Q4 2021 Borgwarner Inc Earnings Call
Good morning, My name is Jerome and I will be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2021 fourth quarter and full year results conference call. All lines have been placed on mute to prevent any background noise offer to speak.
<unk> remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press Star one on New York telephone Keypad, if you would like to withdraw your question press.
The pound key.
You are using a speaker phone please pick up the handset before asking your question I would now like to turn the call over to Patrick Nolan Vice President of Investor Relations. Mr. Nolan you may begin your conference.
Thank you Jerome 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 both our homepage and 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 R.
Our actual results may differ significantly from the matters discussed today.
During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods.
When you hear us 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 that.
FX and M&A.
We will also refer to our market growth.
When we say market. This means the change in light and commercial vehicle production weighted for our geographic exposure.
Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good day, everyone. We're very pleased to share our results for 2021 and provide an overall company update starting on slide five.
I am very proud of our strong top line performance relative to the industry declines.
With approximately $14 8 billion in sales, we were up about 12% organically and we outperformed in all major regions.
I'm also pleased with our margin performance. Despite the significant production volatility we faced during 2021.
This was achieved while continuing to significantly increase our R&D investments to support our E product growth.
These investments will continue and accelerate.
We also delivered solid cash flow performance, despite the impact of a onetime warranty payments for combustion based products during the fourth quarter.
We also have seen progress on all three pillars underlying are charging forward plan.
We secured multiple new EV program awards during the fourth quarter, which I will discuss in a moment and we are already beating our bookings target.
We completed the acquisition of <unk> earlier, this month and today, we announced the acquisition of Central's light vehicle E motor business.
We also completed the first step in the combustion disposition goals with the sale of the water Valley, Mississippi facility to <unk> capital.
Now, let's discuss some of our some of our recent new business. So we will starting on slide six.
I'm happy to highlight two new product awards for the commercial vehicle market.
I'm excited to announce our first win.
For our hydrogen injection system.
This is a product that we've been discussing with our customers for quite some time.
Hydrology in internal combustion is a quick to market powertrain solution that requires only slight adjustments to the traditional Ics.
This is our first award and the program is with a top global manufacturer of construction equipment that is expected to launch in 2024.
But we'll know we'll be providing the full system, including injectors rails.
Use system integration and calibration.
Next we announced that Borgwarner has secured its first high voltage <unk> system with a global commercial vehicle OEM.
Fully electric powered AZ duty trucks will require dedicated high voltage thermal management solutions.
E systems for cooling components, such as the E motor that Reis and electronics.
Borgwarner are specifically optimized it spanned designed for performance and efficiency.
High voltage <unk> is driven by a robust E motor which is powered from the vehicles electrical system via an inverter.
This is another application of the three in one concept with mechanical motor and inverter.
The system will be utilized in a battery electric heavy duty long haul trucks.
<unk> to launch in 2024.
Both the hydrogen injection system.
And the <unk> are great examples of us continuing to organically develop new products to drive profitable growth in innovative powertrain systems.
On slide seven.
Happy to highlight two more wins in North America.
First for one has been awarded the generator inverter for an innovative electrified architecture.
The North American program is anticipated to launch in 2024.
Our product will be used in a range extension system to challenge domain battery.
This win highlights our technical capabilities in managing continues high currents.
Next I would like to highlight a new battery system award called the North American electric commercial vehicle market that we expect to launch in 2023.
Borgwarner will supply <unk>, a leading manufacturer of heavy duty transit buses in North America with third generation of our Ultra high energy battery system.
The battery system was develop for long distance application and can be scaled for the customer needs. It.
Get offered close to 700 kilowatt hour of available energy. This is the largest capacity in the North American Transit bus.
The system will be produced in our Hazel pump manufacturing facility here in Michigan.
On slide eight.
We highlight two additional 800 volts awards in China.
First I'm glad to announce that we have secured an 800 volt silicon carbide inverter with a leading Chinese OEM for electric vehicle anticipated to launch in 2023.
The award includes Inverters forefront.
And Ria drive modules.
Our 800 volt silicon carbide technology offer the enhanced power density proven performance and long term reliability.
And our leadership in this area continues to be recognized by our customers globally.
We're also partnering with a leading luxury in new energy vehicle maker in China to supply an 800 volts IDM.
Expected to launch in 2023.
Designed developed and manufactured by both Walter the 800 volt IDM includes our electric motor inverter and gearbox.
It features our exclusive and contact Viper power module, which is the core of the silicon carbide inverter.
This is borgwarner is first 800 volt IDM project worldwide opening a new chapter in the company's global electric drive business.
We're pleased to continue our long standing partnership with this leading domestic manufacturer of luxury electric vehicle.
As you can clearly recognize we're seeing a strong pool for our new <unk> products, we are increasing our R&D investment by $130 million to $160 million. This year to support this growth.
Now on slide nine I would like to expand on our announced acquisition of Central's light vehicle E motor business.
E motor either.
Key element of Borgwarner is electric vehicle growth strategy.
The acquisition of Central's business is expected to have multiple benefits for us.
First we expect this acquisition to improve both our E motor product leadership, and our manufacturing capabilities, adding state of the art equipment design and proven automation expertise.
This acquisition will also expand our E Malta portfolio breadth and scale.
Post this transaction borgwarner expects to produce more than three 5 million units in 2026.
For a wide range of customers and regions.
