Q1 2021 Borgwarner Inc Earnings Call
Good morning, My name is Sharon and I will be your conference facilitator at the time I would like to welcome everyone to the Borg Warner of 'twenty or 'twenty, one first quarter 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 period, if you'd like to ask the question drain.
This time keep the press star one on your telephone keypad, if you'd like to withdraw your question press. The pound key if you are using a speakerphone. Please pick up the handset before asking your question I would now like to turn the call over to Patrick Nolan Vice President of Investor Relations Mr. Nolan.
May begin your conference.
Thank you Sharon.
Good morning, everyone and thank you for joining us today.
Each of our earnings release earlier. This morning, the listed on our website Borgwarner of Dot com on our homepage under Investor Relations home page.
With regard to our Investor Relations calendar, we will be attending multiple conferences. We've now of our next earnings release. Please see the events section of our Investor Relations homepage for a full of west.
Before we begin needs to of 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'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business of forms and for comparison purposes to prior periods.
When you heard of say on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
Can you hear us say adjusted that means excluding non comparable items.
Can you hear us say organic that means excluding the impact of FX and net M&A.
We will also refer to our market when you hear the same market that means the change in light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the market.
Yes.
Please note that we posted an earnings call presentation to the IR page of our website. We encourage you to follow along the slides during our discussion.
With that I'm happy to turn the call of their front.
Thank you Pat and good day to everyone.
Very pleased to share our results today for the first quarter of 2021 and provide an overall company update starting on slide five.
I'm very proud of our strong start of the year, despite the components supply of headwinds.
With just over 4 billion in sales, our first quarter revenue increased over 18% organically.
This compares to a market being up less than 13%.
So our outgrowth was about five of them 70 basis points for the quarter.
Which was ahead of our expectation and our guidance for the year, we saw strong outgrowth in North America and Europe.
Our earnings per share increased year over year due to the impact of a higher revenue.
Our incremental margin performance was in line with our expectations we.
We delivered strong free cash flow of one of them $47 million for the quarter. The good start towards our full year guidance.
We also secured additional new business awards for electrified vehicles, which I'll speak about in a moment.
And finally during the quarter, we announced the planned acquisition of ACA Phil.
The key strategic elements of the ACA sort of acquisitions are detailed on slide six.
Based on the last couple of years of experience we have in this space. We're believers in the prospect of EV battery systems, and I'm very familiar with the industry players.
As the leader in this space I guess I'll add been on our radar for a long time as the potential partner.
We're confident that I can fill in extending the how did the fitful borgwarner and we're really excited about adding the capabilities to our portfolio.
In particular, we were attracted to <unk> following strength.
Flexible battery technology across multiple cell architectures.
Moving technology and products with established manufacturing facilities already in the cellular production today.
Strong old of backlog of about $2 $4 billion, primarily from leading Oems and the focus on bus CV and off highway applications. We're extremely excited and expect to complete the transaction during the second quarter.
Next I would like to highlight the significant new program wins for electric vehicles on slide seven.
Borgwarner of integrated drive module or as we call. It our IDM was selected by a major non Chinese Asian OEM for its upcoming global Air segments Electric vehicle production planned to start in mid 2023.
This is of significant program for the company as it is our first AGM of world, combining Borgwarner is and legacy <unk> technologies portfolio.
It is a validation of the potential we so in bringing our two companies together.
I want to thank the team's intense efforts to get to such a significant booking only seven months after the close of the Delphi transaction.
And there is more to come.
This IDM features our electric motor or gear box and our integrated power electronics.
It operates at four hundreds of volts and his exceptional peak power of one of them 35 kilowatts.
The idea of weight and space are reduced by integrating our gearbox, our 400 volt silicon in water and our moda the.
This results in of maximize power density and functionality.
The IDM also offers of scalable and modular invoked the design, making it easily adaptable to customer requirements.
This is an important step for the company with a great partner.
Okay.
Next on slide eight let me summarize our new strategy called project charging forward that we unveiled at our Investor day in late March.
With the successful execution of the strategy, we expect to deliver over 25% of our revenue from electric vehicles by 2025, and approximately 45% by 'twenty 30 that compares to under 3% of revenue today.
Project charging forward as the three pillars.
One we.
We plan to profitably scale E. L vs through our continued integration of Delphi and our ability to capture synergies the new.
New IDM win is a great example, we would also pursue other organic and inorganic actions.
<unk>.
We intend to expand more aggressively into E. Cvs, we will do that by leveraging our strong intimacy with CV customers as well as our position in Elv's.
We're building out a go to market product portfolio and operation capabilities organically and Inorganically.
Or I guess sort of acquisition is a key part of this expansion.
