Q1 2022 Borgwarner Inc Earnings Call
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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 IR 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 during this call.
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 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.
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 the discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good day everyone.
Very pleased to share our results for the first quarter 2022, and provide an overall company update starting on slide five.
I am pleased with the residence of our revenue relative to the industry decline.
With approximately $3 9 billion in sales, we were up about 1% organically.
And we outperformed in both Europe and North America.
Our margin performance was negatively impacted by higher commodities and other inflationary costs. However are.
Our M&A synergies and restructuring savings helped partially mitigate these headwinds.
Free cash flow was a usage during the quarter due to inventory increases. However, we still expect to generate significant free cash flow in 2022.
While navigating the near term industry headwinds, we took steps to drive our long term positioning during the quarter.
<unk> completed the acquisition of Central's light vehicle E motor business.
In addition to deploying capital to M&A investment.
We opportunistically repurchased $40 million of stuck and lastly, we secured multiple new electrification and program awards.
Let's look at to electrification awards on slide six.
I'm excited to announce our first OEM business win for our flexible battery management system.
We have been selected by a leading global vehicle manufacturer to equipped OLED <unk> segment.
These segments and light commercial vehicles with production expected to begin in 2023.
We've been working with this global manufacturer for two decades and are delighted to further strengthen our relationship by contributing our advanced that re management solutions for their vehicle platforms of tomorrow.
Our battery management systems for hybrid and electric is designed to monitor the state of jobs the state of health.
And that that re temperature of each individual battery cell.
Slide precisely measuring con flow in and out of the battery pack.
The cell balancing has performed during both the charge and discharge consumption cycles.
It allows our highest state of challenge to be achieved optimizes that re lifespan.
Enhances that safety.
Preventing over or under challenging.
The system is suitable for battery applications operating at up to 800 volts.
This is another great example of a wide range of products available for electrified vehicles.
Next I'm excited to announce our second dual inverted program.
We will be providing a leading Chinese OEM with our highly efficient Julian voted for high voltage hybrid vehicle models slated to launch in 2023.
By combining different power electronic technologies into one compact package are dual inverted provides unrivaled functionality single unit can control and drive to electric motors.
While delivering cost and weight reductions. It also comes with a DC DC converter as an option.
These advanced inverter or a world showcase not only the product leadership, we have in these domains, but also the trust and confidence we've built in our electric side application with multiple Oems globally.
In addition to their mid term revenue opportunities advanced high voltage hybrid programs such as these.
Allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicle.
On slide seven I'm happy to highlight an additional E Motor Award.
But one has been selected to provide our high voltage have been E motors for leading electric vehicle brand in China.
The E motors will be using the company's second generation 800 volt propulsion system platform.
The first vehicle equipped with this platform is expected to start mass production in 2023.
These motors deliver peak efficiency of over 96% and feature our percentage high voltage have been stater widening technology.
As you can see by the chart on this slide are booked E motor volumes, which are testament to the recognition of our customers are expected to grow rapidly from 800000 units in 2020 222 million units by 2025 more than a 30% CAGR.
With the additional booking opportunities that we see over the next one to two use we believe are E motor volume reached more than 3 million units by 2025.
Central's acquisition is a key part of our multi strategy and I would like to provide a brief update on this acquisition on slide eight.
Starting with revenue, we expect central acquisition to contribute $60 million to $70 million.
2022 revenue over the next three quarters.
We expect the impact to EBIT to be a modest negative for the full year.
However, we did not acquire central Florida near term impact on results.
To expect the central acquisition to drive approximately $300 million of revenue by 2025 inclusive of assume revenue synergies.
Central's added manufacturing capabilities in E motor design improvement.
Advanced our overall competitiveness in E Motors.
With central Borgwarner now as a full suite of E motor products at scale.
With application in small and larger passenger vehicle as well as commercial vehicles that we will bring on a global scale.
On the right side of the slides, we've provided a sampling of the revenue synergies.
Now in position to pursue.
And we're excited that we've already secured two programs on these synergies and we expect to see additional success in the coming quarters.
So let me summarize our first quarter results and our outlook.
Overall, our first quarter performance was respectable.
Our revenue once again proved more resilient than the industry volume.
And while our margins are being negatively impacted by inflation. The proactive steps, we have been taking to implement restructuring and cost synergies over the past several months and years, helping to partially mitigate these headwinds.