With central Vaughn and that our full suite of E motor product at scale with.
With application and small and larger passenger vehicles.
As well as for commercial vehicles.
And we obviously see potential for significant revenue synergies over time globally.
The acquisition will be funded with existing cash balances and is expected to close late in the first quarter 2022.
As you can see on slide 10, we've made significant progress towards our charging forward plan.
Starting first with the organic electric vehicle revenue growth.
With the awards secured of this as of these calls we now have electric vehicle programs that we expect will generate about $2 7 billion of booked revenue in 2025. This is an amazing achievement by the Borgwarner teams.
Turning to M&A, which includes the complete through the acquisition of <unk> and the planned acquisition of Central's E Motor business. We've secured additional businesses that we expect to generate more than 600 million to $700 million of additional <unk> related revenue for 2025.
And we expect to take additional M&A steps and are actively engaged with a number of potential targets, which would impact multiple pumps.
Our EV portfolio.
Related to dispositions, we completed the sale of our water Valley, Mississippi facility to a ton of capital during the fourth quarter.
With just under $200 million of revenue in 2021. This transaction represent 20% of the dispositions that we plan to complete by late 2022.
With less than a year since the announcement of challenging forward I am pleased that we've made significant progress across all pillars of this plan.
The takeaway from two days this.
Borgwarner successfully managed a volatile production environment during 2021.
Our revenue growth outperformed the industry and we delivered strong margins and free cash flow.
We're seeing strong demand for our product as evidenced by the numerous awards that we have secured throughout the course of the year.
We're making the necessary organic and inorganic investments to support this significant growth in E S.
In short we are successfully executing on our long term strategy challenging forward, which will deliver value to our shareholders long into the future.
With that turn the call over to Kevin.
Thank you Brett and good morning, everyone.
Before I dive into the financials I'd like to provide a quick overview of our fourth quarter results.
First our revenue came in higher than we were expecting going into the quarter due to better than expected industry volume.
Second our margin performance in the quarter was strong driven by better than expected revenue and cost synergy performance.
Additionally, our net R&D investment was lower than our guidance due entirely to higher customer reimbursements of engineering expense than we had anticipated.
And finally, our cash flow performance in the quarter was strong despite the impact of a onetime cash warranty settlement payment.
Let's turn to slide 11 for a look at our year over year revenue walk for Q4.
We start that work with last year's revenue, which was just over $3 9 billion.
Currencies had a very small impact when comparing Q4 of last year to Q4 of this year.
Then you can see the decrease in our organic revenue about 7% year over year.
That compares to a 15% decrease in weighted average market production.
So we delivered another quarter of strong outperformance in the face of challenging end market environment.
And we're pleased with the fact that this outperformance occurred in all three major markets.
On top of that what's particularly exciting to see in our outgrowth is that we're seeing a portion of it coming from our electronics and electrification products, especially in China and North America.
And finally, you add to that the $34 million of Q4 battery pack revenue coming from <unk>.
The sum of all of this was just under $3 $7 billion of revenue in Q4.
Now, let's look at our earnings and cash flow performance on slide 12.
Our fourth quarter adjusted operating income was $375 million or 10, 3%, which compares to adjusted operating income of $448 million or 11, 4% from a year ago.
On a comparable basis, excluding the impact of foreign exchange and the impact of <unk> adjusted operating income decreased $60 million on $256 million of lower sales.
That translates to a decremental margin of approximately 23%.
That's not a bad decremental for such a volatile environment, especially considering the roughly $16 million of net commodity cost headwinds that we experienced in the quarter.
Excluding these higher commodity costs, our year over year decremental margin was approximately 17%, which we view as a sign that we're effectively managing our operating cost performance.
Moving on to free cash flow, we generated $370 million during the fourth quarter.
Our free cash flow included a $130 million payment to a customer which was related to a warranty claim that we settled in the quarter for an engine related component.
Based on the agreement with our customer this onetime payment fully resolve the claim.
Let's now turn to slide 13, where you can see our perspective on global industry production for 2022.
When you look at this slide you can see that our market assumptions incorporate a wide range of potential outcomes.
That's primarily a result of the semi conductor supply challenges that we think will continue to impact the industry during 2022.
With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of 6% to 9% this year.
Looking at this by region, we're planning for our weighted North American markets to be up 13% to 15%.
In Europe , we expect our blended market increase of 12% to 15% and in China. We expect the overall market to be down 2% to 5% mainly due to a mid teens decline in commercial vehicle volumes.
Before moving to our financial outlook I wanted to highlight a change we are implementing in 2022 with respect to how we report our adjusted operating income and margin.
You can see this summarized on slide 14.
As you know M&A is expected to play a significant role in project charging forward.
And given the nature of the likely acquisitions, we anticipate the potential for significant goodwill and intangibles associated with these transactions.
Importantly, intangible asset amortization expense flows through our adjusted operating income line.
Now sitting here today, we don't know the magnitude of the intangible amortization expense that may come from future potential acquisitions, but what we do know is that it's likely to make true underlying operating performance as measured in our operating margin less comparable to previous periods.
Therefore, we believe that excluding intangible asset amortization expense from adjusted operating income will improve year over year earnings comparability.
And provide a clearer picture of the real performance of our ongoing operations.
But it's important to also note that the impact of intangible amortization expense will continue to be included in our adjusted earnings per share.
Now, let's talk about our full year financial outlook on slide 15.
