Q2 2021 Borgwarner Inc Earnings Call
[music].
Good morning, My name is Jerome and I will be our conference facilitator at this time I would like to welcome everyone to the Borgwarner 2 pals from 'twenty, 1 second quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks.
There will be a question on care period.
If you would like to ask a question. During this time simply press star 1 on your telephone keypad. If you would 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 like to turn the call over to Patrick Nolan Vice President of Investor Relations. Mr. Nolan you may begin your conference.
Thank you drew.
Good morning, everyone and thank you for joining US today, we issued our earnings release earlier. 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 <unk> earnings release.
Please see the events section of our Investor Relations homepage for a full list.
Before we begin able to inform you that during this call. We may make forward looking statements, which involve risks and uncertainties as detailed on our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods.
When you hear us say on a comparable basis.
Excluding the impact of FX net M&A and other non comparable items.
When 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. When you hear us say market that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the market.
Please note that we posted an earnings call presentation to the IR page on our website.
Carriage 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 day everyone.
First on slide 5 I'm very proud of our strong performance in the quarter. Despite the ongoing components supply headwinds.
With just on the $3.8 billion in sales on our second quarter revenue increased over 72% organically.
With strong incremental margins and free cash flow.
As Kevin will discuss we are increasing our full year guidance as we believe our growth in synergies are offsetting commodity and other headwinds.
Net total short term execution.
Now going forward I'm very proud of our sustainability strategy highlighted in a report that our team just published.
The acquisition of <unk> was completed in early June and I'm very positive about what I see great technology, great entrepreneurial spirit and mindset.
Got it from ACA filled to Borgwarner.
And we secured multiple new product awards for electrified vehicles, which I'll speak about in a few moment.
Starting with our overarching sustainability topic, and our vision to a cleaner on more energy efficient world.
We'd like to highlight some key takeaways from our global sustainability report called evolving for <unk> on slide 6.
Evolving for comprising 2.1 document what is possible when nearly 50000 people resolve to do the right things.
It is a testament to our commitment to create an enterprise that is shaping the future of sustainable mobility.
We are accelerating our clean mobility technologies, we're reducing our carbon footprint on a weighted on our way to achieving our stated goal of carbon neutrality by 2035.
The reported also includes scope 3 emissions data to illustrate how our product on improving the world in which we all live.
We're fostering a diverse and safe workplace and giving back to our communities and our pay equity on that is shows parity results I'm extremely proud of our sustainability focus.
Moving on to another pillar of challenging forward, we have completed the takeover offer of ACA. So early June as detailed on slide 7.
Since then we have increased our ownership stake to approximately 93% through additional share purchases.
We have informed <unk> of our intention to progress towards a squeeze out process to achieve 100% ownership.
To put in perspective, we expect <unk> to represent 20% to 25% of the M&A portion of our challenging forward project announced just 4 months ago.
I guess, Phil also continues to secure additional new business Awards.
Last month, we announced an agreement to supply their battery systems to a major bus and commercial vehicle manufacturer from Belgium.
<unk> will supply the second and third generation of their high energy systems for the customers knew all electric city bus starting in 2021.
Yes.
Now, let's go to China and look at other recently announced new product awards for electrified vehicles on slide 8.
First we announced new contracts to supply dual inverters for great wall motor and another major Chinese OEM.
Julien voters will be features on both hybrid electric vehicles and plug in electric vehicles for these customers.
By combining different power electronic technologies into 1 compact package.
Fueling Virtu provides unrivaled functionality.
A single unit can control and drive to electric motors, while delivering cost and weight reductions.
These advanced inverts or awards showcase not only the product leadership, we have in these domains.
But also their trust and confidence we have built in on electrified applications with multiple Oems globally.
In addition to the midterm revenue opportunities advanced hybrid programs such as these allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicles.
Also downstream the battery I would like to highlight another IDM Award.
This new 3 in 1 as the biggest size and output functionalities than the 1 already announced a few months ago with you on day.
This 1 is also all borgwarner mate mechanical motors vertical integrated electronics and software.
We're partnering with a leading luxury new energy vehicle maker in China with Sop in 2023.
Designed developed and manufactured by Borgwarner. This AGM features our electric motor gearbox and our integrated power electronics. It operates at 400 volts and as a peak power of 250 kilowatts.
Now adjacent to the battery packs I would like to shed some light to day on our high voltage coolant heater is on slide 9.
This product line is a great example of our best product developed organically by Borgwarner and now commercialize and manufacture that scale.
It helps improve the battery operated range of our custom of battery electric vehicles by controlling the battery temperature at an optimal level by.
While also increasing passenger comfort from the delivery of an ideal intaglio climate.
We recently expanded our existing business with the allowance of a new program with Geely.