And free we plan to optimize our combustion portfolio, reducing our exposure by disposing parts of the portfolio that we believe are lower growth that don't have a path to product to the ship all of that are not expected to deliver strong margins.
We believe we can fund the EV growth underlying project challenging forward, primarily from the capital generated by our existing operations.
This is not a sudden change in the company's direction. It is the logical extension to what we've been building since 2015.
We're excited about the acceleration of the market towards electrification and about the momentum that we're building with our customers.
I wanted to take a moment to thank all of the Borgwarner employees working very hard to both manage the present.
And accelerate the future of the company towards Bev.
Next on slide nine.
I am proud to announce that Borgwarner of achieved the great place to work certified status for the second consecutive year.
Great place to work is the global authority on workplace culture.
This certification validates Borgwarner is positive work environment.
I've said before that the Borgwarner secret sauce starts with our people.
To lead develop in the attract the best talents, we strive to be an employer of choice, where we operate around the world.
Guilty of Ada workplace environment that is collaborative true.
Transparent inclusive and that promotes continuous learning and excellence.
Yes.
So let me summarize our first quarter results and our outlook.
The first quarter was a good start to the year, particularly considering the supply challenges currently impacting the industry.
We delivered strong top line growth and we believe we're tracking well towards our full year margin and free cash flow objectives.
Our first quarter performance has led us to increase our full year revenue and adjusted and adjusted earnings per share guidance, Despite lower industry production outlook as Kevin will detail.
As we look beyond 2021, I'm extremely excited about our long term positioning.
We are continuing to take significant steps that we believe will help us to secure profitable growth well into the future.
We are winning in line with our expectations in the electric world both from a component of standpoint, like Inverters and <unk> for example, and also from the latest generation systems standpoint without idms.
We are focusing on the disciplined inorganic investment approach like the planned acquisition of <unk>, which adds great technology to our portfolio why is supplementing our growth profile.
With that I'll turn the call over to you Kevin.
Thank you Brett and good morning, everyone.
Before I review the financials in detail I'd like to provide a quick overview of the two key takeaways from our first quarter results.
First our revenue came in stronger than we were expecting going into the year.
This was driven by the fact that we delivered solid outgrowth with both the legacy Borgwarner and former Delphi technologies businesses performing better than expected.
Second our margin and cash flow performance in the quarter were strong driven by the topline results as well as our cost saving measures.
So, let's turn to slide 10.
As we look at our year over year revenue walk for Q1, we begin with pro forma 2020 revenue of $3 2 billion, which includes $945 million of revenue from Delphi technologies.
You can see the foreign currencies increased revenue by about 6% from a year ago.
And then our organic growth year over year was over 18% compared to a less than 13% increase in weighted average market production.
That translates to 570 basis points of outgrowth in the quarter, which breaks down as follows.
In Europe, we outperformed by mid to high single digits, driven by growth in small gasoline turbo Chargers and strong performance in multiple former Delphi technologies businesses, most notably fuel injection.
In North America, we outperformed the market by high single digits as we saw a nice benefit from the ramp up of the new Ford F 150, and other new business launches.
In China, we underperformed the market by mid single digits against very strong outperformance in the first quarter of 2020 also keep in mind Q1 was a very unusual quarter last year in the face of COVID-19, primarily in China.
The sum of all of this was just over $4 billion of revenue in Q1, which was a new quarterly record for the company.
Now we do believe that some of the strong outgrowth. We delivered in Q1 was the result of the production of build and hold vehicles by our customers in multiple regions of the world.
That means it's likely that some level of our reported outgrowth in Q1 is inflated due to a pull forward of production into the quarter.
This will have an offsetting impact on our expected outgrowth later in the year. However, our outgrowth for the full year is still expected to be above our prior guidance as I'll discuss further in a moment.
With all of that background of mine, we're pleased with the strong start to 2021.
Yes.
Now, let's look at our earnings and cash flow performance on slide 11.
Our first quarter adjusted operating income was $444 million compared to the pro forma $274 million in the first quarter of 2020.
This yielded an adjusted operating margin of 11, 1%, which was up compared to the 10, 3% margin for Borgwarner only in the first quarter of 2020.
On a.
Terrible basis, excluding the impact of foreign exchange.
Adjusted operating income increased $145 million and $591 million of higher sales.
That translates to an incremental margin of roughly 25%.
This solid performance was driven by conversion on higher volumes restructuring savings and Delphi technologies' synergies in excess of purchase price amortization.
We are particularly pleased with this performance given elevated supplier costs that we experienced during the quarter.
Moving on to free cash flow, we're proud of the fact that we generated $147 million of positive free cash flow during the first quarter, which was roughly flat year over year, Despite increased investment in working capital.
Let's now turn to slide 12, where you can see our perspectives of global industry production for 2021.