As I mentioned earlier, we expect our end markets to be up 6% to 9% for the year.
Next we expect our revenue growth to continue to exceed industry growth driven by new business launches.
Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 14% relative to 2021 pro forma revenue, which means that we expect to outgrow the market by 4% to 5%.
Then subtracting an expected $220 million headwind from weaker foreign currencies were projecting total 2022 revenue to be in the range of 15, 9% to $16 5 billion.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10, two to 10, 7% compared to a pro forma 2021 margin of 10, 9% when adjusted for intangible asset amortization expense.
This 2022 margin outlook contemplates the business delivering full year incrementals in the low to mid teens on an all in basis before the impact of a planned increase in R&D investment.
Underlying those incrementals, we expect tailwind from continued cost synergies and restructuring savings and headwinds from the continuing impact of higher commodity costs.
And the mounting pressure of other supply chain cost increases.
As it relates to R&D investment, we're continuing to win new business.
You saw it in the six new wins, Fred profiled earlier and you can see it in our 2025 EV business, which now stands at more than $3 billion.
With this continued success, we are leaning forward and continuing to invest more in R&D for our <unk> products portfolio.
In fact, our guidance anticipates, a $130 million to $160 million increase in R&D investment in 2022.
And that increase is 100% related to our <unk> product portfolio.
This is higher than the $100 million increase we signaled on last quarter's call for two reasons.
First as I mentioned earlier, our 2021 net R&D expense came in lower than our expectations due to higher than anticipated engineering reimbursements from our customers.
Second and more importantly, the larger increase is a reflection of our bullishness on the prospects for securing additional EV wins in the coming quarters.
Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $4 15 to $4 60 per diluted share.
This EPS guidance contemplates our effective tax rate coming down to 28%, which is declining from the peak of more than 30% that we experienced over the last couple of quarters.
Gives me the last couple of years.
And finally, we expect that we will deliver free cash flow in the range of $700 million to $800 million for the full year. Despite a significant increase in capital spending year over year that supports the aggressive growth, we're seeing particularly in our <unk> portfolio.
That's our 2022 outlook.
So let me summarize my financial remarks.
Overall, we had a solid year, despite a really challenging end market environment one.
One where we saw significant volatility volatility during the last two quarters and remember it was a year with only 76 million light vehicles produced globally.
In the face of this environment, we outgrew the market.
We drove 10% operating margins by executing on our cost synergies and restructuring savings while also investing more in R&D to support the future of our E business.
And we delivered another year of strong cash flow.
And as we continue to successfully manage the present, we were delivering on the future by making significant progress on our charging forward plan.
Now as we look ahead to 2022, we're keenly focused on continuing to manage the present by sustaining our strong margin and cash flow profile.
Maintaining the momentum in delivering new business wins on electric vehicle programs and continuing to make disciplined investments both organic and inorganic that will help secure our growth and financial strength long into the future.
With that I'd like to turn the call back over to Pat.
Thank you, Kevin Jerome ready to open up for questions.
At this time I would like to remind everyone. If you would like to ask a question press star one on your telephone keypad. If you are using a speaker phone. Please pick up the handset before asking your question in the interest of time. Please limit yourself to one question and one follow up question, we'll pause for just alone.
To compile the <unk> roster.
Your first question comes from the line of John Murphy with <unk>.
Bank of America. Your line is open.
Good morning, everybody.
Thanks for all the info today.
Just wanted to focus on slide 10.
If we look at this.
It seems like your awards are coming faster than nutritionally themed shows from booking to act.
Actual watch I'm, just curious how much room, you have or how much progress you think youre going to make on this on this first bar and how about your bidding on there and then also as we think about this.
Is there more of an opportunity on the commercial vehicle business and Evs, because there may be some less competition and implementation is coming faster I'm just trying to understand.
Are we speeding things up here and is there maybe even a more of an opportunity on the commercial vehicle side near term.
John morning, Yes, I think youre right there are more opportunities on the organic side.
<unk> nine.
Nine to 12 months to go in order to book business that we see daylight in 2025.
<unk> target was at two five we're at two seven.
And continuing to continuing to book business.
Yes, you see opportunities in passenger and commercial vehicles some of the.
I'd like to I alluded to are on commercial vehicles.
And on the M&A I would say that we are engaged with a few a few targets we have a healthy pipeline of.
<unk>.
Of M&A targets.
And.
I am pretty happy where we are.
On charging forward I'm laser focused on charging forward, winning target is $4 $5 billion of.
Bev revenue in 2025, and we are absolutely on target.
Okay, and just to just to follow up if you look at the middle bar there.
All in Central I think what we're going to be about $500 million by 2024. So it seems like it's all potential should be closer to sort of an $800 million ish number something change in the <unk>.
And then also just a follow up on the reimbursements in the R&D for 2021, I mean, why would those larger in 2021 is that something that's changing.
The ratio of automakers, where there is greater R&D reimbursement or is that just timing.
Yes, I'll take that John on the ACA. So I think previously what we had disclosed what that $5 billion of revenue in 2024, we roll. This forward to 2025, which suggests we're probably more in that $600 million ZIP code. When you look at <unk>, which is in that number as well central is actually predominantly at least the revenue that we see through 2025.
More E motor business in and high voltage hybrids. So the bulk of their revenue is not likely going to count toward our explicit battery electric vehicle goal. So it actually doesn't add a lot to that particular bar, but it adds a lot to our capabilities and that's what we're really excited about with central.