And as you can see by the chart on this slide the business is expected to grow rapidly from 600000 units in 2020.124 million units by 2025, that's a 60% CAGR 6 zero.
With multiple customer awards, we expect the high voltage coolant heaters to already accounts for $400 million in revenue by 2025.
Or to put it another way we expect this product to account for close to 10% of our planned EG revenue by 2025 under challenging forward.
This product line does not get as much attention.
As the more high profile product lines like ADM Inverters on motors, but still contributes meaningfully.
2 our EV content.
So let me summarize our second quarter results on our outlook.
The second quarter results were strong, particularly considering the supply challenges currently impacting the industry.
We delivered strong top line growth and we believe we're tracking well towards our full year margin and free cash flow objectives.
We are increasing our full year revenue and adjusted earnings per share guidance.
As we look as we look beyond these near term results I'm extremely excited about our long term positioning we are continuing to secure new business for electric vehicles to support our long term revenue targets and I'm pleased to see awards, both on the components and on the system level.
But 1 that continues to develop clean and energy efficient solutions like our <unk> family of products.
And lastly, we're focusing on the disciplined inorganic investment approach like the acquisition of ACA, Phil that add great technology and additional scale to our portfolio.
The planting our growth profile.
I'll turn the call over to Kevin.
Thank you Brad and good morning, everyone.
Given the number of financial topics, we have to get through this morning, I'm going to dive right into the details.
So, let's turn to slide 10.
As we look at our year over year revenue walk for Q2, we begin with pro forma 2020 revenue of just under $2.1 billion.
Which includes $628 million on revenue from Delphi technologies.
Foreign currencies increased revenue by about 11% from a year ago.
Then our organic growth year over year with more than 72% compared to a 64% increase in weighted average market production.
The significant year over year changes in industry production and the varying levels of supply disruptions among our customers make it difficult to draw conclusions from the quarterly outgrowth figures Nonetheless.
Nonetheless, we were pleased with our performance in the quarter.
Looking at our regional performance.
In Europe, we outperformed by double digits, driven by growth in small gasoline turbo Chargers DCT and fuel injection.
In China, we also outperformed the market by double digits driven by growth in DCT, all wheel drive and fuel injection and.
And in North America, we underperformed the market, primarily due to customer exposure.
The sum of all of this was just under $3.8 billion of revenue in Q2.
Now, let's look at our earnings and cash flow performance on slide 11.
Our second quarter adjusted operating income was $401 million.
Compared to a pro forma loss of $52 million in the second quarter of 2020.
This yielded an adjusted operating margin of 10, 7%.
On a comparable basis, excluding the impact of foreign exchange adjusted operating income increased $423 million on about $1.5 billion of higher sales.
That translates to strong incremental margin of over 28%.
Driven by conversion on higher volumes restructuring savings and Delphi related synergies in excess of purchase price amortization.
We were particularly pleased with this performance given elevated supplier on commodity costs that we experienced during the quarter.
Moving on to cash flow, we're proud of the fact that we generated $133 million of positive free cash flow during the second quarter.
This was achieved despite an investment in inventory to help us better manage the challenging production environment.
Let's now turn to slide 12, where you can see our perspective on global industry production for 2021.
As you can see we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 8.5% to 11%, which is down from our previous assumption of a 9% to 12% increase.
This reduction from our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production, which is reducing our expectations for north American and European industry growth.
We do expect light vehicle industry production to improve sequentially in the third and fourth quarters relative to Q2 as we believe the impact of the semiconductor shortages will be lower in the second half of the year than what we saw last quarter. However, given lower commercial vehicle production in the second half and a varying impact of ongoing.
Supply constraints on our mix of customers were not expecting Q3, and Q4 revenues to return to Q1 levels.
Now, let's talk about our full year financial outlook on slide 13.
You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $965 million to $1.2 billion.
Next we expect to drive market outgrowth for the full year of approximately 500 to 600 basis points, which is a meaningful step up from our previous guidance of 300 to 500 basis points.
Based on these assumptions, we expect our 2021 organic revenue to increase about 14% to 17% relative to 2020 pro forma revenue.
Then, adding a $520 million benefit from stronger foreign currencies and $75 million of revenue related to the acquisition of <unk>.
We're projecting total 2021 revenue to be in the range of $15.2 to $15.6 billion.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10, 2 to 10, 5% compared to a pro forma 2020 margin of 8.3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance includes $100 million to $105 million of incremental benefit in 2021, which is higher than our previous guidance of $70 million to $80 million.
As I'll discuss in more detail momentarily the cost synergies are simply being realized faster than we previously expected.
Partially offsetting this offsetting this favorability our 2 things.
First the acquisition of ACA sales expected to reduce full year margins by 10 basis points.
And second we are anticipating a net negative impact from commodities in the range of $70 million to $90 million, which is worse than we previously expected.
