Q3 2021 Borgwarner Inc Earnings Call
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I would now like to turn the call over to Patrick Nolan.
Nice precedent of Investor Relations Mr.
Mr. Nolan you may begin your conference.
Thank you Jay good morning, everyone and thank you for joining US today, we issued our earnings release earlier this morning.
On our website Borgwarner dot com on our homepage and on our Investor Relations homepage.
With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the events section of our Investor Relations homepage for a full list.
Before we begin I need to inform you that 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 the core business performed and for preparers and purposes, where prior periods.
When you hear say on a comparable basis that means 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 and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus this market.
Yes.
Please note that we've posted an earnings call presentation. The IR page of our website. We encourage you to follow along with these slides during our discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good day everyone.
Let's start on slide five.
We are very pleased to share our results for the third quarter and provide an overall company update.
The third quarter operating environment was very challenged both from an absolute volume perspective.
And in light of the production volatility we experienced throughout the school zone.
Overall, we are doing a solid job managing the near term environment, while securing our future growth.
With just over $3 4 billion in sales, our third quarter revenue decreased by about 7% organically.
Excluding the year over year growth in our after market business, our OEM business declined 9% compared to the 22% decline in our market during the quarter as we benefited from new business and favorable mix.
Our margin and cash flow performance in the quarter was impacted by the volatile production environment, which put pressure on near term cost containment and drove excess inventory within our plants.
Even with those challenges, we're still on track to delivering a near double digit operating margin for the full year.
And we still expect full year free cash flow to be amongst the strongest results in our history.
I want to thank all our employees and particularly our plant managers and plant management teams around the world who are working very hard to manage the short term and serve our customers.
At the same time, we're very focused on ensuring that we secure our future to that end. This past quarter. We won multiple new product awards for electric vehicles, which I will speak about in a few moments.
As a result of these awards along with wins in prior quarters. We have went on our way to achieving the organic electric vehicle 'twenty twenty-five revenue targets and aligning our project challenging forward in fact, we estimate that more than 90% of that target is.
<unk> booked.
Let's now turn to slide six where you can see our perspective on global industry production for the remainder of 2021.
The market environment continues to be extremely volatile with the risk of future production disruption arising from ongoing supply constraints.
With that in mind on the full year basis, we now expect our global weighted light vehicle and commercial vehicle markets to be down two 5% to flat year over year.
This is down materially from our previous assumption, reflecting both the third quarter decline in our most recent expectations for the fourth quarter.
As you can see from the line chart showing the different scenario, we do expect light vehicle industry production to improve sequentially Q3 to Q4.
Underlying customer demand remains robust however, just like we saw in the third quarter industrial production levels will be dependent on the varying impact of ongoing supply constraints and then the potential impact on our customer mix.
Overall, we expect the challenging environment to continue throughout the remainder of 2021 and at this point, we think it will carry on well into 2022.
As we manage this challenging environment. We are also continuing to focus on securing our mid to long term opportunities in electric vehicle.
And we did just that during this quarter securing several awards for electric vehicle programs I'm very proud of the teams.
Two of those awards are highlighted on slide seven first we secured a major award for a north American inverter with a global OEM expected to launch in 2024.
These high voltage Silicon carbide program is our largest inverter win to date.
This business award also marks the company's first major win in the North American market.
It will also be used in multiple debt re electric vehicle platforms, including Pascal and trucks.
Our product performance scalability cost competitiveness size optimization and global manufacturing footprint all contributed to securing this business win.
Additionally, we announced a new 800 volt Silicon Carbide Inverter award with a German OEM expected to launch in early 2025.
This award expands our existing 400 volt inverter business with the same German customer by now, adding 800 volt product.
This new technology offers.
And hence power density proven performance and long term reliability.
Given these two new and significant inverter rewards I would like to give you an update on our positioning in the inverter market on slide eight.
We've had tremendous success establishing ourselves in this market.
When I think about Borgwarner has competitive advantages in power electronics, it's driven by first the breadth of our product portfolio.
This allows us to be faster and more effective at bringing products to market.
Second our ability to innovate like.
Like with our Viper power module technology.
We can continue our innovations in part due to our vertical integration strategy we.
We have in house capabilities full power modules integrated circuit development and software, which we feel our advantage in the marketplace and finally I think the last driver is our ability to leverage the electronic scale that we already have across our company and.
Especially within our engine control units.
Yeah.
The result is that we have secured significant new business awards.
And as you can see by the chart on this slide we expect the business to grow rapidly from about 500000 units in 2021 to two 5 million units by 2025, representing about 50% CAGR.
We expect this volume to drive total invoice to sales of $1 7 billion by 2025 in 2025, sorry.
And remember these programs are already booked.
We continue to pursue additional inventory opportunities with production volumes in 2025, and beyond and would expect to secure more awards in the coming quarters.
And one more thing.