With respect to the R&D reimbursements. So its really just a function of what we were able to accomplish at the end of the year recovery, sometimes come in higher lumpier in certain quarters and Thats exactly what we saw in Q4, I mean, our recoveries were up $20 million or so from what we were previously expecting.
I wouldn't view that as a trend I think that's just sometimes you get some lumpiness when you go quarter to quarter or year to year.
Okay, great. Thank you very much guys.
Your next question comes from the line of Rod Lache with Wolfe Research. Your line is open.
Good morning, everybody.
Couple of things I wanted to ask you about.
The company today is something like 70% North America, and Europe and.
It looks like you have 13% to 15%.
Outside of North America, 12 to 15.
Production, but you're only talking about 7% to 9% on a weighted basis. So I was hoping you can maybe address what you're anticipating in terms of mix headwinds presumably.
I wanted to also just check.
On the year over year bridge, if I added back the amortization.
$88 million to.
2021 am I correct that your incrementals on the.
171, 8 billion of organic growth at the midpoint is in the 12% range if that's right.
What are some of the puts and takes that I should be thinking about to bring that up to the normal high teens.
The 20% that you normally get.
Hey, Rod, it's Kevin a couple of things first on the growth and the market outlook remember when we're quoting our 6% to 9%. We're also including commercial vehicles. So this is a weighted average of our markets, which is the light vehicle, which is displayed on that slide but the commercial vehicle as well and you can see the blend in the backup slides that we've provided.
Did it so we know China actually from a commercial vehicle standpoint is going to be a headwind in that market in the high teens or when you look at Europe , Europe light vehicle might be growing in the mid teens, but the commercial vehicle side of that single digit growth. So when you factor all of those growth elements in across light and commercial vehicle. The way we are waiting.
It it comes out the 6% to 9%. So if you take a look at that backup slide we have in the appendix materials and hopefully that will help answer that question.
On the conversion question you had I'm sorry were you asking a 'twenty one versus 'twenty or 'twenty two versus 21 question.
'twenty one to 'twenty two just looking at I made the adjustment that $88 million on amortization that you pointed out on 2021, and then I'm trying to bridge the various components that you've given it.
Looks like.
Okay.
The organic growth looks like it's about 1.46.
Two point or 6% excluding the.
The well I think all in maybe you can just address that.
Sure when you look at the conversion the way to think about it if you look at on an all in basis, we're converting year over year in that call. It 2% to 10% ish kind of a range ZIP code, but that includes the $130 million to $160 million of R&D and so if you back out the increase that $130 million to $160 million of R&D.
We're actually converting year over year in the low to mid teens call. It more in that 13% to 15% range and so what are the puts and takes on that on.
On the negative side, we have commodity cost headwinds because remember last year that $65 million net impact that we experienced over the course of the year was predominantly in Q3 and Q4 and so as we come into the new year, we're going to continue to get that impact in the first couple of quarters, that's going to be about $50 million to $60 million in those first couple of <unk>.
<unk>.
On top of that we are seeing some additional inflationary pressures coming from the supply base that are part of our guide as well not as big as what we're seeing on the commodity side, but there is definitely inflationary cost pressure coming through that's factored in and then those things are being offset by restructuring savings that we're continuing to drive as well as incremental cost synergies on a.
Year over year basis, and so those puts and takes commodity cost supplier inflation restructuring synergies those are basically offsetting to get us to that call. It low to mid teens conversion year over year.
Okay, and just maybe just a follow up can you give us a sense of what.
What the mechanisms are for recovering some of these inflationary pressures, whether its commodities or what youre seeing from tier two suppliers. It seems like it's a pervasive issue in the industry.
Are you able to make adjustments to pricing.
Or things along those lines with your OEM customers for that.
Yes.
It's true that the situation is a bit unusual with commodity and other increases and so discussions on <unk> with our customers and we expect everyone to pay their fair share to be honest in this situation.
Logistic issues I've been also impacted by.
Never ending customer schedule changes and so we're talking to our customers and hopefully hopefully getting too to some to some resolutions.
Okay. Thank you.
And your next question comes from the line of Noah Kaye with Oppenheimer. Your line is open.
Good morning, everyone. Thanks for taking the questions.
I just wanted to go back and check past transcripts to confirm this but I don't seem to even remember you talking about.
Hydrogen combustion as potential R&D opportunity.
Element and this quarter.
You come out and actually announce a program award we've heard a lot of folks in the powertrain space talking about prototyping and development of hydrogen.
It just seems like to go from kind of stealth mode to announcing this is pretty remarkable. So I was wondering if you could take us through.
The design cycle and development work for this award.
And then I think what did you say about the company's approach to R&D going forward.
To kind of get this time to market.
Yeah.
Thanks Noah.
Hydrogen can be used in two ways right first you injected into combustion second you use it as a fuel cell, which is a range extender or a battery electric vehicle.
This win a small in nature.
<unk> hydrogen.
As a mean of combustion so you inject hydrogen rather than injecting gasoline.
We've been working with with a lot of customers actually on this this is a pretty appealing technology.
And.
And we've actually added in our tech centers engine fired up with hydrogen as a combustion mean over the past over the past few months.
And.
And yes, it's something that.
It can be.
That can be of interest.
And we are focusing especially on commercial vehicle construction and agricultural.
Opportunities at this point in time.