But even with these 2 headwinds were holding our margin roughly in line with our prior guidance.
Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $4.15 to $4.40 per diluted share, which is an increase from our prior guidance of $4 to $4.35 per diluted share.
And finally, we continue to expect that we'll 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 in working capital that largely offset higher adjusted operating income.
This would still represent record free cash flow generation for the company.
That's our 2021 outlook.
Let's turn to slide 14 for an update on the financial impact of the Delphi technologies acquisition.
As I alluded to earlier the cost synergies related to the transaction are being realized more quickly than we previously expected.
The primary driver is faster execution of head count reductions related to our planned SG&A cost synergies in fact at this point, we've completed more than 95% of the head count reductions associated with our synergy plan.
As a result, we now expect 2021 cost synergies to be $100 million to $105 million, which means that cumulatively. We expect to have achieved synergies of $115 million to $120 million by the end of the year.
But to be clear. This is an acceleration of the timing of our synergies as opposed to an overall increase in our performance.
Therefore, our total cost synergy target of $175 million is.
Changed.
In addition to higher cost synergies del <unk> revenue contribution in 2021 is also tracking ahead of our original expectations.
As a result of these 2 factors the accretion to 2021 adjusted EPS from the Delphi acquisition is now expected to be positive 20% to 30.
Versus our expectation at closing of a dilutive impact of approximately <unk> 15.
This is a great result, and a testament to the work being done by the integration teams across the company.
And as we look beyond 2021, it's important to note that the revenue synergies associated with the transaction are also progressing very well.
We're pleased with the systems awards that we've generated through combining our electric vehicle capabilities, including the IDM Award in China that Fred mentioned earlier.
We've been able to secure these and other components awards as a result of leveraging <unk> technology leadership.
With Borgwarner is commercial relationships operational capabilities and financial strength.
Let's turn to slide 15 for a summary of the financial impact of the <unk> acquisition.
As you can see we expect <unk> to contribute 2021 sales of $75 million to Borgwarner second half results.
Then we would expect those sales to grow significantly over the next few years with 2024 sales still expected to be in the $5 billion range.
This growth is supported by <unk> previously reported backlog.
From an EPS perspective, we expect <unk> to have a roughly breakeven impact on the total company in 2021, excluding the impact of purchase price amortization.
Then as the business growth sequentially each year, we do expect to see conversion on the incremental revenue, which we expect to drive accretion of 12 by 2024 also excluding the impact of purchase price amortization.
We're pleased with the transaction in the medium to long term benefits is expected to deliver.
So let me summarize my financial remarks.
Overall, we had another solid quarter, despite the industry challenges.
We meaningfully outperformed the market delivered a 10, 7% operating margin and generated $133 million of free cash flow.
And then coming off that Q2 performance, we've increased our full year revenue and earnings guidance, even while moderating our industry production assumptions and considering higher commodity cost.
Looking beyond our near term results, we believe the faster accretion from the Delphi technologies acquisition and the completion of the <unk> acquisition illustrate our ability to execute the inorganic actions that are part of our project charging forward initiative.
The electrification wins discussed by Fred also highlight some of our progress toward the organic portion of our plan.
Ultimately, it's the pillars of near term execution, securing future profitable growth and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders.
With that I'd like to turn the call back over to Pat.
Thank you, Kevin Jerome ready to open it up for questions.
At this time I would like to remind everyone. If you.
I'd like to ask a question. Please press star 1 on your telephone keypad.
If you are using a speakerphone please pick up the handset before asking your question in the interest of time. Please limit yourself to 1 question and 1 follow up question, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Chris Mcnally with Evercore. Your line is open.
Okay.
Great. Thanks, so much everyone.
Wanted to maybe talk a little bit about the second half.
Assumption.
Just based on your guidance you had a very strong first half.
$850 million of EBIT guidance in the second half implied.
<unk> lower.
$50 million to $800 million range.
Obviously down sequentially, but also down year over year versus the pro forma that you provided on revenue. So if you could just provide some of the puts and takes there that would be really helpful.
Yes, I think maybe to make it simpler widen I speak relative to the midpoint of the range.
But as you think first half second half I think when you exclude the impact of ACA solid at $75 million.
Revenue sequentially first half to second half is down a couple hundred million dollars. So obviously, we have lost conversion on that revenue, but then on top of that as Youre going first half to second half you've got the net commodity headwinds, which are an incremental $20 million to $40 million in the second half our R&D on a net basis is stepping up in the second half another 20.
5% to $30 million and those things are being partially offset by about $20 million to $25 million of incremental synergies. So that's kind of the walk as you look first half to second half I think the thing if you look year over year, if youre talking second half of this year versus our pro forma second half of last year and I think 1 of the things you have to keep in.