As Kevin will detail shortly our reduced full year 2022 outlook is a reflection of the FX update.
The moderated industry volume outlook at the top end of our range and increased commodity costs.
However, I am encouraged that our relative revenue performance outlook.
Nonetheless improved.
We are not accepting our content environment and its impact on our profitability and cash flow as.
As a management team we are absolutely taking the measures that we believe are necessary to continue to optimize the short term margins and cash flow.
My eyes are focused on the longer term and I'm extremely excited about our RF charging forward.
We're taking significant steps that we believe will help us to secure our profitable growth well into the future.
We are continuing to seek your business in the electric world.
And we have now booked significant scale across multiple product lines for electrified vehicles.
By 2025, we have booked programs that will support approximately 2 million E Motors.
2 million Inverters and close to $4 million eaters, together with Ibm's Etfs battery management systems and battery packs.
This represents more than $3 3 billion of booked business already in 2025 ready to carry on booking more and acquiring great assets to become even stronger.
We are focused on disciplined inorganic investment like the acquisitions of <unk> and Central's E motor, which already are having great technology to our portfolio why is the preventing our growth profile.
With that I'm, turning the call over to Kevin.
Thank you Fred and good morning, everyone.
Before I dive into the financials I'd like to provide a quick overview of our first quarter results.
First our revenue came in at the high end of our expectations, despite significantly weaker industry volume in Europe , which is our largest light vehicle market.
Second our margin performance in the quarter was respectable given inflationary pressures that our business is currently facing.
Performance was supported by our synergy and cost restructuring actions that we've been executing on for the last couple of years.
Let's turn to slide nine for a look at our year over year revenue walk for Q1.
We start with last year's revenue, which was just under $4 billion. After adjusting for the disposition of our water Valley facility. This past December .
You can see that foreign currency decreased revenue by about 3% from a year ago. The U S. Dollar strengthened year over year and has continued to strengthen beyond the quarter end.
Then you can see the increase in our organic revenue about 1% year over year.
That compares to a 7% decrease in weighted average market production.
That means we delivered another quarter of strong outperformance in the face of a challenging end market environment.
This outperformance was driven by Europe , North America and Korea.
The sum of all of this was just under $3 $9 billion of revenue in Q1.
Now, let's look at our earnings and cash flow performance on slide 10.
Our first quarter adjusted operating income was $389 million or 10.0%, which compares to adjusted operating income of $464 million or 11, 6% from a year ago.
On a comparable basis, excluding the impact of foreign exchange and the impact of the water Valley disposition.
Adjusted operating income decreased $62 million on $30 million of higher sales.
This performance includes nearly $50 million of net commodity and other material cost headwinds that we experienced in the quarter.
The balance of the operating income decline year over year is explained by the impact of higher E products related R&D and the acquisition of <unk>.
Moving on to free cash flow, our free cash flow was $61 million of usage during the first quarter due to increased inventory as a result of ongoing production volatility.
Let's now turn to slide 11, we can see our perspective on global light vehicle industry production for 2022.
When you look at this slide you can see that our market assumptions incorporate a range of potential outcomes.
That is primarily a result of the semiconductor supply challenges the additional supply chain impacts as a result of the conflict in Ukraine.
And the impact of Covid related shutdowns in China.
With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of two 5% to 5% this year, which is down from our previous assumption of 6% to 9% increase.
Looking at this by region Europe is where we see the largest reduction relative to our prior guidance.
We expect our blended market increase of 2% to 4%, which is down significantly from our prior outlook of plus 12% to 15%.
This is driven by weaker production in both light and commercial vehicle markets.
In North America, we're planning for our weighted markets to be up 11% to 13%.
And in China, we expect the overall market to be down 4% to 7%, which is worse than our previous outlook.
This is an underlying assumption that the COVID-19 related shutdowns are resolved by early June and then most of the loss volumes can be recovered in the second half of the year.
Now, let's talk about our full year outlook on slide 12.
First our guidance assumes an expected $650 million headwind from weaker foreign currencies, which is based on FX rates as of the end of April .
While the U S dollar had already appreciated somewhat against foreign currencies through the end of March we've seen additional meaningful appreciation of the dollar through the month of April as well, so we factored that into our outlook for the balance of the year.
But remember our strategy is to produce and purchase components in the same region as our customers.
As a result, the impact of currencies on our guidance is predominantly translational in nature.
Next as I previously mentioned, we expect our end markets to be up to five 5% for the year.