And so one thing I would add this is this is not.
Yeah.
A big part of the R&D increase at all it is the biggest part of the year.
100% of the path of the R&D increase is linked to Bev right.
The numbers. This year, we will have 45%, 45% of our total R&D focused inbev, which is for me absolutely absolutely exciting because I think it really validates the essence of challenging forward and I'm very proud about where we are.
Great. Thanks, Fred Let me just follow up on the M&A question I asked earlier here.
Are you seeing any kind of a reset on valuations for easy targets clearly.
From the public means in this space have gone through a pretty hard reset at the start of year execution has not been easy there has been supply chain challenges. So just curious to know what that does to your pipeline and potential for closing something relatively near term.
It really I think that ultimately impacts the the seller willingness to be able to execute a transaction. When we go into a transaction. We're looking at a discounted cash flow analysis based on the long term prospects for the business and obviously, if you have a relatively frothy public market influences the way that sellers can think about valuation.
So that makes it sometimes more difficult to bridge difference.
Difference in perspective on valuation so it's those types of valuations come down in the public markets.
That undoubtedly helps in some of the discussions that we have on the buy side, but again.
That's a data point, but for US we're really focused on the long term value of the business through the intrinsic value, which is built based on our discounted cash flow analysis.
Okay, and then Kevin sorry to sneak one more in but just to clarify the 50% to $60 million.
Cost headwinds from commodities you talked about in the first half is that a net number.
Year over year or is that okay. That's net of price increases.
That's net of the recovery mechanisms with our customers. So that's correct.
Okay. Thank you very much.
And your next question comes from the line of Chris Mcnally with Evercore. Your line is open.
Yes.
Thanks, So much team just.
Two questions.
The margins I think you answered my first question.
Rod.
It seems like the core Incrementals, if we go pro forma for the accounting change is about 13% to 15% year over year is that would you just want to make sure that was the number that was given.
Excluding excluding R&D thats exactly right.
Excluding R&D perfect. So the R&D leverage question. So when we think about the step up of that $145 million midpoint year over year should I think about that as sort of R&D and E. Meaning the engineering expense associated with launching these platforms or is it more about R&D to work on new platforms.
Clearly the follow on question would be.
Should we expect similar increases.
In the future or is this sort of a new elevated level it will grow with sales, but not to the extent of $145 million going forward.
Crystal first of all R&D, it's more it's more development and application engineering that RMB right. We're not we're not scratching our heads to figure out what product, we're going to level up right.
So it is both for launches.
And high confidence pursuits.
Perfect that's exactly my.
My question Okay.
It then becomes more of a one time step up and then obviously the business continues to grow.
The opportunities are more than the $2 7 billion.
But for now.
Is largely yet.
A relatively sizeable one time step up.
That's correct and remember when we when we talked about this as part of charging forward, even when we talked about our expectation that R&D would step up to the low to mid 5% range on a go forward basis and Thats stepped up here as part of our 2022 guide as we again have high confidence pursuits, as well as the wins that we've gen.
<unk> and then we're working on launching its driving that but it's right in line with our prior expectations of being in that five to five 5% ZIP code on R&D.
Perfect and then the only a small one on margin Alcosol, It's obviously about 30% to 40 basis points dilutive to margin now and you've given some.
Revenue outlook, but could you also just help us to when we could think about breakeven on an EBIT basis.
Yes, if you exclude purchase price amortization is still that we expect it's going to be a little bit negative. This year, just based on where we're jumping into it and we havent had control of that operation yet until effectively last Thursday last Thursday, we completed the merger squeeze out process, which allows us to now fully control that operation.
So we're excited to get in there and really run the day to day operations of that business going forward and manage it the way we would at Borgwarner, which continuing to drive the types of revenue growth that they're seeing which probably has more upside than downside from what we've seen as well as driving the types of profitability and cash generation, we would expect but a little bit of a margin headwind this year, because it'll be a little bit.
And breakeven before PPA.
Okay. Thanks, so much.
And your next question comes from the line of Colin Langan with Wells Fargo. Your line is open.
Great guys. Thanks, Thanks for taking my questions just a follow up on the walk.
'twenty one 'twenty two you mentioned last quarter, there were cost synergies of 40 to 45 and restructuring of 40% to 50 are those still the right numbers and that would kind of imply.
There is another additional $30 million to $35 million of other inflationary pressures that are offsetting those synergies with our commodity costs.
Okay got it yes.
Yes, good question.
Synergies actually ended up coming in stronger towards the end of the year than we anticipated some of the things that we were executing on benefited us in Q4, so actually part of the tailwind we saw in Q4 relative to our guide with synergies coming in stronger so cumulatively through the end of 2021 worried about $140 million, which included year over year.
Last year $125 million, which means to now get to our ultimate $175 million of objective, there's only $35 million of synergies left to go so a little bit lighter remaining in 2022 relative to what we signaled last quarter only because of the acceleration into 2021 and then on restructuring you are right we have guided.
<unk> at 30% to 35% is what we signaled last quarter I'd say, we should be at least at that level, if not slightly higher as we come out of 2022.
Yes.
Okay.
And then going back to earlier questions about growth over market. So that's kind of hard this year. Since there is such a product mix tailwind last year I mean, how are you thinking about it it looks like you are.
Sure.
You're.
Weighted average market outlook sort of implies about 300 basis points of geographic mix tailwind, but then that also imply that theres another.