With the business. We've already won we believe that we are positioned to be the number one non captive invertor producer globally by 2025 with that I'll turn the call over to Kevin.
Thank you Fred and good morning, everyone.
Let's turn to slide nine.
As we look at our year over year revenue walk for Q3, we begin with pro forma 2020 revenue of just under $3 $6 billion, which includes a little over $1 billion of revenue from Delphi technologies.
Next you can see that foreign currencies increased revenue by about 2%.
Then our organic revenue declined year over year was approximately 7% or almost 9% excluding growth in our aftermarket segment.
That compares to a 22% decrease in weighted average market production, which suggests that our outgrowth in the quarter with more than 13%.
Now with that said the significant volatility in production schedules and the varying levels of supply disruptions. Among our customers are continuing to make it difficult to draw conclusions from the quarterly outgrowth figures Nonetheless.
Nonetheless, we were pleased that we delivered strong relative revenue performance in all three major markets. Despite the overall decline in revenue.
Regionally in Europe, we outperformed driven by new business and small gasoline turbochargers and fuel injection products.
In China, we also outperformed the market driven by the resilience and the former Delphi businesses.
And in North America, we outperformed the market, primarily due to new business as well as vehicle and customer mix.
The sum of all of this was just over $3 $4 billion of revenue in Q3.
Now, let's look at our earnings and cash flow performance on slide 10.
Our third quarter adjusted operating income was $311 million compared to pro forma operating income of $396 million last year.
This yielded an adjusted operating margin of nine 1%.
On a comparable basis, excluding the impact of foreign exchange and the impact of ACA saw adjusted operating income decreased $79 million on $261 million of lower sales.
That translates to a decremental margin of approximately 30%.
This higher than typical decremental margin was primarily driven by $24 million of higher commodity costs net of customer recoveries.
Excluding these higher commodity costs, our year over year decremental margin was approximately 19%, which we view as a sign that we're effectively managing our operating cost performance in spite of the supply chain disruptions.
Moving on to cash flow, we consume $10 million of free cash flow during the third quarter.
This was worse than our expectations going into the quarter due to lower than expected operating income as well as higher than planned inventories.
Fundamentally when production declines this rapidly and unexpectedly it's difficult to get out inventory out of the system in the near term.
We expect inventory to improve in the coming quarters. Once we see less volatility in production orders, which will give us the ability to rightsize our supply chain demands accordingly.
Now, let's talk about our full year financial outlook on slide 11.
We now expect our end markets to be down two 5% to flat for the year.
Next we expect to drive market outgrowth for the full year of approximately 1000 basis points.
This contemplates the strong performance to date with the sequential step down in the fourth quarter as we expect to return to more normalized year over your outgrowth in Q4.
Based on these assumptions, we expect our 2021 organic revenue to increase approximately 8.5% to 11% relative to 2020 pro forma revenue.
Then, adding an expected $425 million benefit from stronger foreign currencies, and an expected $70 million related to the acquisition of ACA Saar. We're projecting total 2021 revenue to be in the range of $14 four to $14 $7 billion.
This wide revenue guidance range reflects the continued production uncertainty we have in the fourth quarter.
Yeah.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of nine 6% to 10.0% compared to a pro forma 2020 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 continues to include $100 million to $105 million of incremental benefit in 2021, the same as our prior guidance.
Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $3 65 to $3 95 per diluted share.
And finally, we expect that we will deliver free cash flow in the range of $600 million to $700 million for the full year.
The reduction versus our prior guidance is a little larger than our projected decline in operating income as we expect inventory to remain higher than usual through the fourth quarter.
Then once we head into 2022, we expect to start to see reductions in inventory towards more normalized levels.
That's our 2021 outlook.
Let's turn to slide 12.
Given the uncertain outlook for the remainder of 2021, we felt it appropriate to provide you with some of our initial thoughts on some key financial drivers and strategic priorities heading into 2022.
Starting with our top line.
As of right now, we do expect to see supply chain challenges, particularly with respect to semiconductors continue well into 2022.
Ultimately, where full year 2022 industry production shakes out will depend on the scope and duration of these challenges.
But at this point, we would still expect a modest level of growth in industry production next year.
Next we expect to deliver outgrowth in 2022. However, we're currently assessing the extent to which the much stronger than expected outgrowth. In 2021 will result in any headwind to our outgrowth next year.
From a cost perspective, we expect incremental Delphi related cost synergies in the $40 million to $45 million range and we also expect incremental restructuring savings of $40 million to $50 million.
These combined savings are expected to largely offset our estimated increase in R&D spending of approximately $100 million.
We're planning for this significant increase in R&D spending in order to support the new business wins, we've achieved to date.
And to pursue additional EV opportunities consistent with our charging forward organic growth objectives.
And finally, we're building our plans based on the assumption that we'll see sustained levels of commodity inflation continuing into 2022, which means we expect that to create a year over year headwind during the first and second quarters.