But we expect our overall organic revenue growth to continue to exceed industry growth.
In fact, our current outlook for outperformance is stronger than our prior outlook based on both our year to date performance.
And an increase in our expected pricing recoveries for commodity and other inflationary costs.
Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 13% relative to 2021 pro forma revenue.
That means we expect to outgrow the market by approximately 7% to 8%, which is higher than our prior outlook of 4% to 5%.
To look at it another way are stronger relative performance is almost entirely offsetting the impact of lower industry production.
Finally, as it relates to our revenue outlook. The Sanchez acquisition is expected to add $60 million to $70 million to 2022 revenue as Fred previously noted.
Adding these items together, we're projecting total 2022 revenue to be in the range of 15 $5 billion to $16.01 billion.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of nine 8% to 10, 2% compared to a pro forma 2021 margin of 10, 9%.
This represents a 40 to 50 basis point reduction versus our prior outlook.
Of this approximately 40 basis points or just over $60 million is the result of higher commodity and other inflationary costs net of additional pricing recoveries.
And about 10 basis points relates to the <unk> acquisition, which is expected to be modestly dilutive this year.
As it relates to R&D investment our guidance still anticipates, a $130 million to $160 million increase in E products R&D investment in 2022.
Despite this challenging environment, we are not constraining the key investments that support the long term growth of this company.
Excluding inflation and this E products R&D investment, our 2022 margin outlook contemplates the business delivering full year incrementals in the high teens.
Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $3 90 to $4 25 per diluted share.
It is important to note that the translation impact alone of the strengthening U S. Dollar is impacting our year over year EPS outlook by about <unk> 20 per share.
And finally, we expect that will deliver free cash flow in the range of $650 to $750 million for the full year.
The reduction from our prior guidance is being driven by our lower adjusted operating income.
Partially offset by lower capital spending expectations.
That's our 2022 outlook.
So let me summarize my financial remarks.
Overall, we had a respectable start to the year.
Our revenue proved more resilient than the decline in industry volume with our outgrowth tracking ahead of our expectations coming into the year.
And we still delivered double digit margins, despite significant material cost inflation and higher R&D investment.
As we look out to the balance of 2022 near term industry pressures are likely to continue with ongoing production disruptions in multiple markets as well as continuing material cost inflation pressure.
As a management team, we continue to work to strike a balance between managing the present by sustaining our strong margin and cash flow profile, while at the same time, maintaining the momentum in delivering our long term plans under charging forward.
But we know how to meet this challenge.
Managing near term results and long term profitable growth has been and will continue to be the hallmark of Borgwarner success.
With that I'd like to turn the call back over to Pat.
Thank you, Kevin Jerome Ray and open up for questions.
Alright at this time I would like to remind everyone. If you would like to ask a question. Please press star one on your telephone keypad. If you are using a speakerphone. Please pick up the handset before asking your question in the interest of time, please limit yourself to one question and one follow up question.
For just a moment to compile the Q&A roster.
Your first question comes from Colin Langan with Wells Fargo. Your line is open.
Oh, great. Thanks for taking my questions.
Just to start I think you mentioned there was about a $60 million increase in the assumption on commodities.
Where does that sort of bring your sort of full year headwind for commodity.
Costs.
I frankly.
Surprisingly not nearly as bad as a lot of other suppliers are talking about seems like a pretty relatively small number and you're doing a really good job offsetting that because.
The incrementals on the sales cut arent really map app.
What are the sort of the key offsets or kind of keeping those decrementals in a pretty low range.
Yes, so a couple of things on the $60 million. If you remember last quarter, we talked about having $50 million to $60 million of net commodity headwind and then we talked about double digit million of additional inflationary pressures with the $60 million addition, where we're actually add on a full year basis for both elements the commodity piece.
And the other inflationary pressures, that's about $130 million to $140 million net that's net of the recoveries and so that's an increase of $60 million in terms of managing the incrementals on the sales cut aside from the $60 million flowing through you'll keep in mind. The bulk of the sales cut is really driven by foreign exchange.
Change if you look at the production cuts the math of the production cuts that were talking about in our guide translate to somewhere around $500 million to $600 million of lower revenue, but the increased outgrowth that we're delivering is kind of in that $450 million range. So it's substantially offsetting the production impact so the lower revenues really.
Predominantly driven by the foreign exchange. That's why you are not seeing a huge decremental on lower revenues, because it's mainly translation.