400 500.
How much of a backlog of just shorten your business how much platform next being positive or is that due to negative if somebody's platforms maybe normalized.
The puts and takes and sort of your organic growth outlook.
The geographic mix for us isn't a tailwind because what we do is we report on a weighted average market basis. So we're not looking at just global markets. We're looking at our weighted average mix. So the fact that you are seeing higher growth in jurisdictions, where we might be more weighted that's already factored into our assessment of market and embedded in that 6% to 9% guide for <unk>.
<unk> market. So when you look at us in 2022, what we're effectively guiding toward is our growth above that market. Our weighted average market is in that 4% to 5% range of this year and thats jumping off of last years about 1000 basis points of outgrowth on a year over year basis, so continuing to deliver that mid single digit outgrowth as we.
Look ahead now for US our focus is less on outgrowth, each year and more about how we execute relative to charging forward in 2025, 25% EV mix in 2025, which corresponds to roughly $4 $5 billion of EV related revenue and that's really how we're measuring success, but underlying that is the expectation.
Patient that will continue that that mid single digit outgrowth on a go forward basis.
Yes, just a follow up.
I kind of get the four to five.
The four to five years, how do you think about it though is that all just brand new business wins or are you factoring any tailwind or headwinds from platform X. I think other suppliers have indicated that you had such a rich luxury SUV mix last year that some of that unwind is that incorporated in your or is apparently neutral color there.
It's not really driven by any sort of a mixed benefit as we look ahead into 2022, it's really some of the product launches some of the strength that we have on particular programs that are ramping up still and so there is nothing unusual from a pure mix perspective about that outgrowth.
Okay Alright, thank you for the question.
And your next question comes from the line of Brian Johnson with Barclays. Your line is open.
Hi, Thanks, I have a couple of questions just around the evolution of the portfolio.
With regard to the acquisition in China, you had already won that.
Hi.
Class a class China IDM business. So what does the acquisition bring you that you hadn't had before and kind of when you think about the Chinese marketplace, what range of vehicles and.
In terms of price points range.
This gets you into that perhaps you weren't in before.
Hi, Good morning, Ryan <unk>.
HMC was was for the as you mentioned for a class IDM.
With the central we are really bringing.
Our portfolio of motors for a whole suite of.
<unk>.
Power level and so.
<unk>.
This is this acquisition is not linked to the IBM within days. Since this was a motor that we are already doing in house.
The.
Logic is around.
I, sometimes alluded to vertical integration of auto volume and they focus this is clearly a vertical integration with great manufacturing capabilities.
And really expand the multiple for you at scale from the eight glass that you can think about within day too too long haul trucks.
At scale in different power levels. So.
It's pretty much the.
Highlights of.
The logic of the acquisition from a portfolio standpoint.
Okay and second question I know I've asked this before but you still have a lot of acquisition budget left in the commercial vehicle market.
Several of the competitors.
To highlight the advantages of <unk> is integrating the motor into the axle.
Your historical application was more tier one motive.
Would be similar Dana where you have an electric motor and through additional drivetrain. So are you thinking about tuck in acquisitions around the E axle space.
I mean, I'll start and in general our components can be utilize our E components can be utilized whether it's light vehicle or commercial vehicle and as we think about E. Axle E. Axel is definitely an important piece of the market on a go forward basis, and CD, but it's not the entirety of the market either and so our ability to <unk>.
Supply components into that market, whether it's E motors like we've had success on whether it's inverters or other things that opportunity is absolutely there and we've been generating those wins and then you can even see what we talked about today with the E fan win as well as the gillig announcement on battery packs. So there's definitely opportunity for us in CV and <unk>.
Actual arent an end all be all that drives whether we can be successful in the CV market.
Okay and final question on the disposition of ice side, you did complete one deal however.
It's relatively small relative to your goals.
Does the pipeline of dispositions looked like and second to the extent that things haven't happened faster is that buyer uncertainty over production environment and not wanting to buy and lever up if it's private equity with choppy production or is it a general hesitation about taking on even profitable life's assets.
In terms of what their terminal values.
Yes, I think.
We're pleased that we were able to accomplish step one here the sale of about $200 million of revenue relative towards that $1 billion goal. So we are pretty pleased with that.
I will say that the current end market environment conditions with the volatility we've seen with a $76 million global light vehicle market and with the supply chain uncertainties is absolutely had an impact on buyers.
Broadly buyer's willingness to engage in some of these discussions over the last couple of quarters, but we do have a pipeline that we're pursuing to drive towards that $1 billion of dispositions. Later this year I think it's just going to be helpful for us to see a more stable market environment, because I think appetite is there when the market is more stable and more certain.
Okay. Thank you.
And your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Alright, Thank you very much.
First question is on the.
Margin outlook.
And progression trajectory for margins I guess beyond this year.
As part of your 2022 outgrowth curious essentially.
Guiding on a comparable basis for margins, taking a small step down despite some meaningful revenue growth in the in the double digits and so I'm just.
Wondering from here, how should we think about it in terms of trajectory what are sort of like more normalized margin is there a trade off between investment and growth in sort of like ability to maintain margins or do you feel like once you've had this step up in R&D.
Vintage of revenues.
Books will be fairly stable from here then.
Show better operating leverage going forward.