As a reminder, our market assumptions incorporate our view of both the light vehicle and on highway commercial vehicle markets.
As you can see we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 9% to 12%.
Which is down from our previous assumption of an 11% to 14% increase.
This reduction to our prior market outlook reflects the ongoing impact of the semiconductor shortage on the industry production.
Looking at this by region, we're planning for North America to be up 17% to 20%.
We see the largest incremental impact of the semiconductor shortage in North America with our market expectations down approximately 500 basis points from our initial assumptions.
In Europe, we expect the blended market increase of 9% to 12% with that range being down approximately 200 basis points from our earlier planning assumption.
And in China, we expect the overall market to be roughly flat year over year similar to our previous estimate.
Now, let's talk about our full year financial outlook on slide 13.
Starting with our pro forma 2020 sales, which includes $2 $6 billion of revenue from the first three quarters of Delphi technologies in 2020.
As you know those revenues were not part of our P&L last year.
But to provide year over year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.
You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly 0.9 to $1 $3 billion.
Next we expect to drive market outgrowth for the full year of approximately 300, the 500 basis points, which is a meaningful step up from our previous guidance of 100 to 300 basis points.
Our higher outgrowth guidance is based on the stronger than expected outgrowth in the first quarter and outgrowth for the balance of the year being higher than our previous guidance based on better than previously expected revenue trends in a number of former desktop Delphi technologies product lines.
Based on these assumptions, we expect our 2021 organic revenue to increase about 12% to 17% relative to 2020 pro forma revenue.
And then adding of $400 million benefit from stronger foreign currencies were projecting total 2021 revenue to be in the range of $14 eight to $15 $4 billion.
That's up from our prior guidance by about $100 million at both ends of the revenue range.
Even with weaker end market outlook are stronger revenue outgrowth is driving an overall increase in our revenue guidance from the guidance, we gave last quarter.
Also you should note that we're maintaining a wider than typical revenue range at this point of the year due to the wide range of potential production scenarios that I discussed on the previous slide which stems from the volatility and uncertainty in end markets of rising from the industry wide semiconductor issues.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10, 1% to 10, 5% compared to a pro forma 2020, adjusted operating margin of eight 3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance includes $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.
And based on our year to date performance, we believe that we're tracking at the high end of this range.
Based on this revenue and margin outlook, we're expecting full year adjusted EPS of $4 to $4 35 per diluted share, which is an increase from our prior guidance of $3 85 to $4 25 per diluted share.
I would point out that this guidance now assumes a 31% tax rate versus our prior guidance of 32% as a result of the successful execution of certain international tax planning initiatives.
And finally, we continue to expect that we will deliver free cash flow in the $800 million to $900 million range for the full year.
This is flat with our prior guidance as we expect the higher sales outlook to drive an increase of working capital debt largely offset higher adjusted operating income.
This would still represent a record annual free cash flow generation for the company.
That's our 2021 outlook.
Let's turn to slide 14 for an update on the near term actions related to project charging forward.
On the acquisition front, we believe we remain on track to complete the acquisition <unk> acquisition in the second quarter.
We've now received regulatory approvals in all required jurisdictions.
The tender offer is in progress with the final acceptance period expected to be completed later this month and then what the closing shortly thereafter.
<unk> represents an important part of project charging for it.
As it represents approximately 20% to 25% of the estimate of 2025 revenue from acquisitions underlying our plan.
And it significantly increases our exposure to the ECB space.
As it relates to portfolio optimization, we continue to target combustion related dispositions with annual revenue of approximately $1 billion to be executed over the next 12 to 18 months.
The process for these dispositions is underway.
We would expect to update you on our progress there as we get closer to executing those transactions.
So let me summarize my financial remarks.
Overall, we had a really solid start to the year, despite the industry supply headwinds.
We delivered 570 basis points of market outgrowth, and 11, 1% adjusted operating margin and $147 million of free cash flow.
And we increased our full year revenue and earnings guidance, despite moderate moderating our industry production assumptions.
Looking beyond our near term results, we're taking the necessary steps to accelerate the company's progression towards electrification the.
The <unk> acquisition and today's IDM announcements are great examples of our progression.
And importantly, we're executing our strategy from a position of financial strength.
Ultimately, we expect Thats the successful execution of our strategy will drive value creation for our shareholders.
With that I'd like to turn the call back over to Pat.
Thank you, Kevin Sharon rate of open it up for questions.
At this time I would like to remind everyone. If you'd like to ask the question press. The star one on your telephone keypad, if youre using a speakerphone. Please pick up the handset before asking your question in the interest of time, please limit yourself to one question and one follow up question.
Just a moment to compile the Q&A roster.
This question comes from Chris Mcnally with Evercore ISI.
Thanks, So much team wanted to add two high level questions around EV demand in the first of all around lead times.