Got it.
Any update on the divestitures that youre planning for internal combustion engines. It seems like the recent volatility probably not helping the market. Currently I think the target was two $1 billion by the end of this year.
Yes, I mean, we're still actively involved in our processes, but I'd say, it's highly likely that the current market environment is going to have some impact on the timing of that disposition process I think until there's more clarity around things like the resolution of inflation inflationary cost pressures the impact of Russia, Ukraine, the impact of Covid Lockdowns in China I think.
It has the potential to impact certain buyers, making them a little bit more hesitant and different processes that we're undertaking so I think that's okay, we're not desperate seller.
Looking at disciplined approaches to selling positive cash flow generating businesses that have a certain value to us. So I would tell you. Those processes. We are involved in right now are continuing to progress, but I think it's fair to assume that this has the potential to impact the market environment for executing these dispositions in the near term until there's more clarity about the <unk>.
Situations.
That situation being the market situation.
Yes.
Okay. Thanks for taking my question.
Your next question comes from the line of John Murphy with Bank of America. Your line is open.
Good morning, everyone. This is aileen Smith on for John .
I wanted to start asking the flip side to that question is from a longer term perspective, and the charging forward plan you might assume that there may be some impact the timing around the divestiture target for this year, but given the volatility in the capital markets and what may be going on with valuation.
Public and private side of things change anything from your perspective in terms of the acquisition opportunities that are available.
Amy I think you need to think about it.
Depending on the.
The attributes of the characteristics of the target. So if you add.
And the acquisition that we're going after that as a substantial conn com business in production.
The current market conditions will have more impact on us looking at it versus a target that would be more of a startup in nature.
That's the way we look at the way we look at it the startup in nature. The low there is a low level of production.
The bulk of the business comes in the years to come the impact is way more marginal.
In any case.
We've always apply a very disciplined approach as far as <unk>.
And as concerted extra the MD&A is concerned this will carry on.
And over the past two quarters, we've turned down some some some <unk>.
Acquisitions that we looked at for Ecmo reason, so very discipline in those approaches.
Okay got it thats helpful.
And then we've asked this question a few different ways to suppliers on the cost inflation side, but your automaker customers have been pretty successful in passing on cost inflation and more recently to their customers in the form of price and I think we can understand the dynamic of commodities and past there is between you and your customers. The contemplation is really everywhere. So in the past few months have automakers.
And any way ever separate receptive or you've kind of opened the door to discussions of taking on some incremental cost burden from you beyond commodity as they may be able to pass it onto their customers.
Yes.
I think I'm getting encouraged by the discussions that we have with our customers.
Those are not easy discussions, but we're making progress.
And.
And I think we will have substantially more clarity in the next earnings call to give you more detail, but the discussion is ongoing.
And encouraged by the <unk>.
The buy the tones.
Okay, Great and one quick housekeeping or clarification clarification question, if I may and the battery management system win that you highlighted on slide six is that technology that came from the <unk> acquisition.
No.
Technology that came with the Delphi acquisition that has been enhanced since we got together.
Okay fantastic. Thank you.
Your next question comes from the line of Noah Kaye with Oppenheimer. Your line is open.
Thanks, so much.
Wanted to ask about the pace of quoting and award activity it feels like.
From what we can see it continuing to.
Accelerate you've maintained your outlook for.
R&D spend this year.
Any considerations that we should have about maintaining that.
With activity picking up.
And just wondering how to reconcile the two.
So very happy with.
The intensity of discussion with our customers intensity of quotes and book book business and also very happy with the increase of 130 $260 million year over year on R&D on E and we want to maintain that.
And again these increases linked to application engineering.
Announce and and quoting activities for.
For businesses, where we have.
Sure.
Hi.
High confidence, it's not R&D scratching our heads on what products were going to develop its really concrete linked to announce activities.
We feel good about those numbers.
Okay very helpful. Thanks, Brett and then just to clarify how much of the anticipated weakness in the European markets.
Have you really started to see here.
Quarter to date versus what Youre thinking for the back half.
So I would tell you that.
Think that the.
The people that have been impacted by the by the Ukraine will directly.
That really our case.
I've done a pretty good job over the past weeks.
Getting around some of the origin of the supply chain that we that we so windows when this conflict.
Arrays.
And so we've reduced.
We have reduced the midpoint of our European forecast by about one 3 million units, but.