That's the near term, but while we are managing the near term. We're also focused on securing our long term future.
So consistent with our charging forward initiative, we have three key strategic priorities heading into next year.
First we plan to continue to pursue and secure additional electric vehicle awards for both components and systems.
Second we intend to execute additional M&A to accelerate our positioning in electric vehicles.
And finally, we expect to complete the disposition of approximately $1 billion in combustion revenue.
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 Fred Thank.
Thank you Kevin.
I'm not really excited to share an update of our progress towards our project charging forward targets on slide 13.
As evidenced by our program announcements over the past several quarters, including the two wins that I alluded to earlier, we're making significant progress on the organic growth in electric vehicles underlying our charging forward plan.
As of this goal, we've now booked electric vehicle programs, leading to about $2 3 billion of revenue in 2025.
Or to put it another way with this book business with more than 90% of the way towards our $2 5 billion organic revenue target. We gave you back in March.
The breakdown of these programs is highlighted on the chart to the left we are excited about the mix of both components and system Awards and importantly.
Our book business is across all major regions with leading Oems.
We expect to add to.
This book business portfolio over the next quarters by securing additional E V Awards with 2025 revenues.
And then we will supplement these organically develop revenue with EV revenues from ACA. So.
And any future acquisitions.
The takeaway from two days of this.
It's a challenging near term environment.
Once again <unk>.
Warner is successfully managing the present and delivering solid financial results at the same time, we are delivering our future. We're doing that we're doing this by establishing product leadership and winning new business in the world of electrification.
And with these wins, we are successfully executing on our long term strategy challenging forward, which will deliver value to our shareholders long into the future.
With that I'd like to turn the call back over to Pat.
Thank you, Brad Jay ready to open it up for questions.
Thank you at this time, if you would like to ask that question. Please press Star then the number one on your telephone keypad, if youre using a speakerphone. Please pick up the handset before asking a question in the interest of time. Please limit your question.
To one question and one follow up question.
We'll pause for a moment to compile the Q&A roster.
Our first question comes from the line of choline Langan.
Wells Fargo. Your line is open.
Oh, great. Thanks for taking my question.
And then just looking sequentially the midpoint of guidance would imply sales are down and also margins are down sequentially. Just any color on what I think you commented that you thought the market was up so is there a certain sort of product mix. That's a headwind as you go into Q4.
And why would margin certified sequentially.
Yeah, Thanks, calling it a couple of things, even though production is expected to be sequentially up our revenue with when you look at what's embedded in our guidance is expected to to be under a little bit more pressure because we had 13 plus percent outgrowth in Q4 or Q3, but as you step into Q4, our implicit guy.
It's somewhere of outgrowth in the range of seven five to eight 5% so sequentially actually it's a revenue headwind, even though market production is up so when you look at our revenue our revenue actually is under more pressure on a sequential basis. The other thing you have is is commodities are still a continuing headwind and that's true on a sequential basis, where it steps up probably <unk>.
The range of $5 million to $15 million going from Q3 to Q4. So I'd say those are a couple of the big drivers.
Got it and just more strategically pretty impressive with the inverter targets sort of.
Being a leader by 2025, I mean, how is that market shaking out is that going to be.
A significant percent of the market by 2025, and there's going to be three or four top players there or is it still just a very fragmented market I guess, there's some concern that that still can be fragmented and competitive as we go out.
I think it's 2025 as far as we see it is going to be the inflection point the volume in 2025, who are starting production in 'twenty three 'twenty four 'twenty five it's only going to go up from there.
This is this is a.
This is a product where you need a lot of product leadership unit scale in electronics, you need a certain level of vertical integration to innovate freely and.
And I think we have all that we are a global manufacturing footprint and we are very very pleased with the product leadership I'm hearing a lot of good feedback from customers. So very pleased with the momentum we have in power electronics at this point in time.
Okay, Alright, thanks for taking my question.
Thank you next question comes from the line of John Murphy.
Bank of America. Your line is open.
Hi, good morning, guys.
Just on slide 13, it's pretty impressive that you're this far along in your and your goals I'm. Just curious you know typically around the powertrain, we'd think about solid four to five year lead time for bookings.
Not more I'm just curious as we're going through this transition.
And even maybe evs more generally is the time frame compressed in which you can win business, meaning instead of 4% to five plus years. We're now looking at like two to three plus years. So there's a whole lot more that might pile in here.
Yes, John I think you are around three.
It's pretty much what we have in electronics between between award and start of production.
In some cases since we have a large breadth of products.
And a very modular design in some cases, we can be at even faster than that but I think a good proxy John would be three years from booking to Sop.
So it would be fair to say that you have a solid year.
Left to kind of build on what you might be able to win for 2025 is that a fair statement you think Fred at least I think I think it's fair.