The business that Youre, winning in 2021 for the Moe.
The part is is it fair to say that the startup of production for 2025 and beyond I was kind of surprised by the by the comments that you made about the IBM would be at the.
Early 2023, just trying to get a sense of.
The Mega awards out there.
And what type of lead times, we're looking at.
Yes, we're talking about the trauma of production in the second of half of 2023.
This is this is something that the depending on the production ramp up can be can be very well achieved.
I don't see any issues with that at all.
And is it sort of surprising that there weren't meeting that business out to be awarded so some soon or is it maybe you're just we're only able to actually disclose that you.
Had that specific customer just now.
No we were disclosing that when the.
A pretty much of.
At the same time, we want it we're not disclosing the name of <unk> you.
You've noticed and we'll do that when we can.
Hey, Chris I think it's fair to think that it's normally it's a three year type of of lead time. So most of the production awards, we would be looking to win in 2021 of probably more likely going to be in that 'twenty four 'twenty five timeframe, but there is some fluctuation around that and this one happens to launch later in the latter part of 2023.
No it's simple.
Super helpful. I mean, the reason I ask is basically there was another European supplier of that was mentioning some of the mega programs like VW.
Basically we're only going to award business for 20 567 later in the year. So I just wanted to check with you guys. It's super helpful.
The second question is maybe by by region and I know, it's hard to be the sort of.
Overarching question, but where do you think specifically for the Borgwarner borgwarner.
Suite of products are you seeing right now the most amount of.
Of interest when we think about it on a on a region basis.
No I think I think on the on an Esa we see growth in all regions and some regions will.
We'll be more on components some regions will be more on systems, even if that is not of clean cut of we see we see growth in all major region. It is it is also true then.
Those are the regions don't move at the same pace on the on the on the on the electrification so.
So of so you'll see you'll see potential growth in North America, a little bit later than in other parts of the world.
Great and then if I could sneak in one last one just to be greedy I mean, the IDM win the Super interesting.
Since it's in a segment car.
Should we expect lower content per vehicle or can you still get that 500 plus.
We have laid out and in some of the the detail at the analyst day.
I'm not totally of the able to answer the price point at this point in time I don't think you can.
Uh huh.
Just the price point, depending on the on the size there is a little bit of that but.
I'm not in the position to answer that in detail Chris.
Fair. Thanks, so much.
Next question comes from James Picariello, with Keybanc capital markets.
Hey, good morning, guys.
Good morning, James.
On the guidance can you just provide some context on the second quarter in terms of what Youre seeing thus far in an OEM build schedules related to the chip shortage and just how you perceive that situation playing out in the back half relative to the market assumptions you laid out.
Yes.
As you know, we're not providing quarterly guidance, but what I can tell you is that we do expect the bigger impact from the semiconductor shortage issue to occur really in the second quarter and a little less so in the third quarter.
If you look at the way I would help you dimension. It is if you look at what's implied at the midpoint of our guide for instance, about the last nine months. It implies that the average quarterly revenue somewhere in that $3 7 billion Zipcode and you should assume that probably.
The semiconductor issues more likely going to have a bigger impact in the near term as opposed toward the back end of the year.
Okay, No that makes sense and then on Borgwarner is outgrowth I mean, clearly the first quarter came in stronger.
Can you provide color from maybe a product perspective segment perspective revenue what drove the quarter's strength because I thought the first half year had a difficult diesel comps from from an outgrowth standpoint. So just curious on the upside and how we should be thinking about growth over market for the rest of the year and I guess also you know within the context of the the chip shortage.
Lower volumes, maybe near term.
Yes.
I think a few of the things that we saw from a pure product perspective. The Ford F. 150 launch was actually helpful. In terms of driving some of the outgrowth that we saw in North America, we saw gas turbo business in Europe, which was helpful and we saw good performance across the legacy of Delphi technologies businesses.
Stronger than what we were anticipating as we started the year protect the particularly in the fuel injection business. So I mean, I think we saw it across a wide variety of our businesses and so as we look at the back half of the year you saw that we took up the full year of outgrowth guidance I think before we were at 100 to 300 basis points for the full year now, we're saying the full year's 300 to 500 basis points.
Based on both what we saw in Q1 as well as what we're expecting in the back nine months of the year. So in the last nine months of the year I think it stacks up to be about 200 to 450 basis points or so of implied outgrowth in that full year guide.
Very helpful. Thanks.
Yeah.
Next question comes from Noah Kaye with Oppenheimer.
Hi, good morning, Thanks for taking the questions.
So the organic growth in the quarter.
The year over year being paced by E propulsion of drivetrain at 36% what were the major drivers of that growth just trying to get a sense of the segment is more geographically weighted to last year's more affected markets, whether there was some significant E business growth of ingots, giving some color on the segment.