But remember 40% of that reduction is Russia, where we have very very low exposure. So I think even if Q2 is going to be under pressure steel.
I think our customers are really doing an effective job managing through those supply Jews through those supply issues in Europe .
Very helpful. Thank you.
And your next question comes from the line of Rod Lache with Wolfe Research. Your line is open.
Good morning, everybody.
Just.
First of all a couple of housekeeping things.
You originally at the beginning of the year pointed to 4% to 5% growth over market now at 758% relative to.
Youre weighted production assumption.
That organic.
Growth what is the commodity reimbursement and.
And Kevin you mentioned two numbers for net inflation was $60 million and one was 130 $140 million.
Which which one is the net for the year.
Yes, so the increase in the outgrowth effectively going up 300 basis points is really a combination of the flow through of what we saw in Q1, the good news as well as the incremental pricing recoveries that were anticipating now ultimately the pricing the additional pricing, which is both related to commodities that contractual commodities as well as some of the non contractual things that were.
Working on it's really going to be subject to the negotiations that ultimately transpire, both with the suppliers how much of that flows through to us and how much of that pass through to customers. I think you should assume that that of the three points of additional outgrowth, that's somewhere in the ZIP code of plus or minus two points of that three points and the Q1 outgrowth coming through.
Being the rest of it so still even without that delivering five or six points of outgrowth on a full year basis in.
In terms of that $131 40, what I was trying to get at apologize if I confused the situation, but 130 to $1 40 represents the total net impact of material cost inflation inclusive of commodities on a year over year basis, that's a $60 million increase from what was embedded in our prior guide.
Okay.
And your.
R&D increased for the year.
Definitions changed a little bit originally it was R&D and LTE products R&D I just wanted to see if there's anything there.
It seems like you have.
A different cadence.
Our margin expectations than we've heard from others, you did roughly 10% margin.
In Q1, and you've got the midpoint of your margin targets around 10 for the year.
Can you maybe give us a little bit of color on how you expect the year to evolve.
It does.
This production look a little bit better mix or.
Or commodity absorption later in the year.
So the R&D and the R&D you are right, we changed the wording a little bit and the main reason, we did that is because actually as part of managing our cost structure along with other things.
We manage it within our P&L, we actually did manage our R&D on the combustion side lower in the quarter than what was implicitly in our guidance. So it was part of our cost management actions. So if you look at total R&D for the company was up $8 million year over year, but our E products R&D in the first quarter was actually up over $20 million, which is.
Means combustion based R&D was down on a year over year basis. So we wanted to make sure. It was clear that we haven't come off the expectation that we're continuing to invest the same amount of R&D on a year over year basis.
With respect to the cadence of margins, we're obviously not giving quarterly guidance, but what I would suggest to you is Q2 is likely going to come under the most pressure because that's where we're likely to see a lot of the volume headwinds as Fred talked about with Europe . Some of the challenges that we're likely going to see in Europe from a production perspective, we're going to be most pronounced probably in the second quarter and we're obviously living <unk>.
Now through the impact of the China shutdowns and Thats going to have an impact on second quarter revenue as well. So we will obviously see impacts of that from a conversion perspective as we then get back to the back half of the year. We would expect those types of pressures to abate at some of the Oes are working on solutions to navigate the European situation than we would.
The China situation to recover in the back half of the year most of the volume that gets lost in the second quarter and then on top of that we expect that we will see significant progress even over the next 90 days or so as we work with our customers on these recovery mechanisms, which should help to further mitigate some of the headwinds that we're expecting to see there.
Part of that $130 million to $140 million net.
Okay, and just really quick Fred this BMS contract. It seems like it's very short lead time is that going to be typical.
Any thoughts on the size of that contract.
Yes. This is this is a little untypical, we've been working with this customer for quite some time and it's we've announced its since they are really.
Spread the volumes to all those platforms.
I would say that for such a product to 18 18 months would be a good proxy to 24 months, obviously when thats correct.
Starting from scratch, we have modular battery management systems available in and this was.
This was this is why we can announce.
The rapidly.
<unk> seen some of the other announcements also E motors.
Our motor is also linked to the modular design that we can be up and running pretty rapidly. So.
18 months would be a good proxy.
Thank you.
Okay.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Alright. Thank you very much I was hoping to come back to the topic of commodities.
And in particular can you give us a little bit more color around.
Some of these recovery mechanisms work for you how you expect them to play out for the rest of the year.