Yeah as we look ahead. After 2022, our expectation is that we're going to continue to deliver the types of cost performance, we've been generating over the last few years driving restructuring savings that have been coming into the P&L and we'll continue to come into the P&L and maybe still a little bit of a tail left on some of the cost synergies from a Delphi perspective, but at the end of the day, what's really going to drive them.
Margin performance jumping off a 2022 into the next few years is going to be where end markets are because obviously, we're talking about a guide thats based on it at the midpoint about 80 million light vehicles and so on.
Our ability to deliver continued improvement in our margin profile is going to be markets returning to more normalized level call. It the high eighty's millions of units or even where IHS is now talking about being in the $90 million next year and ultimately our ability to convert on incremental revenue and on growing markets is there the same way, it's always been but markets youre going to be.
Big driver of our ability to improve the margin from where we are today in terms of that question about trade off in growth versus margin, we're willing to make that trade off to the extent that the new business wins are there to support investment in R&D and you can see that in what we're doing in 2020 to stepping up our R&D of 130.
$160 million is obviously, a pretty meaningful step up at greater than 20% increase in our R&D and so we're willing to do that if we see the growth opportunities. There because we think it's the right thing to do for the company. So the more growth opportunities to see them more willing to invest in those growth opportunities through R&D.
And if that comes at the expense of near term margin so be it but we still see the trajectory of margin growing over the coming years.
Understood and just sort of following or following up on this last point so presumably.
Pipeline of available easy opportunity is only going to grow right. Because <unk> is at the beginning of penetration and eventually is going to make its way towards 100% of the industry.
Thereabout, so theres going to be a locked through investments or it's easy. So I guess when would you want us to start seeing it as a margin.
Driver of the margin expansion.
In other words, how long would you be willing to stabilize.
Margin compression.
Compression as an investment into EV growth.
Well I think we saw obviously the big step up this year, we had guided before that we thought we'd be in the five to five 5% range on a go forward basis, and we were running below 5%. The last couple of years. So this is a major step up that we thought it aligned with our longer term objectives. So we would expect to continue to invest in increasing.
R&D, but probably in that ZIP code of where we're operating today in that five to five 5%, but what's important to also note is that we're now starting to see the EV revenue coming into the P&L and we expect to have healthy contribution margins on that and you can see we indicated in our press release today that our revenue is north of 800.
Yeah.
In 2022 embedded in our guidance, which is more than double what it was last year. So we're getting contribution on that incremental revenue, which is now starting to help fund that increase in R&D investment. So I would say less of a headwind as we go forward because we start to operate operate at a more normalized R&D.
More and more of our steady state run rate R&D expense on a go forward basis as a percent of sales and then getting contribution margin on that revenue as it comes into the P&L.
Okay, and then just one quick final one still on this topic. So you very helpfully broke out sort of the EV revenues for 2022.
Versus 2021.
You see how much of the growth from here and then also back into how much of the revenue growth still comes from the combustion engine side of the business.
When over the next few years would you expect like.
Ratio to sort of flip for essentially more of the EV more of the revenue growth would come from EV than from combustion engine.
Impressed and positively surprised that you're still so much revenue growth from combustion engine wins reflect the industry production seems to be heading the other direction.
Yes.
We are targeting we're targeting $4 5 billion in 2025.
And part of the panel challenging forward pretty much half and half in 2030.
And that's absolutely part of the plan.
Kevin you want to add.
No I was going to comment on that.
Really it's the drive toward about $4 5 billion.
Under our charging for a plant, which is the 25% <unk> mix. So as we jump off a 2000 $20 million to $800 million growing to $4 5 billion or so in 2025 I mean, that's the type of growth you should expect part of that coming from acquisitions, but but.
The bulk of that really coming from the whats already in our business today.
And it's true that 2025 might be 'twenty four 'twenty five might be a key inflection point then for us jumping off that inflection points already having in house.
Right now as of this $3 3 billion of book business I'm not talking about.
Sure.
Other things then booked.
With the target of being at four five or above is a great jump off point.
Yes, thank you very much.
Okay.
And your next question comes from the line of Ryan Brinkman with Jpmorgan. Your line is open.
Hi, Thanks for taking my question.
That's on now having fully booked to your targeted 2025 electrification revenue I thought to ask given the <unk>.
Very strong expected topline growth at central it looks like from de Minimis revenue in 'twenty $1 million to $300 million and 25 are able to say how much of that growth has also been booked versus maybe it requires more bookings.
We're not going to comment on that right now, we'll give you more clarity around the outlook on that when we close on the transaction.
Okay. Thanks, and then you got one question already on the multiples you might pay for acquired companies and how that could be impacted by the decline in public company multiples.
Maybe the flip side of that question has there been.
There has been at least like a relative rotation right from growth to value in the public markets. This year, so with slower growth companies that are generating a healthy margin and cash flow is now similar to those who are looking to dispose benefiting relative to the currently unprofitable high growth companies, whose cash inflows or in the future like similar to those here.
Looking to buy so might you benefit from both ends.
Because of this rotation.
Or what has been the appetite for some of the businesses that Youre shopping are you. How are you thinking about the value of some of these businesses now versus I don't know maybe like a year from now after the industry is continuing to claw back some of the volume from the chip shortage et cetera.
We'll see I think just as you alluded to there at the end of your question I think it's really going to be dependent on.
More stable end market environment. So undoubtedly the end market's informed buyers and sellers as to how to think about valuation I would tell you in this market right now with the Choppiness, we're seeing in the volatility and only an 80 million unit global end market that we're projecting at the moment.