<unk> is part of the revenue walk is ACA saw a $75 million and foreign exchange, which is a little bit over $100 million. So $200 million of our revenue improvement comes with virtually no margin because FX converts at basically our operating income and <unk> actually because of purchase price amortization.
<unk> is dilutive this year about $10 million. The net is no conversion on net incremental $200 million, which.
Which means what it means and then on the revenue that slipped there is actually the downside conversion at the midpoint of our guide plus those other things I spoke up the commodity costs, R&D being up but synergies being a little bit of an offset so.
Hopefully that helps.
No that's great detail. Thanks, so much.
Talk to the executive side of the business that you announced several.
EV wins in the quarter.
Of note the 3 on high voltage day, obviously, Europe more significant value acumen burgers.
And on the IBM could you talk about just relative to give a hard number but relative.
So the window, we're talking about hundreds of millions.
The backlog addition, where these are 100000 per year type type vehicles or something.
A little bit smaller.
I think the volumes the volumes on meaningful and.
And what we've seen also as each.
Each time, we book of business in this field volume is expectation is going up and up so those on through 2 great programs for us from an IDM perspective, as you've seen it's we're building a modular portfolio, it's a different power output different power level, and so very happy about that.
And.
On the heating the market with great products.
Great. Thanks, so much.
Your next question comes from Luke junk.
Drunk with Baird. Your line is open.
Yes. Good morning first question wanted to ask if there is any additional color that you could share on the scope of the idea on where that you disclosed today should we think about this is an award on the single vehicle or could it potentially could cross platform at the customer.
So right now the idea the idea.
On a power level, so within that power level it cuts across.
The vehicles that the customer wants to wants to do.
Sales for that power level so.
That's that's the color can give you it starts with the platform and.
And we will come across.
At the.
250 kilowatt power level.
Okay. That's helpful. Thank you and then bigger picture what are the focus areas that you had highlighted at your Investor day on March <unk>.
<unk> in Asia in General thing here 6 months later, you have now booked a couple of these awards and we are still not even a year out from the close to the Delta deal is it fair to say that the level of interest in Asia is consistent with or maybe even a little better than you had anticipated in March.
It's in line with what we expected.
And this is this is constantly where the music is played the allowed us from an acceleration standpoint. This is where we're going to gain scale early very happy about that.
And the technologies that we're bringing to the market and the competitiveness that we're bringing to the market with in house transmission motor on electronic software is very very well received.
Your next question comes from Brian Johnson with Barclays. Your line is open.
Yes.
Alright are you there.
Brian Johnson from Barclays. Your line is open.
Yes.
Hi.
Yeah.
Yes.
Robin I think we can go to the next question.
Okay. Your next question comes from Joseph Spak.
RBC.
RBC capital markets. Your line is open.
Thank you very much.
Thanks for that.
First half or second half walk out that was helpful. I guess just on on the commodities.
If im following along it seems like.
On a year over year basis, Youre talking about another 55 or so million dollar headwind.
In the back half I, just want to confirm that and also if you can just sort of remind us of your policy here because I thought over time, you tend to get some recoveries. There. So as we begin to think about.
The bridge into into 'twenty 2.
Is this sort of headwind remain or do you start to get some some of those recoveries on the raw materials.
Yes, I think you've got the number right as you look at the second half of the year on a year over year basis, it's in the $45 to $65 million range. So you've hit the mid point exactly right and that is a net number net of our recoveries now obviously there are some timing lag is.
Relates to recoveries, but the bulk of those recoveries are expected to be in our results as we progress through the year and so that number that we're talking about the 45% to 65 in the back half of the year on year over year basis is net of the recoveries.
Already but there might be a little bit of a tailwind heading into the first quarter of next year.
So I mean, if we if these commodity levels hold then it's fair to.
Assume at an absolute level there is still.
Headwind in the first half of next year, even if you know me.
Maybe it's mitigated somewhat by some some of the recovery timing.
Yes, a little bit.
So certainly as because the the headwinds as we go to the first half the second half are definitely more negative call. It $20 million to $40 million on is that carries over to the extent that carries over into Q1 of next year that would be an incremental headwind on a year over year basis relative to Q1 of this year, but of course, there's lots of moving pieces as we.
Head into the beginning of the year, we know next year in 'twenty, 3 and we got another $55 million to $60 million of synergies to recoup to recruit from the Delphi transaction. We've got the legacy Borgwarner restructuring actions, we announced 18 months ago and you remember we said those actions were to mitigate unknown risks. These are the types of risks exactly then it was geared towards things that.
Were unforeseen at the time and Thats another $25 million of tailwind next year as the legacy Delphi restructuring actions project pioneer, which is incremental tailwind next year and then any conversion on our continued outgrowth. So theres a lots of puts and takes as we head towards next year, but incrementally of commodity levels held there would be an incremental headwind.
Heading into next Q1 versus this year's Q1.
Okay.