Because obviously you seem to be very successful offsetting a lot of these costs, but $130 million to $140 million is still less net.
The year is there any perspective through these mechanisms to get some of it back.
In 2023.
Yes.
It is.
It is ongoing.
As I mentioned before.
Progress are being made and encouraged by the buy in the mindset of the.
<unk>.
The interaction and the discussion with the customers.
And so yes I'm absolutely.
We're confident that we're going to we're going to get to the target that we said to ourselves.
Both managing the cons and we're not as you know we're not in the business of <unk>.
Making deals when the business of a long term relationship and I expect famous in the relationship in the in the short term being two semi to volume to inflation.
And also improving and nurturing the relationship on the longer term.
With great products at the lowest total cost cost of ownership for our customers we're doing both.
And.
As a side note I've been in sales related functions for about 20 years of my life.
This is something that.
I've got a little bit of experience.
And just to be clear Emmanuel the 130 to 142 is net net of our assumption about pricing recoveries, which is both the normal contractual commodity recoveries, which are still working the way they're designed at 50%, but also an assumption that we're going to be continuing to work with our customers to try to recover some of the extra inflationary impacts that we're seeing.
And so the 130 to 140 is net of the assumption about those recoveries.
Yes, yes.
But I guess my question is so at the end of the day you are left by the end of the year with sort of like this headwind to your margin profile.
<unk> hundred $40 million net of recoveries.
Do you have either a contractual mechanical or just commercial discussion process to then.
Continue these discussions next year, assuming spot prices stay where they are and go back to the automakers and say hey look the margins are not where they should be we were still left holding this amounts can we do.
Do something towards that or at this point. This is sort of the results over the result of your negotiations will be seen this year and.
No no.
Additional upside and excellent next in 2023.
It's already difficult enough to get to a resolution for this year.
Don I don't want to speculate for what's happening next year next year will be the next year right now the focus is to <unk>.
Get to our targets.
Fair enough.
In some families this year.
Okay, that's fair.
So then second question will be on the.
Key products R&D and then the overall.
<unk> for the company. So as you mentioned in the remarks as part of guidance the margins on the year over year pressure, both because of some of this inflation, but also because of.
Extra investment in R&D, how should we think about it going forward. Obviously, you assume you products R&D will keep we will keep growing but what about the R&D.
At the company level does that remain.
A headwind to margins.
Stabilizer Ana.
Same level as a percentage of revenue while we we.
We're not giving updated guidance on an R&D in total for the company. It's obviously one of the levers that we have to be able to manage our cost structure. When we look at the non <unk> related R&D, but I think you should continue to expect that we're going to drive the investment and growth in the E. R&D. It is necessary to support the launch of our pro.
Grams in the profitable growth of the future. So we continue to expect that to be growing at $130 million to $160 million. This year I think it's still also overall a good way to think about as being in that five to five 5% range from a total R&D perspective.
On a full year basis, and Thats, where we are based on whats underlying our current guidance.
Okay. Thank you.
Our next question comes from the line of Brian Johnson with Barclays. Your line is open.
Thank you alright.
Just wondering.
Talk a little bit about pace and.
<unk> plug in hybrids.
A couple of things when you look at your growth over market. How much is still driven by uptake of your product line on ice vehicles is there, perhaps a mix effect. There G luxury market has held up better, but secondly, given all the discussion around both cost and shortages of battery materials.
It seems like the same amount of minerals that could power one EV could power 10 plug in hybrids.
Which for most of the week could be operating an all electric mode.
Are you seeing any renewed interest in plug in hybrids are you seeing any uptake the sales have gone well so far in your sales and is that helping drive that near term performance and is there may be more upside on the mid term than most investors would think.
Yes.
Brian I think.
We're focusing charging forward on pure Bev and it's the right thing to do.
Hybrid is simply a combination of good combustion product and great product.
The Julian vertical program in China is a good is a good example of that.
You are seeing we are seeing high voltage plug in hybrids.
400 volts and above.
Steve taking some some share of the market and for us.
What's really important to understand is that this is giving US scale. This is giving us now experience.
In motors in those inverters that apply in high voltage plug in hybrids full now.
Would get us really.
The scale and invest too so.
High voltage plug in hybrids are is a clear trend.
As well as Bev and with <unk>, we are.
Able to serve our customers without being.
Two whether they won't Bev oi voltage plug in hybrids and <unk>.
And all that converges into.
Getting us scale.