I mean, we're not we haven't really disclosed outgrowth by segment, but clearly when you look at that segment that we do have a lot of business in that segment coming out of China, and the global markets, where simply up a lot more in China. If you look at our global weighted production. It increased about 80% in China versus you look at Europe, and North America.
Much smaller increases or even down in North America on a blended basis. So that's part of the reason you see stronger revenue numbers year over year in that business. It has a little bit more disproportionate skewing to the Chinese market than some of our other businesses.
Sure makes sense. Thanks, and then maybe just if you can comment on the drivers for the increased Capex outlook I'm just curious to know if there's new programs getting pulled forward any other factors to consider in increasing the capex outlook for the year.
Not specifically I think as we've just rolled up our programs and rolled up our forecast, we've we've realized that probably needed to take that up a little bit along with that there are some of the investments, we're making associated with the Delphi Technologies' integration, particularly on the it side that are actually being bucket it of in capital that we didn't.
Anticipate we thought it would be in a different line item. So we're bucking that now on capex as well so that has a little bit of an impact. Although that's just a left pocket right pocket when it comes to free cash flow outlook.
Alright, thanks, very much of the color.
Next question comes from Dan Levy with credit Suisse.
Hi, good morning, Thank you.
Just wanted to start on the on the growth side.
One of your key customers is highlighting.
Particularly challenged volume outlook. So maybe you could just give us a sense for and I know you've given us the ranges there but.
You know to what extent is the end market guidance, reflecting maybe some of the more draconian outlooks that have been sighted and then also of you could just comment in the quarter.
How much revenue growth did you get from maybe partially built vehicles vehicles that may not be reflected in the production builds but that you ship the goods too.
As we look at I mean, you can see the our end market production assumptions, we've taken down about 200 basis points globally, which factors in the intelligence. We have based on production schedules based on conversations with our customers and based on other things that we see going on in the marketplace. So so based on the things that we've seen announced or discussed with <unk>.
<unk> as late as last week, that's contemplated in our full year guidance and Thats part of the reason, we took our guidance down from a production perspective, particularly in the North American market.
Well I'm sorry, Dan what was the second part of your question.
Was there any growth benefit of revenue benefit in <unk> from partially built vehicles, yes.
I think the answer to that is yes, although it's hard to tell for certain when you look at that outgrowth coming in at about 570 basis points.
We're trying to sort through the numbers, it's not 100% clear, but our expectation is the amount of outperformance were generating relative to call. It that 300 to 500 basis points full year is probably the amount that's that's.
<unk> linked to the build and hold vehicles that we're seeing but it's really hard to dimension that for sure, but thats our assumption at the moment.
Great Great and then my follow up is really just more of a I'd say of follow up from the Investor day, and it's around Silicon carbide and high voltage. The burgers. So I think this is an area that you mentioned you had some market leadership, you've obviously got some pretty.
Chunky wins here.
The content could be a pretty material step up over the some of the based on <unk> could you just maybe walk us through your view of how you see.
Nick's for yourself or for the industry.
Silicon carbide or high voltage vs. IGT over time, maybe the margin content differences.
How did the competitive environments different wondering you know is there.
As we get more silicon carbide does that incrementally favor you more versus some of your competition.
Yeah, you see one of the advantage that we have is that we can do.
Low voltage silicon the higher voltage silicon count by very high voltage of the 800 volt Silicon carbide and we are positioning our sales more in the high voltage.
Hi, Oh, let's say lower losses type of product more efficient product with silicon carbide.
<unk>.
Yeah.
The tendencies to increase efficiencies for the tendencies to go to.
Two of those direction of higher efficiency technologies.
At the end of the day, it's the customer's choice, who want to who is going to decide what they want.
And Silicon carbide is primarily on the <unk> vehicles today, they might find their way down to the two other ranges in the future.
And the competitive environment, your competitive positioning versus the others on silicon carbide or of hub voltage.
I really like where we are.
Yeah.
Okay, great. Thank you.
Next question comes from Rod Lache with Wolfe.
Wolfe Research. Please go ahead.
Hi, everybody.
So it does look like the adjustments that you're making the global production in North American production to go beyond what we heard from Ford last week and I'm just wondering if.
Okay.
Or do you think your customers are providing transparency into the constraints that are kind of bubbling up through the supply chain from tier threes tier twos at this level.
Obviously, some some questions about that in light of what we saw from Ford and.
Do you see of other Oems moderating their forecasts anywhere near what we're seeing per one.
For that one customer.
So what I would say is that for sure we are very aware about about.
What we are delivering meaning that we are on top of making sure that we can.
Continue the flow of products and we have a lot of three party meetings with our customers ourselves and the semiconductor suppliers and we manage debt very very very intensively and very as accurately as we can.