Then the second question just Fred maybe this is a question we've been getting a lot from investors right. So.
At your analyst day earlier this year I think you sort of put up a slide we share your thought 80.
80% of Inverters would be outsourced it seems like during the quarter.
Whether it was for no or forward or some others like theres been more and more announcements of automakers trying to do power electronics themselves.
And so it seems like it would seem like maybe that figure is incrementally more challenge I'm curious whether whether your view has changed there or is this just a definitional issue, meaning like by in sourcing you mean like the OEM would actually make it but in reality in some of these cases like the Oems might help with.
Sign, but they don't necessarily build.
Yes, I think I think inverter, we I believe we are on the very very strong position.
And we've already announced more than $1.1 million units by 2025 in Europe.
If you do the math it's.
It's a significant share of the overall European inverted volume from <unk> and since then more booking it happened, we don't see too much change.
I think it's due to 3 reasons we were successful in this in this field for 3 reasons first it's our product leadership the different voltage 400, 800, Silicon Comber, we continued to innovate with.
Cost and weight reduction with more efficiencies to us we have scale and I absolutely believe that this continues to be a strength.
We are leveraging the whole electronics business that we have and last but not least I think we also have a high degree of vertical integration in our capabilities.
Integrated Silicon development software power modules and maybe more in the future I think this is this is a very competitive business.
To have the best efficiency of the best cost you have to have scale.
I'm very confident that we are in a very good position to grab a significant portion of what will be outsourced and we're not seeing a change from about 80% of outsourced invert volume 2 suppliers.
Okay. Thank you.
Your next question comes from Colin Langan with Wells Fargo. Your line is open.
Oh, great. Thanks for taking my question.
You've done a pretty good job here you keep cutting your sort of production assumption and yet you keep raising your sales guidance.
What is driving that much better than expected growth over market does mix have anything to do with that with the commercial maybe holding in better.
So I think we outgrew the market in Q2, we underperformed in North America due to customer exposures and we.
<unk> from Europe, and China double digit driven pretty much by all products. There is not 1 product that drives more than the other now in Q2 I must admit there was a lot of moving pieces.
We're not looking at our growth per quarter that is there is too finite so.
Very happy with the way our top line is.
Evolving this year and very happy to be able to.
2 to beat and raise in the short term also very focused in the long term, we are investing R&D to in R&D in order to support the programs that have been booked.
And very happy with where we are both short term on the on the margin and cash flow and also the activities from a long term from a long term booking.
I wanted to take the example.
People will focus a lot on downstream the battery, but the example of that high voltage coolant heater I think is a great example, where borgwarner can develop in house and really.
Solve a problem of battery electric vehicle battery electric vehicle required innovation solutions to critical functions that are east thermal and cabin heating and the position. The solution that we gave to the market is taking a lot of traction you won't be surprised we of our own integrated.
On the electronics and software and we are leveraging the heating technologies that we that we have from other borgwarner product line. So very happy about where we are both organic and inorganic in the long term.
Got it and any color on the commercial market.
On the thought that was holding in better, but if I look at your guidance from Q1 to Q2. It actually our outlook is it's getting it actually came down.
Did that actually hold up better on the quarter or does it get a lot worse on the second half now.
Because I know, that's a pretty high margin business and I think with the sulfide deal. It's a larger chunk of your business now.
I mean, 1 of the big things is that China, we would expect to see headwinds as we look at the back half of the year from.
Our year over year production perspective, and that obviously has an impact on us on our overall outlook.
Okay and is that okay. So on the second half getting weaker okay. Thanks for taking my questions.
It can have weaker on a year over year basis definitely in China is the big driver of that.
Got it.
And your next question comes from Dan Levy with Credit Suisse. Your line is open.
Hi, Good morning. Thank you for taking the question just wanted to follow up on.
On the on Collyns question, there just on that help growth.
Can you maybe unpack some of the items that you saw in the second quarter that drove the growth between the <unk>.
<unk> and <unk>.
Turbo GTI.
Maybe a little more color on on what exactly was.
Driving that and as we're thinking about especially.
Especially in Europe.
Pushed the Bev.
Is there any shift in where.
GTI.
Turbo sits in the automakers pushing toward there.
<unk> targets.
Yeah, and as I mentioned before we outgrew Europe, and China double digit driven by a lot of factors, but youre right gas turbos.
<unk> and <unk>.
In Europe also all wheel drive.
And so this is driven by.
<unk>.
Also don't forget that in any hybrid powertrain architecture, you've got a good gasoline engine with.
With <unk> and <unk> and other other elements.
And don't forget that.
<unk> powertrain, especially in Europe, but also in China.
And the business that we book through with that Julian.
Good example is ramping up very very fast and that is giving us on the east side scale.
And and lounge expertise on.
That are translatable into the world of Bev and on the combustion side.