Okay.
Second question on capital.
I mean, you've got 1 billion five roughly in balance sheet.
Generating six to 700 million. This year assume next year is no worse, but maybe better we're looking at north of well north of $2 billion.
Cash plus youre going to sell $1 billion of ice business presuming you get something for that we're probably going to be approaching $2 $5 billion of cash on the balance sheet in the next 12 months.
It's a pretty heavy load.
How do you think about cap I mean, a good way.
How do you think about.
Allocating that capital.
The organic business, the acquisitions or or directly back to shareholders. I mean, it just seems like that's going to give you a lot of dry powder to potentially make some pretty intriguing acquisitions.
Yes.
And it's consistent with what we laid out and are charging forward to Investor day presentation back in March we expected just like the math, you've gone through and we expect to be able to generate a lot of capital over the planning horizon here and we believe that capital is available to support our dividend policy as well as the complete ultimately the buyback program that we have outstanding but.
Right now the priority for us is to preserve that that dry powder for M&A priorities.
Over the near term and the medium term to accelerate the path toward winning in electrification for this company consistent with our charging forward initiative. So that's where the priority and the focus is right now and so to the extent that we have pipelines of opportunities built up that we think will potentially utilize that capital we're going to maintain that capital to be ready to support those.
Types of M&A initiatives.
And Kevin just im sorry that $1 billion, you're talking about selling by 2022.
A pretty direct statement is there stuff that's in process that is.
Just a matter of timing that you kind of almost locked and loaded at this point at this point.
There's a couple of dispositions that I'd say, we are actively in progress in fact, when you look at our 10-Q, that's going to get filed later today youre going to see some assets and liabilities on one of those transactions actually were moved into held for sale accounting. So you can see we're making some progress there. Although we don't have anything specific to announce today, but those couple of transactions that are in progress are really there.
The start point, we have a couple of others that I would say are in the planning phases that we think when you combine those things when we look at the 2022, we think we're on the path to disposing of $1 billion of.
Of combustion revenue consistent with what we laid out back in March.
Great. Thank you very much.
Thank you next question comes from the line of Brian Johnson of Barclays. Your line is open.
Thank you Yeah I wanted to follow up on Collyns question around power electronics.
Competitive environment, and especially the kind of value add.
That borgwarner brings.
You have a comment in there that you're talking about cuts them.
Silicon.
Proprietary integrated circuit development. So is that custom silicon do you have a fab to do that.
And that gets to the bigger question, which is.
How do you kind of quantify the value add and hence the margins in power electronics.
Land.
And it might say OEM goes decree or one of the many power electronics suppliers like silicon carbide and they are really just looking for a tier one debt package it and ship it.
Which is more of a build to print function.
Yeah, Brian that we are not making silicon the silicon carbide, we have.
Very very strong relationship with our supply base, we're developing.
Products together.
And those are very important elements. When you think about the fact that those elements are embedded into our power modules and floating voters.
Those are really critical critical elements.
As far as do you wanted to take the mountain.
I think on the margin I mean, even look at the two programs that Fred presented today, we look at those types of programs on the same way we look at all of our other programs. We focus on the the ROIC of those programs and given the capital intensity of those types of programs being substantially similar to what we see in the bulk of our business. It means that the margin.
Profile of those businesses ends up looking substantially similar to the types of programs. We've looked historically at this company so.
Those programs in particular as well as any others actually come up through Fred and me. We look at those we look at the ROIC and the margin that comes out of that and we're pleased with what we see.
The financial discipline on this company of this company has not changed.
Whatever whatever we quote in the world of electric vehicle, we have the same discipline and absolutely the same discipline.
So what is the key value AD board that.
Drives your win rate and also creates the margins that you like.
I think it was just simply is better product.
Thermal products that that package better that are lighter that are more competitive than competition.
This is a link to better product better innovation and also ability to innovate in all verticals, which all power module software <unk> and design. There is no. There is no magic there you need to be better in all those elements and the proof is in the pudding we are.
Great. Okay. Thanks, and look forward to chatting with you in a few weeks.
Likewise, thank you.
Thank you next question comes from the line of Noah Kaye of Oppenheimer. Your line is open.
Good morning, and thanks for taking the questions. So the CEO of a leading premium.
European OEM was talking this morning until.
All the commentary about the lack of charging infrastructure in Europe, just not keeping pace with the growth in demand and the availability of new models.
As you think about growth verticals and opportunities for the companies. How do you look at the EV charging opportunity are you doing any work there. It's an area of potential growth for you can you comment on that.
We have.
Small operations in business today.
Using charging stations.
It also.
<unk> that the future of fast challenging may embed battery packs in there.
We're looking at.
And that easing the value that we can add to the market. This is something we're looking at right now.
Okay.
Then as it relates to the step up of $100 million in R&D that you're expecting for next year and understanding it sounds like a significant portion of that is just to support new EV programs in development.