We see some we see some customers that have announced shutdown the obviously.
We are sometimes the west through the schedule changes, but more of a way of through the discussions that we have with our customers more than looking of the schedules and that is informing also auto market intelligence on what is likely to happen.
Okay.
And then I was hoping maybe you just can elaborate on just two points. One is the strong turbo and <unk> mix.
Are there any changes that are happening here.
So we've seen very strong performance in hybrids in Europe recently, but are you are you detecting any kind of.
Durable strength, that's happening there and any color on what you've experienced in terms of the commodity costs and your outlook for that.
So of.
The rug there is a strong demand for efficient.
Of the downsize gasoline engine and all of the efficient downsized gasoline engine are usually turbocharged and include <unk> injection right. So.
That is that is one key element for combustion based engines as well as for hybrid engines.
Sure.
The second part of your question is around raw material, we are seeing some increases.
Incorporated we have incorporated what we had seen so far in our guide.
And the color I wanted to give you is that of.
On the biggest raw material purchases, we have about 60% debt through with our customers.
And when when we go into discussing those items with than we usually do it should be better than debt.
So that's that's the that's the situation of room on enrollment jail and yes, we're seeing some we're seeing some inflation.
What's the magnitude of that.
And we have we're not disclosing that it's just embedded in our guidance and so the good news is we're able to offset that with the performance. We're seeing in the business in April of actually even take up the bottom end of our margin range for the full year.
Understood. Thank you.
Thank you Robert.
Next question comes from Joseph Spak with RBC capital markets.
Thanks, everyone, maybe just to follow up on some of that one.
Despite all of that Kevin so.
You are pointing to some weaker margins over over the balance of the year now as you pointed out like the average sort of revenue is lower than the first quarter. So is it really just.
A volume sort of.
Flow through of dynamic or.
Is there sort of the less or a bigger net raw material headwind there may be some other things like freight has obviously been some of that's been called out as big.
The constraints in the system.
Yes, I mean, it's really fundamentally linked to volume more than anything else. If you look at what's implied by our guide about the back half of the year, it's still.
It's still suggests that we're going to convert in the low 20 per cent call it 23% to 25% over the last nine months of the year pretty much in line with what we saw in Q1 on a year over year basis. So.
Nothing beyond volume of certainly there's puts and takes in our P&L you have certain things going one way of sort of things going on in other but overall when it comes down to in our guide is really the conversion on incremental revenue.
Okay.
Second question just on the IBM Award the first using combined Borg Warner and Delphi technology.
I know you said the tour in a segment of the vehicle can you just spend a lot of the time talking about like how scalable is is that kind of is what youre showing therefore for larger vehicles and is it actually like an easier or harder for larger small vehicles I imagine each comes with some of its own engineering complexities.
It is scalable it's easy as the modular of.
And in both of US pinpoint the the building blocks of our modular.
The same four of motor standpoint, we are familiar of motor and the transmission that is hosting the whole thing.
Will.
Will.
We size up depending on the tools that we need to to.
To give.
So it's it's fairly modular.
I would not.
The thing that.
Smaller idms or Inc.
The class vehicle IDM of more or less complicated than C class vehicles idms the different types of complexities.
For sure.
With the customers that we have.
Wait.
Perfect N V H.
And and and and good power density is very good power density was key element for us to to win this program. The west competitiveness of Julian I think this is the recipe for success for the full the full the others ibm's debt.
Debt.
<unk>.
We don't really come in the future. So you will see continuous booking both from a component standpoint.
The power electronics.
Combined power electronics boxes, combining and voters in DC DC converter of any of the type of combination of UEC also hopefully continues booking on the system like this IDM.
Okay. If I could just sneak one in any update on the $1 billion of dispositions or of the market for that I'd expect by the all next year and what can we expect some of that to occur in 'twenty one.
Yes, I think the process is underway.
Nothing to report obviously, we're 45 days removed from announcing our project charging forward strategy.
I think we still.
Feel good about the the ability to deliver on the approximate $1 billion of dispositions over the next 12 to 18 months. So we'll update you when we're closer to executing transactions, but nothing additional to report at this point sitting here today.
Yes.
Thank you.
Comes from John Murphy with Bank of America.
Good morning, guys. Just the first question to follow up on the the production outlook.
Without naming names or maybe if you could give us groups in health very well to.
The upside of the downside of the changes in schedules been because it just seems like some automakers, particularly the Japanese gone through this with the tsunami and the past out of better handle on the CIT had higher buffer stocks Europeans, maybe somewhere in the middle of and it seems like the North American companies are less prepared for this and Thats. The reason theres the may.
These extreme divergence as opposed to the companies not being up the data I'm just curious what your perspective on sort of the variances between your customers' preparedness.