<unk> things a little bit more challenged on the disposition side, so, but we'll see how things progress from here because I think as market conditions stabilize and if theres continued rotation towards more value related investments, maybe that'll be a tailwind, but we'll see.
Our focus is on executing our strategic plans controlling what we can control and making sure we get good value for the assets that we dispose of.
Great. Thank you.
And your next question comes from the line of Luke junk with Baird. Your line is open.
Good morning, Thanks for taking the questions Fred hoping we could start with a big picture question. This morning, and in some project charging forward.
And back on when you first outlined the company's current strategy about a year ago now how does where the company stands today compare to your initial expectations in all three of the major fronts organic bookings, which clearly look to be above expectations M&A in the asset dispositions, where are you ahead of expectations and is there anywhere that you are not in.
And if not what's driving that.
I think we are on track.
And personally I am.
I'm fully focused on challenging forward.
And with with.
With a broader team I think we're absolutely on track. We are ahead of where ahead of organic bookings and I'm very proud of that.
I would say that our decentralized operating model allows me and a few others of the top of the house to really spend a lot of time challenging forward.
And and.
I'm really excited to two.
All game on R&D with 45% of R&D on E. Next year, I think it's really really validates the essence of using the cash that we generate and reinvesting in the business with the traction that we have for all the products that we now have in our portfolio.
No.
I am I am happy with the way we are.
The year after or maybe less than a year after the announcement of challenging forward.
And then thank you for that my follow up question can you just remind us now that the squeeze out process is completed ACA. So with the initial steps are as you are able to take a little more control. Thank you.
I think as.
Kevin alluded to before we see some we see some good prospects in the <unk>.
Pipeline of growth is strong with that investment go with it and we're not shy about about investing for the future of battery pack technologies.
In battery pack product leadership.
We are we at.
Literally.
We are in Johnston last Thursday, so we're going to put in place.
We're putting in place the different the different steps to to run the company the way we would like it to.
To be run.
I am very impressed by the talent in this in this company the technology leadership that we have in the bookings that they've been able to generate in in Europe and in the U S.
We'll be one of the only one in the world having production facilities for high volume commercial vehicle battery packs in both sides of the pumps. So a lot of work to be done, but very very excited about about running with the <unk> people.
People and talent.
I'll I'll leave it there thank you.
Alright, we have time for one final question and that question comes from Dan Levy with Credit Suisse. Your line is open.
Hi, great. Good morning, Thank you for squeezing me in.
Wanted to go.
Revisit some of the assumptions on the combustion side, so if youre, saying youre going to grow.
By $400 million this year that basically implies that sort of the outgrowth related to the ice pieces.
Maybe.
A point or so.
As opposed to call it 3353 points or so from EV. So just wondering that's obviously a clear deceleration versus what we saw in 2021 and I have seen in 2021 was more driven by ice outgrowth. So maybe you could just give us a sense of the underlying outgrowth dynamics from your.
Your combustion products and then maybe you could also just talk through.
The underlying margins, obviously can you strip out the elevated R&D.
The margin tracks Youre, keeping price wondering what those margins for combustion would look like.
Yes, I mean, when you when you look at that Youre right. Good chunk of outgrowth. This year is being driven by the <unk> and we're excited about that but.
But we're continuing to see some level of that organic growth coming from the combustion business as well. So the combustion business has actually been holding up well and actually outperforming the market. So.
Not sure what to add to that other than I think we feel pretty good that the combustion portfolio is holding up in the <unk> business is now really starting to gain traction and coming through in the P&L.
Okay.
And are you seeing increased penetration of say turbos and DDI is that okay.
And increased trends.
We're definitely seeing that as it relates to hybrids I mean, when you look at the advanced hybrid technologies those products lend themselves to driving more efficiency and downsizing of the engine and so we do see adoption rates of products like turbos, Vcd GTI actually increasing in the hybrid world.
So that is a piece of what we expect to be a tailwind for the coming years and why we continue to expect underlying growth in that portfolio over the next few years.
Okay. Thank you and then the second question is just on your longer term planning assumptions.
When you gave your.
Your targets through 2030 plan was assuming global B the penetration of 30%.
But I think what we've seen is just broadly.
Third party forecasters. These long term assumptions keep on skewing higher and higher and this is occurring very short period of time. So I think some would argue that 30% is now looking conservative so to the extent 2030 is a ways out but to the extent we continue to see the expectation of accelerating maybe you can unpack.
What that does to your plans on acquisitions dispositions or organic growth initiatives.
And then I think you are right. The EV market interruptions appears to be accelerating based on public comments and also conversations with our customers.
What's very important for us is our positioning in 2025, and Thats really key to our long term success target of $4 5 billion of Bev Bev product in 2025, we're at three three.
And we have time to book more organic business and we have a healthy pipeline of M&A.
More to come on that I think the jump off point of 2025 is really really important.
The right portfolio, the right product the right customer intimacy and the and the right base of a significant multibillion dollar.
Revenue in 2025, it's going to be key to our success.
Great. Thank you very much.
Thank you all for your great questions. Today, if you have any follow ups to reach out to me or my team that Jerome you can go ahead and conclude.
Alright that does concludes the Borgwarner 2021 fourth quarter and full year results Conference call you may now disconnect.
Okay.
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Thank you.
Okay.
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