Those are products that drive efficient combustion.
Engine. So I think it's I think it's.
On that particular reason I don't have the color about how much is still below versus <unk>, all wheel drive, but im pretty sure Pat can follow up on offline with you.
Okay, and then the line of sight for the remainder of the year as far as you know.
DDI and and turbo in Europe is that something that.
It's still playing on a rolling.
And driving.
2 targets there.
Absolutely it does absolutely does it does.
In reducing.
The.
<unk> and emissions of combustion engines. It does because it is an enabler of hybrid powertrains and.
And as you've seen this is helping car makers in Europe, especially to meet.
The C O 2.
This view to the future targets so absolutely it does help.
Great. Thanks, and then.
As a follow up I just wanted to follow up on Lamb.
Last quarter's announcement, which we got a little more color.
Randy The IDM award with with Hyundai.
So you have an ace segment car here and it's putting in IBM content, that's probably if I had to guess it's Alan.
Give or take on even if you could maybe comment on the content but.
<unk>.
Usually in a segment cars going to be.
A much tighter content cost is much lower budget for content. So what does it tell us about going into B or C segment platform.
Is that telling you that there is better potential to scale that up to DRC segment or is there something unique about the <unk> segment vehicle that makes them more likely to approach you on on an IBM as opposed to doing it in house.
So last quarter, we announced the IDM award who on.
Class a so so small.
Small doesn't mean simple, but small this quarter, we are announcing a different type of IDM.
Viggo with about twice the output power than the 1 from the other day and as I mentioned in the last call we're building.
Mobile modular portfolio and this is a great example.
<unk> 2 different power level, all Borgwarner made in Asia combined with the Idms that we're currently producing as an integrator you see that we will starting seeing.
Path of integrating with.
The motors or even other inhibitors of the customer wishes to do that a path for different power levels and different sizes of IDM. All Borgwarner made transmission motor product tronic software on vertically integrated on the on the Asics and so on.
In the past with components and as we mentioned in the in past calls, we're very happy to sell inverters to customers, we want to make.
So you're seeing the strategy of developing and commercializing our portfolio of idms globally that is.
That is seeing daylight.
Great. Thank you.
Welcome.
Your next question, Ken Lewis from Noah Kaye with Oppenheimer. Your line is open.
Thanks. Good morning, appreciate you taking the questions I guess first.
Congrats on closing Arkansas.
Wanted to understand what margins roughly are you assuming for assets all by 2024 and the accretion estimates you've provided excluding amortization.
And then more strategically how do you see assets all.
Maintaining competitive differentiation in battery packs overtime.
Yes with respect to the margin, we're not disclosing a margin outlook at this point in time, but I think you can probably do some math underlying our EPS and get a sense as to what the pre tax.
Assumptions are as it relates to the overall performance of that P&L relative to the $5 billion or so of revenue that we're expecting by the year 2024, but at this point again not going to disclose any margin profiles other than we think it is going to be a profitable business over time.
As far as as far as technology technological edge of ACA Phil.
A few things.
First.
The concrete producing day adjourn to the launching the Gen..3 later this year and being able to allowance generation and improve efficiency and power density.
Regularly is key now they part of soon there'll be fully fully path of Borgwarner and you can imagine that we will be working with them and linking them with the battery management system and software that we have currently in production coming from ex Delphi technologies, we certainly are going to.
A link them also to the high voltage coolant heater.
<unk> elements are heating the coolant for the batteries and I expect that we're going to find innovation and products that are going to be generating value for our customers and for borgwarner going forward.
Very helpful. Thanks, and then just around R&D to clarify.
The new guidance of $725 million of spend that compares to 5% previously so just to understand are you are you.
Are you actually bumping up R&D level from.
On prior guidance and so is that driven by EV programs kind of where is the focus just help us understand.
I'll take that a couple of things worth noting around the R&D Guide first thing is that when you look at our Q2 results on when you get a chance to go through our 10-Q Youll see that our net R&D sequentially was down in the second quarter versus the first quarter, but it is because we actually had higher customer recoveries from engineering perspective there.
We had anticipated and then we had in Q1 by about $20 million. If you look at our gross R&D going from Q1 to Q2, it was actually up sequentially, but the net was down and so what that means is that actually had an impact we've actually brought down.
Our implied full year R&D from what was about $740 million implicitly at the beginning of the year to about $725 million as our current guide and so that's really being driven by the higher than anticipated customer recoveries that we generated in the second quarter as you look at it as a percent. The reason we gave.
Dollar guide as opposed to a percentage guide is the percentage is coming down and the reason the percentage in 2021 is coming down is because revenues going up so its not because were cutting our R&D spend we had better recoveries, but our R&D spend is actually still $725 million, but with revenue coming going up the <unk>.