To this and why we might be seeing as the emergencies.
So in the thing it varies a lot of across the region across customers.
Upon.
The sourcing strategies and things like that.
<unk>.
And by program, it's very difficult for us to.
To figure out.
Those dynamics will not and we're not in that in that detail of what.
OEM.
What the Oems issues in details all right. So what I can tell you is debt.
It varies.
I don't want out of.
A way to ring fence, this either by region or by customer types.
It is not possible at least for us.
Okay.
And then maybe just a follow up on the IBM.
Congrats on the award is the kind of thing that everybody was skeptical that you would ever get and it seems like you've gotten a pretty early on so it's a good sign.
As you think about the transition towards the electric powertrain.
Sort of skeptics.
On your company that believes the automakers of any source everything.
And then there are some optimist of realists that I would call them that you have to understand at least part of the parks will get outsourced and maybe overtime full of ibm's might be away.
Go.
Thank you.
As you look at the the shifting technology, how different do you think it is versus the other shifts in technology can be seen in the past where the automakers are trying to learn what's going on and sometimes they might in source and sometimes it might outsourcing how do you think this is it.
Going to shape up.
Or similarly to past transitions in technology.
So John I think at the end.
Of the product leadership and scale will prevail.
The the force of the force of that will win.
There will be some insourcing.
The market is very big and the content per vehicle debt that we have on the E is three times the more than we have on CNA I gave some examples sometimes than the wanting volta is equivalent to pretty much.
Ken sale if.
If we sell it all on combustion.
So as you mentioned the IDM is of very very good example, there is the mall to come on the system outsourcing.
And.
Again, you will see some customers that are outsourcing they won't do learn the to buy better some customers will install some platforms out some outsource some others.
And the.
That varies across customers and the cross region and that will also vary overtime, where I think when suppliers like us we'd have.
Very good product leadership and scale in an IDM for example, but you have other products.
I think the the likelihood for us to be able to sell more systems is becoming that will become higher.
All the time.
But I'm sorry, just one follow up that I mean, how different do you think that is in the commercial vehicle market. I mean, it just seems like there is huge potential for outsourcing their consolidation with the <unk> acquisition. It seems like Youre right to play is.
Pretty strong I mean is there even a greater opportunity on the commercial vehicle side at least for the foreseeable future.
Yeah.
I would say that especially on the battery pack standpoint, there is obviously the way more opportunities on the commercial vehicle for US then on Pascal debt is one of the reason why we went and focused on commercial vehicle debt recharging systems.
And battery systems, so on the on that front there is.
There is there is certainly more room for outsourcing than than on the Pascal sales.
And on the IBM.
On the IDM.
Uh huh.
I think generally.
The likelihood of outsourcing in commercial vehicle.
By the volumes of those industries and by the diversity of what is required.
<unk> is at the high level.
The needing to maybe more outsourcing than than in other segments.
You have seen the commercial vehicle I think maybe more combination of motor and power electronics as those two go together one controls the other.
Then the idms from from a from a promotional the propulsion standpoint.
Okay. Thank you very much.
Next question comes from Emmanuel Rosner with Deutsche Bank.
Hi, good morning, everybody.
Hey, Good morning, I was hoping just good morning, I was hoping to follow up on the.
Your comment about.
The insourcing versus outsourcing of electric powertrain.
And wondering how much we can read into this.
Specific.
First when so.
Are you able to comment on.
Whether the customer has other evs, either onshore coming out of things.
Whats the sourcing strategy has been the so.
I'm wondering if there's something we can read into of shifts towards sort of like more in sourcing of weather, depending on which platform in which class of the equal.
Some of our different sourcing strategy within the S. One OEM.
Obviously, we won't give you cant give you detail on the customer.
What I can what I can give you is that I think.
What it means is debt.
Great technology.
He is making of different and.
And in the in line with my prepared remark I want to again, thank the borgwarner the team.
<unk> been working.
Since the closing of the Delphi transaction together to get in the world of this magnitude and that strategy impact seven months. After the close of thing is pretty remarkable.
Yes definitely.
Are you able to comment on the year.
The volume expected for this program.
No.
The I call.
Okay.
I guess on the <unk>.
The topic, so the volatility around the.
The semi shortages.
I was wondering how do you manage this on the on the ground and I guess in your operations non.
True.
The baking on forward, but I guess that you have some.
For the clear out growth last week it feels like the lot of their factories may be shut for a prolonged amount of time in Europe, potentially six or eight weeks or so and so.
And with pretty low amount of notice little notice. So how do you manage this in terms of cost efficiencies and making sure. The so thanks.
<unk> continued to run at the right level of margin.
So there is two facets to that.
First is the fact that of what we supply to our customers that ive semiconductors and the we working.
