's meeting and we weren't going to go through that and detail. We wanted to give a profile that made sure you understood. How we're tracking toward our mid term outgrowth format and we still expect to be in that mid four and 5% range just as we talked about a year ago I think the big picture items that we wanted to make sure you're aware of coming out of today or the fact that force.
5%, plus or and the products and we continue to have the greater than 100% of the backlog on a net basis and hybrid and electric but where today, we are not going to be breaking down anything further than that from a combustion hybrid or electric perspective.
Maybe just as the follow up.
And recognizing that we will probably hear more about that later like one thing you did sort of update rate wise.
The addressable content because I think the last time you gave those numbers, we're pretty Delphi. So now it looks like on an electric.
Right.
Volume.
And $2 four K and before it was I think just under two and and combustion its a little bit over 900, and it was 684 so.
100 Bucks higher on each.
And you also used to give like an average CBD content and I think that assumed your participation rate of about a third on electric can you.
And if that has changed at all or is that still roughly what you think you can get post Delphi or has that has the number has changed.
And with some of the inverter and stuff you were talking about earlier today, yes.
And back on the content per vehicle opportunity that we talked about on the earlier side, we'd actually put those numbers out here a couple months ago. So they are consistent with what we've been sharing for the last couple of months, which contemplated basically combining the legacy borgwarner and Delphi content opportunities. When you look at the electric side you can obviously.
Do you see the number has increased quite a bit before we did have inverters and there because we had capability inverters and inverters, even prior to Delphi, but we didn't have it at scale and with the technological.
Logical leadership position and light vehicle that Delphi has so I think the probability of us delivering on on that content opportunity is increased and the dollar amount actually increase because of some of the other power electronics capabilities in particular that Delphi brings to the table and.
So as we talk about possibly peeling back the onion here, giving a little bit more data I think you should be on the watch for Investor day, and we'll give more color to how we expect the business to be evolving over the coming years.
Okay, Thanks and leave it there thank you.
Question comes from Brian Johnson with Barclays.
Yes.
Rather than doing some random housekeeping questions.
James.
Alright.
And I'm not going to ask you, although I'd love to hear within your backlog, how much is E motors versus inverters, but.
You put out some interesting slides and December after our comp and.
Discussion about what's in source outsource E motors versus <unk>.
Inverters, so and the.
E Motor World.
And you talked about 50% and towards 50% outsourced.
And a couple of questions do you have any update on that based on what you're saying and the market and then second with the C V wind and obviously with Kevin's background and CV.
Is that where and given most if not all of CB motors are going to be outsourced.
Do you see more pivot to the commercial vehicle sector, and then kind of third within that Meritor, and Dana and talk a lot about integrating them others into the axle set this looks like something you could put it under the hood of a freightliner and something and just drive additional transmission. So just maybe technically how that product works would be helpful as well.
Brian our view of.
And in sourcing versus outsourcing has not changed from what we presented in December.
And our view that our family of motors can be applicable in both Pascal and CV has not changed either.
And so we started bookings from CV business.
And a few years ago and this one is certainly.
Getting into another dimension, but we've always.
We've always and.
We've always and our product portfolio across Pascal and CV and learned from those two market segments to be.
At the forefront of technology and and and reliability.
And in terms of being in the axle versus away from the axle.
For us it doesn't really matter.
Most of our us away from the actual lowering the actual you will always need for very high.
Power density mode, with a very small comfortable and attached to it.
We are seeing is that.
More and more customers not wanting to be in the middle of the motor on the motor controller and Thats the thing those those synergies.
We're going to make our customers life easier going forward as we are able to.
A great motor and a great motor controller for blade.
Developed and supplied together.
Okay. Thank you.
Next question comes from Adam Jonas with Morgan Stanley.
Hey, Thanks, everybody one question one follow up first.
First on.
Asset write downs.
Auto companies and I have been announcing plans to aggressively decommission ice tech and some are planning outright stop sales and the next 15 years. So I'm wondering if you see scope for this to trigger some asset impairment or write down and some of your own.