I was mentioning $3 $3 billion of <unk> revenue in 2025, if you add the voltage plug in hybrids on top of that and I don't have the number today, but it's pretty significant.
And then in terms of the specific outgrowth related numbers, Brian I guess, if you look at what's embedded in our guidance that 7% to 8% outgrowth that translates to more than $1 billion of outgrowth. This year and separately, we've disclosed that we expect our <unk> revenue this year to be over $800 million, which is more than double what it was last year.
So you can see and there is $400 million plus coming from Evs and the rest of it is coming from everything else. So to answer. Your question. Yes, we are still seeing outgrowth in parts of our business other than EV.
Okay. Thanks.
Thank you.
And your next question comes from the line of Dan Levy with Credit Suisse. Your line is open.
Hi.
Good morning, maybe we could just start with the margins in the first quarter.
Could you give us a sense of the extent to which the China Covid shutdowns in the Ukraine War.
The impact to your margins, meaning.
Excluding those items, what would we have otherwise seen.
Yes, I mean, I think China, we really started to have an impact very late in the quarter. It's really more of an impact here as we get into Q2, but then in terms of Europe . You can just see the loss production. Obviously, we normally as we've talked about in the past we normally convert in the high teens on incremental revenue and so as we start to lose revenue. It has an impact on our <unk>.
Version Accordingly.
You just cut through the math of what happened to us in the first quarter from a margin perspective on a comparable basis. When you exclude FX and you exclude the water valley disposition. There were really just three things that move the needle for us. It was the net material cost impacts that we talked about year over year, almost $50 million. It was the incremental products.
<unk> R&D of $20 million, and then a little bit of impact from from ACA saw other than that it was pretty normal conversion. So again, if we had more production coming out of different geographies, we would expect to convert on that normally at our typical incremental margins.
And the go forward guidance is that assuming any additional.
Fly impacts from Europe or any.
Lumpiness around <unk>.
Around the China Covid shutdowns.
It assumes a couple of things.
We're expecting that Q2 will be the most challenged quarter from a production perspective, because I think some of the lingering impacts of the Russia, Ukraine situation will likely manifest in Q2, and then probably see some recovery in production beyond that in China. The Lockdowns are going on right now and our expectation underlying our guide is that those the.
Tuition in China gets resolved in the early part of June and that we see the bulk of those volumes.
Recovered later in the year so embedded in the guide is that Q2 will be the most challenged from a production perspective.
Great and then.
As a follow up.
I want to understand.
In this inflationary environment, how costs are trending between EV versus combustion products and most notably on the <unk> side and burgers.
Is there any difference in the input costs on each side for you and.
Given the likely added margin pressure for EBIT margin pressure for everything are the levers to mitigate those headwinds any different than what you'd have price.
The in terms of the input costs I mean, a lot of it goes back to the overall inflationary environment is really having an impact on I'd say just about everything I mean, you see it on semiconductors, you see it on a lot of underlying commodities I mean take a commodity like nickel Nicole gets used in batteries Nicole gets used in stainless steel so that's having an impact.
Across both types of propulsion architectures, whether youre talking about evs or ice. So the way we go about managing our cost structure is pretty much the same whether it's an ice based component or.
On EV component, except that on the EV side, we're very cognizant of making sure that we're continuing to make the incremental R&D investments to support our long term growth and the launch of the programs that are coming into the P&L over the coming years.
Okay. So the cost pressures arent any worse for EV products than they are for ice correct.
We're seeing cost pressures in both.
Okay.
If you look if you look at the indices, even just in the last 90 days, what's happened to stainless steel to Nicole to aluminum copper those types of things you are seeing.
30%, 40% increases in some of those indices and so that cuts across that can be ice based technology or it can be <unk> based technology, and then logistics cost freight costs labor costs at some of the suppliers those are impacting across the propulsion type as well so I wouldn't say, it's limited to one technology or the other.
Great. Thank you.
Your next question comes from the line of James Picariello with BNP Paribas.
Your line is open.
Hey, good morning, guys.
Ryan.
We appreciate the E motors detail on slide seven.
From an industry perspective, you provided the <unk>.
Average CTV promoters at around $500 just curious if this is.
In line with what Borgwarner seeing what it Hasnt backlog and then within the 2 million units slated for 2025 can you share.
Roughly what the IBM mixes and is there any way to think about the margin differential between.
Any more E motor component sale versus the full IBM system.