Should we start to see operating leverage.
From an R&D perspective on EV sales growth is R&D.
Within EV as a percentage of sales going to stay the same or decline next year.
It's helpful I think to understand the trajectory because.
By 2025, presumably already intensity will have significantly declined to achieve those target margins.
Absolutely I think I'd refer you to the slide that we had provided back at our Investor day, because I think thats a good way to think about it.
Showed how the R&D right now is heavy particularly relative to the revenue that we have and we're running at $3 million to $400 million of EV revenue, but were investing of that $725 million of R&D. This year.
A third of that being focused on the product portfolio, obviously that math doesn't work for from a near term profitability perspective, as we go out over time, we start to launch some of these programs from an EV perspective, the evs the EV businesses start to get some real gross margin and contribution margin that starts to help to fund.
On its own some of those R&D investments. So R&D is continuing to ramp over the next few years, but ultimately that contribution margin is coming on more quickly and you start to get the leverage that we that you alluded to and you can see as we laid out in that Investor day deck by the time you get to call. It 22024 ish timeframe is when.
We start to cross and you start to see profitability on a standalone basis as the contribution margin on an incremental sales starts to overtake the R&D investments that we're making and I would say as you think about that for the long term as we think about the steady state for that business. The margin profile of that business. We think is a good margin business. Its just.
We're in growth mode for a long period of time, so until you stop the growth you never fully offset the R&D from a normal operating margin perspective, we're always continuing to invest as long as we're growing but we start to get the real leverage in the coming years here.
Great. Thanks very much.
Thank you next question comes from the line of Dan Levy of Credit Suisse. Your line is open.
<unk>.
Hi, good morning, everyone and thank you.
First on 2022, I know on Slide 12, you gave us some parameters, but I just wanted to aggregate this.
What type of incremental margin might be and I realize it's early here, but what type of incremental margins might be able to expect.
On any volume recovery.
I think when we add up the items listed here seems like Incrementals should be a little lower than usual, but just wanted to see if theres an aggregate view.
Yes, I mean, the good news right now is as we're looking at the Decrementals, we experienced in Q3 and even what's implicit in our Q4 guide, we're suggesting there's a 30% decremental, but about 10 points of that is being driven by the commodity cost headwind. So underlying the performance outside of commodity costs, we're managing right around there.
20% Mark on a year over year basis, which is going to considering how much revenue has come out on a year over year basis when volumes come out relatively quickly like that and then they recover we would expect generally to incur maintenance increment directionally at the rate at which we decrement. It when you have a dropdown and then a snapback.
And then as you look longer term, we continue to expect once you get into a more normalized operating environment Incrementals go back to a more normalized we are in the high teens tends to be where we operate from a pure incremental perspective.
So all in that that could lead to an incremental next year potentially in the 20% range.
On recovery of volume from the low levels that we're operating at now absolutely.
And then as you get into more normalized outgrowth relative to normalized market expectations than you would expect a return to more normalized.
Incremental margins, but when we get a snapback from production drops like we would anticipate at some point here, we would expect to be able to increment at the rate at which we decrement it no different than what we saw coming out of Covid.
Covid started this when we started the snap back at the end of last year, we had obviously decrement it at a pretty healthy rate earlier in the year and it came back very quickly and we incremented at the rates in which we decrement. It. So I think thats the right way to think about us as we come out of hopefully the the production challenges that we're seeing in the market today sometime during 2002.
Great. Thank you and then my follow up is that I know there'd been a number of questions on in brokerage here, but I'll ask another one.
I think it's pretty clear inverters are effectively becoming your signature product sort of the same way that turbos are the signature product.
<unk>.
And a nice world. So if we're making the inverter versus turbo comparison, maybe you can just give us a sense, where you know.
Turbo is clearly.
Have a very concentrated position.
What type of competitive environment do you anticipate for Anders I think you talked about it earlier and how would that compare to motors and drive units.
And maybe you could also just give us a sense I assume that given historically turbos, we'll call it like a quarter or a third of revenue you'd probably allocate a disproportionate resources.
Yeah.
Certainly deservedly. So how are you thinking about allocating resources to inverters internally versus other products is just going to get disproportionate attention. Just given this is going to be your signature product in the future.
A lot of questions in your question.
So the first.
Very happy with the Inverters positioning.
As I alluded to in my prepared remark.
We think we're going to be the number one non captive and vote to produce about 2025, $2 5 million Inverters in 2025, and absolutely growing from there more to be booked already 90% booked and that ramp up in R&D to support that that booking rate and also the <unk>.
High level of.
For suit that we do.
Sure.
So.
Very happy with it it's not.
I would not call that the signature product when you look at slide 13, you have other products in the mix. It is true that this product is a high content per vehicle, we're very successful with.
Systems' Idms, we've announced quite a few wins and more to come very successful with.