Long lived IP and assets to reflect the curtailment of their useful lives are we at a point, where you could run such tests pasture auditors could.
Could we see potential write downs and the next year or two and at the same time could.
Could borgwarner be compensated by by Oems for the curtailments, given the upfront R&D investments you've made that may not.
And all the advanced ice pack that might might not.
Get the full engineering cycle behind it.
Yeah, I think as we look at at the moment and we don't see any sort of.
Accelerated asset write down I mean, the bulk of the investment we make when it comes to Capex for instances is depreciated over the life of the programs and so were really supporting programs and amortizing on that basis and.
And then just keep in mind some of our core businesses.
Our continuing to grow even and the ice space as we see some movement towards hybrids and whether you think of turbos and <unk> and <unk>, but again the basis of the way we depreciate assets is predominantly over the life of the programs that those assets are there to support and then when you think of footprint remember, we're predominantly and assembly model business and terms.
Our manufacturing footprint and so we actually can leverage using that footprint and different ways. As we look ahead, if we need to pivot.
Great and just a follow up I'm going to go back to slide 16 again.
And it's a pretty simple question, but the previous way you described that backlog. It just said net light vehicle here, it's a bit more of an elaborate definition and light vehicle CV net backlog plus aftermarket I just want to confirm because it wasn't I think I know the answer but just wasn't quite clear that there was no definitional or SKU.
Nope change from the previous way you described the backlog to now and then and then I'm curious how much aftermarket growth contributes to the mid 4% range what would that be if it didn't have that extra part to the right of the ampersand.
Good questions Adam.
In terms of the way that we're calculating the backwards. The one thing that's changed is the way, we're measuring market because commercial vehicles become a much bigger part of our portfolio, especially with the Delphi acquisition. We're now using market assumptions for commercial vehicle. In addition to light vehicle and then compare.
<unk>, our organic revenue growth against that weighted market. So that is one change that we have in the measurement the backlogs and as always included aftermarket as it from a dollar perspective and totality measured against those markets when we measure that.
Outgrowth, though what we do is we're measuring the outgrowth, but we're excluding aftermarket as a measure of that outgrowth against the markets because we're really measuring against the OE markets and we're measuring the OE.
Revenue that we're generating so and you see that mid 4% range. The math actually doesn't include any tailwind from aftermarket in the mid 4% range, but the backlog is comprehensive.
That's very clear I appreciate the clarification. Thanks.
We have time for one final question and that question comes from David Kelley with Jefferies.
Hi, good morning, everyone and thanks for squeezing me in and then.
Maybe just to follow up on the inverter discussion I believe you had previously noted a $4 billion plus billion addressable and Burger market by 2025, we were just curious as to how much of that and your view is likely to be tied directly to silicon carbide and also curious to hear your thoughts.
And how the competitive landscape might shift at the and Burger market appears to be transitioning to silicon carbide.
Yeah.
So.
There is we're leading the market with high voltage and silicon carbide.
And then.
And in our World, it's all about efficiency.
And it's certainly the.
Effect, then I voltage and silicon carbide enables <unk>.
Lower losses and higher efficiency.
And we're laser focused into enhancing this technology to the highest possible level.
I am.
And I'm very happy with what we're seeing the fact that we have vertically integrated power module <unk> software development is also.
Sure.
And the advantage that we have.
And that the customer also values quite a bit.
Okay got it. Thank you and then maybe just one quick follow up I believe Delphi had established a partnership with Cree as the silicon supplier for 800 volt Silicon carbide and burners that was prior to your acquisition. So I guess a is that part.
And our ships still at play here and also are they the supplier for the 400 volt transition.
Reference that should be a big part of some of the growth go forward.
The relationships that exist and I will not comment about sourcing of the silicon carbide the.
Partnership with Kris.
Not changed and is being nurtured.
Yeah.
Okay, great. Thank you.
Thank you.
Yeah.
With that I'd like to thank you all for your great questions. Today. If you have any follow ups feel free to reach out to me are ready with that.
And you can close the call.
That does conclude the borgwarner 2024th quarter and full year results Conference call you may now disconnect.
[music].