Very well with our customers and with our semiconductor suppliers in order to keep keep it going.
The second is when we impacted by somebody else's shutdown, you're thinking for the as an example, well we are agile enough to be able to to manage debt and with the notice we have.
This is something that we do for a living we can flex and this this particular element is is in the Grand scheme of Borgwarner is not going to move the needle to two of.
Point, where where is impacting us too much.
The plants and the pump manages know how to how to flex with the app to flexing the other to cope with the latest schedules.
That's very true and then the final follow up on this topic as.
You were mentioning I think in the prepared remarks, some supplier of elevated costs.
And the way too.
Quantify this and how material those were in the quarter.
Yes, there were two things that are really impacting us one in the bigger item was really a troubled supplier situation that we have impacting one of our segments in Europe and Youll see that disclosed in the 10-Q as well and that had about an $18 million impact in the quarter and then the second as we talked about earlier is the impact of commodity cost.
On us as well we are seeing some escalation there as Fred noted, we do have recovery mechanisms for the underlying movements in the raw materials that are just a subset of our material purchases, but that does have an impact on us and we will continue to have an impact as we look ahead to the balance of the year, but again both of those things are contemplated in the the 11%.
Margin performance in Q1 as well as the full year guide of 10, 1% 10 five.
Great. Thank you.
Okay.
Next question comes from David Kelley with Jefferies.
Hey, good morning, and good afternoon, maybe starting with a follow up on that last semi conductor point.
Just given the your electronics mix you referenced discussions ongoing with your semiconductor partners I guess can you talk about if you're currently seeing any price inflation and electronics or if you expect to see increases and then the also was curious to hear if you. If so if you see an opportunity of pass through.
We're not seeing we're not seeing anything.
Important.
So far.
It is it is the situation is as you know still very volatile, but we've not been faced with those types of demands yet.
Okay got it. Thank you and then maybe quickly shifting gears.
You raised your commercial vehicle underlying outlook just curious if you could talk a bit more about contribution to the quarter and how youre thinking about the CV our growth through the balance of the year that'd be great.
Yes, I mean, the main thing that we saw from of CV perspective was really China coming in a little bit stronger, including Inc. But from a production standpoint than what we were previously guiding to but that's really all of the comment on at this point, it's mainly coming from that.
Okay got it. Thanks, So Kevin maybe one quick follow up on that can you remind us the typical of an incremental margin contribution from commercial vehicles.
We haven't broken it down between commercial vehicle and light vehicles I think it's appropriate to think of US just until the <unk> is being normally in that.
High teens from a conversion standpoint, obviously our guide this year, both what we delivered in Q1 and in what we're guiding to for the full year suggests that were in the low 20% tiles from our conversion year over year perspective, which would contemplate anything in both the CV in the light vehicle space and obviously, we're getting a tailwind from things like the cost synergies in excess of.
The purchase price amortization getting a tailwind from the execution of our restructuring initiatives. Both on the legacy Borgwarner side and project pioneer at Delphi and so it's leading the conversion that this year is in the low twenties right now.
Okay, Great. That's helpful. Thank you.
We have time for one final question and that question comes from Brian Johnson with Barclays.
Yes, good day everyone.
It is the less glamorous part of the drive and power electronics business than pure Bev, but can you comment a bit on the pace of your business and plug in hybrids and just how that could unfold in the next couple of years.
Before further inflection of debt, perhaps later in the decade for mid decade.
Sure.
We are we are seeing.
A pool.
The strong pool of shooting for pregnant hybrids.
The coming from Europe.
Also a little bit from China.
And as you know, Brian we more into the high voltage plug in hybrids.
More than the in the lower voltages and we see strong pool.
We're very very happy with the programs that we have in the pool that we're seeing and especially in Europe.
Okay, and I'd think of a few people who sit on commodities, but in the past there've been some special alloys, I think forget which the alloy that pitch of about five six years ago was it.
Is that going to be particular problem now.
In terms of the input cost of that alloy and two are you now fully protected with pass throughs of that particular alloy.
Yeah, I mean, when it comes to steel costs, we are seeing underlying inflationary pressures in the raw material underlying our material buy remember of material spend for us runs about 55% of revenue and the underlying raw material is the.
The relatively modest percentage of that but within that spend the bulk of which from a raw material exposure perspective would be on the steel side. We are seeing some inflationary pressures, but as Fred mentioned, we do have cost recovery mechanisms with our customers associated with the underlying raw material increases, but there is an impact.
Hitting us this year and it's embedded in our guidance.
Okay. Thank you.
Yeah.
I would like to thank you all for your great questions. Today, Sharon you can go ahead and close out the call.
That does conclude the Borgwarner of 2021 first quarter results Conference call you may now disconnect.
Okay.
Alright.
Okay.
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