I don't want all the detail Pat.
Just come back to.
James.
What I can tell you at least one of your question is the most of the 2 million of E motor volume in 2025, our Standalone Motors.
And.
A few go into ibm's, but but but not.
They found that the vast majority of it for the rest of that is going to come back to you.
Okay, and just like at a high level, just the margin differential for the full IBM system versus others.
Is the IDM system materially margin accretive relative to the component.
I mean, it's.
We price our business substantially similar whether it's a system or a component we look at the return on invested capital I look at the capital that's required and it tends to be since we are in the assembly business, whether it's a system or a standalone motor that we likely have relatively comparable capital intensity.
For that individual sale, which means that the margin profile on a percentage basis tends to look similar obviously, if youre selling more content through our system the dollar amounts might be bigger but the.
ROIC and the margin profiles tend to look directionally similar.
Okay understood and then is there is.
Kelly as to how many.
The Dms related awards you have in backlog and then you do have five months inorganic contribution from <unk>. This year. So curious if you could share what <unk> revenue was in the quarter and how youre thinking about that business for the rest of the year.
Yes, so with respect to <unk> I'll take that question.
I mean, <unk>, we deliver between 40 and $50 million of revenue. This first quarter and I would say we tend to be trending stronger in terms of what we're seeing is the longer term prospects for that business from a growth perspective.
Okay. The vitale on the BMS related awards is this your first one that you announced or.
So.
This is the first major one that we announced cutting across a lot of volume in the level of platform for.
400 ounce globally there are.
The BMS businesses in the company that that.
Kim with identify acquisition and of course, we're doing our own Vms spas.
Actual vehicle battery packs are concerns who would not flagged that out independently from the battery pack revenue.
So that's a little bit of color for you James.
I appreciate it thanks.
Thank you. Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line's now open.
Yes, good morning, and thank you very much for taking the question I was hoping to better understand the 2025 booked EV related revenue I think last quarter, you talked about $2 7 billion.
<unk> booked this quarter you talked about over $3 3 billion I'm, a little unclear if those are apples to apples or if there's some.
Differences in how M&A is being treated but.
The second part of that question is can you bridge as to what's driving that increase from the two 7% to 33.
That's easy to two seven is organic.
It's the first bar of charging forward.
Dashboard that you can see on.
On our on our website.
Additional 600 or $700 coming from acquisitions so.
And it's essentially a console.
Central and two seven points.
More than 66 67 is north of 303, that's how the math works.
Got it that's helpful and I guess then the follow up is you've got the BMS when Youre speaking about today that starts late 'twenty three so I was thinking that might have some contribution to the 25.
You have your targets can you talk a little bit more on what kind of revenue we can be expecting from the BMS program and.
You spoke a little bit already around what led you to win there, but thats a pretty competitive segment and I thought was very encouraging that you picked up the BMS win. So if you could also speak to with differentiating your BMS product line and what allowed you to win.
Yes, so on the two seven.
We're not we're not updating.
Three or four digit after the <unk>. So this is a rounding we're not going to update that each time, we book of business. So.
No.
As far as faas.
The BMS.
That's a competitive advantages.
It is our ability to combined again hardware and software.
And.
And this is this is this is part of the winning equation that I always alluded to.
Mechanical hardware and software together and this is what this is what we do very well in stopping being absolutely recognized globally for a whole suite of products.
Including now battery management systems.
Pascal independently, but also together with that consumer and commercial vehicles.
Thank you.
Alright, we have time for one final question and that question comes from David Kelley with Jefferies. Your line is open.
Hi team. This is Gavin Kennedy on for David Kelly.
And believe you mentioned, the M&A synergies and restructuring savings, partially offset the margin headwinds you saw in the first quarter can you remind us of your expectations for synergy and restructuring savings for the full year.
For the full year, it's north of $100 million combined.
Great and then the major wins you highlighted in your presentation today.
In electrification to work for China do you expect the pace of new business awards and bids to be impacted by the COVID-19 related shutdowns in that region or is it business as usual despite the disruption.
It's business as usual, except when it comes to production, but I'm not expecting any day as far as new technology.
And sourcing are concerned.
Alright, Thanks, Tim.
I'd like to thank you all for your great questions. Today, if you have any follow up questions reach out to me or any member of my team. Jerome you can go ahead and conclude the call.
That does conclude the four corner 2020 to first quarter results Conference call you may now disconnect.
Okay.
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