With.
The surrounding of the batteries.
Needless to say that slide 13 does not include <unk>, because we don't we don't totally own it yet we are in the squeeze out period.
It's not a one product. It is there are a lot of product in the world of electric vehicles that we are extending it now.
Inverters as I mentioned in prior calls.
The products that are outsourced by our customers value. The vast majority because it's very very complex to do it requires a lot of scale in electronics, a lot of vertical integration and so we're very successful with that.
On motors.
We are.
And bedding own motors in it.
<unk>, who also setting Standalone motors I would say that the marketing motors is still more fragmented that the.
The competitors in Inverters that is becoming more and more concentrated.
What I would that's what I would tell you if I.
I hope I covered most of your question.
Thank you I know, there's a lot there I appreciate it that's very helpful.
Thank you next question comes from the line of Emmanuel Rosner Deutsche.
<unk> Your line is open.
Alright, Thank you very much Mike.
First question is.
Some of the elements of outlook that you provided for 2022, which are really helpful. So maybe focusing on the.
The top line and the gross first I think that.
You mentioned, you're expecting at this point at least modest LDP growth and then still assessing sort of like the growth over market.
Could you provide just a little bit more color around your early thinking I would think.
I'll, just LBP grocery is probably quite a bit more conservative.
IHS, maybe or even what we've heard from some of the.
Automakers that have spoken so far and then on the growth of the market size.
To what extent some of the growth that you saw this year I mean, I guess, what would be a cost for us coming out of next year's growth.
Yes, so a couple of things on the Saar.
Outlook for next year, obviously, it's still early days and we're still operating in a very volatile environment as evidenced by the fact that we still got a $300 million revenue range on our Q4.
Revenue outlook and so that just gives you an indication as to the volatility in the environment and as we look out into 2022 from where we sit today, we don't see a rapid solution to the semiconductor challenges in a sudden snapback in volume market volumes coming so our expectation is that there is going to be.
<unk> continuing impacts of the supply chain disruptions well into 2022, and so that's why we're suggesting given where we sit today, we expect that that probably translates to modest growth from a year over year production perspective, but I'd say it's.
Sitting here in early November trying to project what next year looks like when we're still struggling with Q4 production, it's pretty challenging to project right now, but we don't see necessarily an end in the near term in terms of some of the supply chain disruptions, which might be a little bit different than some others. We're guiding you to a much more rapid recovery.
In terms of the outgrowth.
It starts with well what was your outgrowth.
In 2021, and how much of that might've been effectively a pull forward or a benefit you would have otherwise expected over the couple of years. So the fact that we outgrew the market based on our guidance or expect to outgrow the market by 10% in 2021.
It's obviously not a normal outgrowth for this company, we're happy with it but it suggests to us that knowing that we normally grow in the mid single digit range or at least have for the last number of years that some of that may have been a pull forward of things we would have otherwise expected in 2022, but we're in the middle of that assessment right now we're in the middle of our long range planning.
And really understanding in this volatile environment, how much of that is a headwind to next year's year over year outgrowth versus we expected. This is the new base from which we grow so still in the middle of the assessment, but that wouldn't be a bad thing. It would just be that had accelerated into this year and you can really see that in our full year guide where our.
Backlog in our full year guide is one 1 billion and a half and 2021 I mean that tells you the strength of what we've been able to accomplish this year and it's just a question of how much of that might've been a pull forward from next year.
Understood and then second question on your strategic priority to dispose some of these.
Ice revenue.
At the end of next year can you provide a framework of how to think about.
Potential.
Implications on margin.
Typically business that we'd be at average margins or below margin and then I guess more broadly.
Combustion engine revenues may be declining.
Decline was worth time, while obviously growing fast in the electric vehicle side.
How would you plan on managing.
The impact on profitability from essentially a declining very profitable business.
Either organically or through disposal.
And then obviously the growth in ESG, which is.
At least initially doesn't necessarily have the scale.
Yes.
The margin profile of the businesses and products that we would consider for disposition.
Depends I would say some probably have below average company.
Company average margins some might not they might have at or even above the company average margins remember when we're looking at the framework for what we don't think as a business or product that fits with borgwarner longer term.
It's a business or product that doesn't tick one or more of three boxes, we look and say do we have product leadership in this space do we have medium to long term growth prospects do we have a strong margin profile. So you can have businesses that might have a solid or strong margin profile, but actually just don't have the growth prospects that we would expect or <unk>.
<unk> leadership that would be a candidate for disposition at the same time, we have products that are undoubtedly below the average margin profile that are candidates for disposition. So when we had investor day talked about our longer term margin guide we contemplated the types of businesses that we thought would be would be included in our disposition strategy and still thought that over the long.
Longer term that we would be in the double digit margin range on a go forward basis that contemplates the dispositions and it also contemplates the impact of growing the EV portfolio.