R&D as a percentage of sales is actually now 4.6 to 4.8%, which just looks like a lower percentage, but it's.
It's implying lower spend but it really isn't the case so as we as we look at the full year. That's what the 725 represents about a $15 million reduction, but really driven by the recoveries and then as we think ahead to next year and beyond we continue to expect that we're going to be driving R&D spend in that 5 plus percent range on a go forward basis.
That's very helpful detail, Thanks, Kevin I'll jump back.
Jerome ready for the next question. Your next question comes from David Kelley with Jefferies. Your line is open.
Hi, guys. This is Gavin Kennedy on for David.
From my end first you mentioned that North America customer mix was a headwind in <unk> just was curious what borgwarner it seeing as far as visibility into customer schedules in North America through year end.
What we're saying is.
Our mix.
On a recovery.
Coming coming into Q3 and Q4 from the from the from the Q2 level.
And still very volatile.
Especially because of the semi conductor supply issues, that's what we currently seeing Kevin.
Okay. That's helpful and then switching gears on your <unk>.
Investor Day, you mentioned $3 billion to $4 billion in targeted legacy ICU.
Commissions by 'twenty 5 in about call. It 1 billion in the next year. So can you comment on how disposition conversations are going particularly given the volatile currency environment.
And any additional commentary you can give us on what products you might be focused on these dispositions that'd be helpful.
Yes, I mean, it's in progress just as you noted the $1 billion or so we expect it to execute from.
Over a 12 to 18 month timeframe from what we announced at Investor Day, which means as we get to the end of Q3, we expect to complete that $4 billion or so and we are in progress right now as we talked about we're really focused on disposing product lines or businesses that don't meet our long term financial objectives of our portfolio, which means they lack.
1 of 3 things either lacked product leadership, they lacked medium to long term growth prospects are they lacked strong margin and cash flow generating ability and so if a product line on our business doesn't take all 3 of those boxes. If a candidate for disposition. So at this point, we're actively moving forward in line with what we talked about at our Investor Day, and we think we're on track to deliver that.
Billion or so of dispositions I call. It mid to late 2022, consistent with the timeframe that we laid out back at Investor Day, and then we continue to expect $3 billion to $4 billion by the end of 2025.
Great. Thank you everyone.
Your next question comes from Brian Johnson with Barclays. Your line's open.
Thank you and I apologize if this was covered in the opening but I kind of doubt it.
When I.
When you look at the 800 volt market I was struck at the Chicago Auto show.
By the <unk> 800 volt systems and of course the advantages.
On a small question is can you confirm if you are on that or not but the bigger question is 800 volts started in the high performance.
Performance market with the Porsche and now we see it in on dice I know you're on.
Hi, your new EV motor runs on 800 bolts for commercial. So my question is do you see 800 volt as a big trend..1 2 is the inverter product line you got from.
Delphi Tech uniquely positioned in that market relative to competitors and 3 are there synergies then between your 800 volt converter capability.
E motor capability, and where <unk> could go and exactly total capable of doing 800 volt packs.
Okay.
So the answer to your first question is 800 volt, a big trend and is it going down and.
In.
Vehicle sales the answer is yes.
Why because.
It increases the power density and decreases the charging time.
Are we well equipped absolutely the answer is absolutely yes.
We are.
We are going to be 1 of the first 1 announcing very soon 8 hundreds will seek from calpine.
At high volume. This is this is.
Our competitive advantage that we have to match the high voltage silicon carbide.
And then also a massive 800 volts made in our polymer jewelry, which is the heart of the.
<unk> of the inverter.
Synergies absolutely I was thinking about high voltage coolant heater is we will start in 2024.800 volt high voltage coolant heater and yes, there are synergies across the different product portfolio that we have running at 800 volts Brian.
And <unk> will do 800 volt packs.
Aye.
I need to check that.
My my answer is yes, but.
I need to go back to you on this 1 topic in the evening.
Okay. Thank you.
And your next question comes from Emmanuel <unk>.
<unk> from Deutsche Bank. Your line is open.
Yes, Thank you and good morning, everybody.
Good morning.
Our first question is about your gross over the market outlook is.
Good to see.
You boosting the outlook for the full year can you talk in a little bit more detail around what you're expecting for the second half of the year. Obviously, your you mentioned mix improving and customer mix in particular, but then obviously you had pretty solid growth from a market already in the second quarter and then for the full year you with new <unk>.
5 to 600 basis points.
How would you see this play out in the second half and then just looking a little bit more forward.
How should we think about mix going forward.
Then represent a headwind in 2022.
The acceleration in growth over market make you rethink your framework for growth over market.
Yes, I mean, a couple of things when you look at the first half year to date, we're somewhere between 600.5700 basis points of cumulative outgrowth for the first half and so as we look at the second half of the year. We don't think we will be operating at quite that pace. We think we're probably in the 4 to 550 basis points for that second half the <unk>.