The one thing you have to keep in mind, when we talk about the growth in the EV portfolio.
The impact on our P&L is already in our results today.
It's already there because we're investing over $200 million in R&D right now in our P&L in 2021, and we only have three years to $400 million.
<unk> related revenue in our P&L. So that's only a tailwind as we continue to grow that business going forward, because we start to get contribution margin that's more than offsetting the incremental R&D as we look out over the coming years. So you can't look at that business and say well, it's a negative margin business have been growing a negative margin business, we're growing from where we are.
Today, and starting to generate the contribution margin on the incremental revenue that comes into the P&L.
And the margin profiles of those businesses, we feel very good about.
Yes, that's very helpful. Thank you.
Okay.
Thank you.
Next question comes from the line of Luke.
Baird Your line is open.
Good morning, Thanks for taking the questions first question I had is if theres any additional color you could provide on the North American Burger Award specifically was described as a high voltage program and just wondering if that includes both 400 volt 800 volt business and whether that'd be all EV or if theres a hybrid element here to just trying to unpack the <unk>.
Most of your competitive edge through the lenses. The specific award in the spirit of some of the questions. We've gotten this morning.
Look I'd love to give you more detail.
The only thing I would tell you it's that it is all EV.
Okay, great I'll take that.
Follow up question wondering Fred to what extent is.
There is a potential for award activity to not only sustain in evs, but to pick up from here. Obviously you have got good momentum going to the 2025 EV targets already but it's only been about a year. Since you closed the Delphi deal in other words, we're just now serve on the front end of the 12 to 18 month window that you had originally outlined.
For rewards for the combined company any high level thoughts there would be great as well thanks.
Yes, so from an organic standpoint, we are at 90% all target. It was $2 5 billion to three very happy about that from an inorganic standpoint <unk>.
We mentioned in the past represents about a quarter of the.
Organic.
Sales underlying project challenging forward and we have a few a few years ago.
Very happy with the pipeline that we have.
Good healthy pipeline, we are engaged with some targets.
And of course right now we're focused on preparing the <unk> integration, which is not to 30 hours until the squeeze out process is happening we are on track for this position overall.
We are on track versus what we presented to you back in March and very happy to see that momentum both organically and inorganically.
Thank you next question comes from the line of Joseph Spak with RBC. Your line is open.
Thank you good morning.
Kevin I want to go back to some of the comments you made on growth over market, how you keep saying.
Pull forward, but.
It would seem to me that part of the better growth over Mark. This year is more mix related right because you're comparing a dollar value to a unit number and.
The units that were made.
This year it tended to be.
Probably have sort of higher dollar content. So.
I am curious if you could if you have an estimate of sort of how much of that was just sort of mix related and then moving to 'twenty two.
I get the tough comps I think what people are sort of trying to understand is like is that going to be does that mean like back to your sort of mid single digit target or potentially below it because.
The path for margins next year seems really dependent on like the conversion.
On volume versus some of the headwinds.
You've laid out here.
Yes. So the first question in terms of the growth over market. It's a combination of those things it's absolutely a fair comment that as some of this potentially mix and that mix of product.
Mix of customer absolutely.
Potentially a piece of the equation and that's what we're assessing right now.
Think that undoubtedly had some impact on Q3, where we delivered over 13% growth. If you just look at the quarter in isolation.
Both of our market on a year over year basis.
So we're in the process of assessing okay. What do we think 2022 looks like and versus that 10%. Okay are we back to the average or is it slightly below the average I don't think where we sit today, we're expecting to be delivering 10% growth above market again.
So it's a matter of a question of are we back to the normal growth rates that we've delivered over the last few years or that we have projected before or is there any sort of headwind relative to that based on the really strong outgrowth in backlog. We delivered this year in the middle of that assessment right now.
Okay.
And then just.
Fred maybe maybe.
Picture is obviously really good to see the traction towards that $2 $5 billion number in 'twenty five.
But I am curious because it seems like the pace of Bev announcements and penetration are.
Only increasing in <unk>.
Forecasts are moving up which is clearly helping you in that opportunity, but does this change like does this meaningfully change the mix of bad relative to is that you were sort of originally laid out and 25% I think it was originally.
Still like 15%.
So I guess.
The question is is the mix of ice sort of decelerating, a little bit faster and accelerates faster.
Two I think in 2025.
We still we still thing that are.
Functions are are accurate if you remember back in the back in March at our Investor Day talked about 30% of Bev market.
Vehicle.
In 2030.
Sure.
I think.
We might be on the low side.
In the market might be higher than 30% Bev I remember our target in 2030 was 45% Bev.
But I don't think 2025 is going to move meaningfully 2030 might be north of 30% actually might be north of what we thought back in March and you are right the pace of.
The volume is accelerating and the pace of request for sourcing is accelerating too.
And the volumes of what we are booking.
They are in the several hundreds of thousands of pumps, but we're not talking about low volume. So it's significant the acceleration of the yen.
Very happy to be to be.
A big part of it.
Thank you for that.
Yes.
Thank you next.
Our next question comes from the line of Adam Uhlman Cleveland Research. Your line is open.
Hey, guys good morning.
Let me go back to the margin commentary for next year and Im wondering if you could share with us.
How do you stay where they're at today, how much of an additional headwind.
We might expect to see in 2022, and then combined with that outside of commodities, you've incurred a bunch of other non material costs I'm wondering if you could frame for us.
Potential commercial recoveries that you could expect and if that could be a meaningful offset to the commodity headwinds.
And in terms of the commodity headwind I mean remember this year, we're effectively get embedded in our guidance is a net commodity headwind of about $80 to $90 million for the full year and as I mentioned Q4 is supposed to be up $30 million to $40 million of that so the bulk of the commodity headwind. We've experienced has been in the back half of the year as opposed to the front.
Half of the year, we started to see it little bit in Q1, but it really started to accelerate in Q2 and in Q3, and Q4 and Q3 dollars 24 million in Q4 $30 million to $40 million and so you can kind of do the math based on that and assume that if commodities remained at those types of levels. If the year over year headwind as you look at Q1 and Q2.
So that's what I would say given where we stand at this point those are the planning assumptions that we're using but it remains to be seen where we actually end up in terms of the other cost TBD those are embedded in the P&L today in terms of our guide in terms of the impact on us.
I think the biggest impact though is what we're seeing at the moment is really the commodity headwind when we when we look at the.
The impact on our financials this year.
Okay got it thanks, and then lastly.
Near term question.
Wondering what youre seeing so far here in the fourth quarter in terms of customer call offs.
And perhaps any color on geographies of that just given the wide range of the fourth quarter revenue guidance I'm wondering if maybe it started off a little rockier than.
Previously expected or anything you could share there.
Hey.
It's a tough one that's why our guidance is so wide for the remainder of the year volatility happens in all regions and can change from one day to another staying close to customers the <unk> key.
<unk>.
Surprises do happen.
Where schedules are in place.
Ready to ship and the customer is stuck with no path. So.
It is a very volatile environment.
I don't think it would be wise for me to answer that question regionally in detail It's theater.
Pretty wide world right now.
Thank you we have time for one final question and that question comes from David Kelley of Jefferies. Your line is open.
Hey, good morning team. Thanks for squeezing me in maybe Kevin to follow up on that last commodity headwind question. Your comments into next year could you remind us of the pass through timing and opportunity.
As we start thinking about first half 2022, I believe you have about 60% kind of pass through rate typically on purchases, but just.
Any color there would be helpful.
Yes, our typical pass through is when you look at the blend of all of the pass through mechanisms. We have contractually as it relates to steel aluminum nickel copper the things that were most exposed to the contractual pass throughs are about 50% on a fully blended basis.
Couple of things to note about that when we talk about the net commodity headwind that we've disclosed the $80 million to $90 million that is on a net basis and so we've been executing at or around that 50% level.
Thus far in our guidance this year, which means the gross impact of those commodity headwinds is roughly double what we've talked about roughly and so the 80% to 90 already contemplates recoveries in it. So as you think about how that translates into next year, maybe you get a little benefit from some of the lag that's in there, but we're already pretty close to 50% I would say today.
The second thing I would just note is when you when you get into more sustained inflationary environments of such a high degree like we're seeing there it's not uncommon to see suppliers, having conversations across the industry with customers about what to do beyond that.
The contractual pass through mechanisms, so the 50% and what we're experiencing to date is really the contractual piece and we'll see how long the inflationary environment last and at what level and whether that warrants additional conversations that that where others have with the customer base heading into next year.
Okay got it. Thank you and then maybe one last one commercial vehicle traction maybe if you could talk about.
Kind of your outgrowth in the quarter and any color on how you're thinking about the fourth quarter contribution.
From your commercial vehicle exposure would be great.
I mean, our commercial vehicle is still in a running in that low teens call. It around 13% of our total portfolio.
So.
Not a material change as you look out.
Whether it's the balance of this year as we think about where we are going to be next year. The things that move the needle would be at this point anything that we do on an acquisition front. Obviously <unk> is really focused on the commercial vehicle and industrial space and so as they ramp up over the coming years, we will get a tailwind from that in terms of a mix percentage perspective, but we're continuing to operate in that low teens.
Range in terms of the mix.
Great. Thank you.
So with that I'd like to thank you all for your great questions. Today. If you have any follow ups feel free to reach out to me and the rest of the team.
With that Jay you can go ahead and close the call.
Thank you and that does conclude the Borgwarner 2021 third quarter results Conference call you may now disconnect.
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Sure.
Yes.
Okay.
Okay.
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