Have we benefited from some mix, we probably benefited from some production of vehicles that ultimately in the production numbers of the OE. So there's probably some level of give back that's implied in our numbers in the second half, which is why you see a lower year over year and implicitly.
Step down sequentially going from the first half to second half, but overall feel good about our ability to deliver 500 to 600 basis points for the full year in terms of what that translates to for future years, not prepared to give any update on that I mean, we feel good about the backlog we've disclosed previously looking out 'twenty 2 to 'twenty 4.
And we'll probably give an update on that as we get into the beginning of next year.
Okay. Thanks, and then.
Second question on.
IBM Ken.
Just diving a little bit deeper here can you just give us a sense of how should we think about the.
The range of content per vehicle and how would you see your either volume or revenue.
And margin profile of that line.
Business.
Evolve over the next few years, so sort of like a mid term outlook on how you would see IBM goes from here.
Average content per vehicle is going to range from about 1000.
For the smaller versions and.
Time, 3 or 4 from much higher.
Sizes.
Sure.
Im not going to comment on volumes on not allowed to comment on volumes.
Only I think that gives you some color on the content per vehicle.
And then on the margin side of the equation I think as we've talked about before any new product programs, whether they're a combustion based product or an EV product like an IDM. We look at it on a return on invested capital basis, and given that were predominantly from a manufacturing perspective, and the assembly business. What that means is the capital intensity of our programs <unk>.
Adding the IBM <unk> tend to be similar to our other product lines and so as we drive to deliver consistent ROIC across our product portfolio and we have relatively consistent capital intensity. It means the margin profile on any discrete program look substantially similar to the margin programs of other other business that we approved throughout the company whether it's <unk>.
Or not.
And that would be from day, 1 or is there a targeted data on this.
That's the life of a program. So when you look at our EV programs generally speaking they tend to have much more R&D intensity, which tends to be upfront. So as we're growing in evs. What happens is we have a lot more R&D hitting the P&L upfront and then you generate the contribution margins over time and the blend of all that hits on ROIC.
Targets over the life of the program, but what that means is you're in ramp up mode across EV.
<unk> is much higher proportionately relative to the conversion you are generating on the incremental revenue because the revenue is still coming in the future. So the EV portfolio in total has a more depressed margin while you're in growth mode, but that is not because of the underlying fundamentals of the business. It's because we are growing and investing in R&D to <unk>.
Fort the contribution margins that will generate over the coming years as we start to generate the revenue.
2 things I would add.
First is that everything that Kevin has said is the additional R&D that we do for her is already on our margin profile right and 2 countries spending 30%.
R&D, an easy win when our revenue is 3% to 5% like we like the market is quite frankly, though that shows you how deliberate we are in accelerating the path towards electrification.
Yes, definitely I appreciate it thanks.
We have time for 1 final question and that question comes from Mark Delaney with Goldman Sachs. Your line is open.
Yes, good morning, and thanks very much for taking the question first I wanted to talk on Delphi and <unk>.
Reflecting back when that was announced as part of the industrial logic was that Delphi I would give the company a broader set of technologies, including for Evs I know some of that is with IBM, but more holistically. So now that you've had that asset for a longer period of time you have a few wins with IBM can you give more clarity on your win rates and to what extent your convert.
Adding on.
On that broader set of solutions to the extent that you had been anticipating.
So yes, we are.
Only 6 months after the after the close we booked idms.
Is which is very important but it's not limited to those systems. We also booked a lot of inverters.
We think.
Could be booked only with that combination. We are also accelerating on battery management system. The software battery management system. So from a top line synergy perspective, we're absolutely on track with what we expected coming into the Delphi acquisition.
Got it that's helpful. And then you talked already a little bit about the supply chain situation and your views on the second half versus the first half, but maybe you can talk a little bit more on the longer term implications from the supplier shortages. Some of the Oems have said that they want to change that they're going to procure supply and work more directly with.
On the semiconductor companies.
How do you think that may impact a tier 1 like borgwarner in terms of how you may partner, both with your customers and suppliers and some of the implications around margins and working capital.
So.
Sure.
We we are not seeing that trend at least in the products that we focus on.
But.
What that thing is would that semiconductor issue has taught us is that it is extremely important to partner upstream and downstream upstream with our customers on downstream with our semiconductor.
Suppliers. The second thing that is as total thing is that scale matters.
And is easier to.
Get going when you have when you have scale them nuts, and I think those 2 lessons, we're going to keep very close to our mind when we move forward in the next years.
Got it thank you.
Thank you all for your great questions. Today, if you have any other follow up questions feel free to reach out to me directly.
Jerome if you can go ahead and closed on the call.
Alright that does conclude the borgwarner to Thompson for any 1 second quarter results Conference call you may now disconnect.
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