Q2 2022 Borgwarner Inc Earnings Call
Good morning, My name is Chelsea and I will be your conference facilitator.
At this time I would like to welcome everyone to the Borgwarner 2022 second quarter results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer period.
I would like to ask a question. During this time simply press star one on your telephone keypad.
If you would like to withdraw your question Press Star Q.
You are using a speakerphone please pick up the handset before asking your question.
I would now like to turn the call over to Patrick Nolan Vice President of Investor Relations. Mr. Nolan you may begin your conference.
Thank you Chelsea and good morning, everyone. Thank you for joining us today.
We issued our earnings release earlier this morning.
Hosted on our website Borgwarner dot com on our homepage and on our Investor Relations homepage.
With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the events section of our 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.
Actual results may differ significantly from the matters discussed today.
During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods.
When you hear us say on a comparable basis 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 M&A.
We will also refer to our growth compared to our markets.
When you hear us say market that means the change in light vehicle 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 Beth and good day everyone.
We're pleased to share our results for the second quarter of 2022.
Provide an overall company update starting on slide five.
I continue to be impressed with the strength of our revenue relative to the overall industry.
With approximately $3 8 billion in sales, we were up about 7% organically.
<unk> global production being down slightly and we outperform in North America and Europe .
From a margin perspective, our performance was negatively impacted by a planned increase in E product R&D investment.
Net metal youll headwinds and southern production shutdowns in China during this quarter.
We were able to partially mitigate these impacts through overall cost performance and progress on executing customer pricing actions with a number of key customers.
You will see that our guidance implies a sequential improvement in margins into the second half of 2022, which is driven by volume improvements and our expectation of continued success in executing our customer pricing actions.
We are pleased with the progress we made in Q2 on this front. However, there are still some other ongoing customer discussions that we expect to resolve in the back half of the year.
We expect that the successful execution of these actions will position our financials more strongly heading into 2023.
While navigating the near term industry environment. We also took steps to drive our long term positioning during the quarter.
First we completed the acquisition of <unk> energy solutions in.
In addition to deploying capital to fund our M&A investments.
We opened and Opportunistically repurchased 100 millions of stuff.
Lastly, we secured multiple new electrification program awards.
Next I would like to highlight our recent ESG report on slide six.
In June we released our 2022 sustainability report gold charging forward together.
I am proud of the work of Borgwarner employees around the globe delivering on our vision of a clean energy efficient world and then putting our beliefs of inclusion integrity excellence responsibility and collaboration.
And this comes across in the report.
Together, we are accelerating the world's transition to E mobility by empowering everyone to drive sustainably leave by.
By leaving cleaner healthier and safer lives.
Our charging forward target to generate 45% of our revenue from electric vehicles by 2030 is consistent with our environmental goals.
We remain committed to carbon neutrality in scopes, one and two by 2035.
In addition, we've now introduced a target to reduce our greenhouse gas emissions by 85% by 2030.
We have formalized our commitments to diversity equity and inclusion with measurable targets.
We continue to advance towards our vision and build our future each day with the industry's top talent.
Lawyers are changing the world's morbidity.
I invite you to read more 2022 sustainability report on our web site and join US on this journey.
Next I would like to highlight.
<unk> product portfolio for hybrids on slide seven.
Although the last quarter, we've been asked about the amount of revenue we're generating from these products on advanced hybrids and.
And as you can see on this slide it's actually quite sizeable.
We have a wide range of hybrid products that are helping our customers bridge to evs.
To name a few these includes endorsers motors advanced decision drive modules and high voltage coolant heater.
The hybrid product helped provide the breach to evs for many Oems by pairing efficient gasoline engines.
A quick drivetrains.
In many instances and as I've mentioned before several times the technical profile. So these products are very.
Similar to the same products used in the full electric vehicle.
This is what allows us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicle.
As you can see from the chart, we expect our hybrid sales to be close to $1 1 billion by 2025.
And this does not include <unk>.
Really efficient combustion product that will also be used on many of these same hybrid vehicles.
So this is a substantial revenue opportunity for Borgwarner and one that really reinforces our products through this shipping that electrification, which goes beyond pure battery electric vehicles.
Now, let's look at some pure Bev awards on slide eight.
First.
Im happy to announce that we have secured two additional high voltage coolant heater programs.
One is for a global OEM and the other piece for the emerging electric vehicle brands in China.
By offering consistent comprehensive distribution inside the battery pack in itself.
One of those high voltage coolant heater. This can be used for improving battery energy performance.
Also now comfortable cabin tougher set to be generated in a short time improving passenger experience.
This is a great internally developed product success story at Borgwarner, and one where we've quickly established products with this ship.
Second, but one has been selected to deliver battery systems for a European commercial vehicle OEM.
Is that in the system will be utilized in the company's first range of heavy duty electric trucks.
<unk> two announced in 2024.
Both of these exciting new project, our customer will benefit from the latest generation of out were try energy battery system, which provides a 50% increase in energy density over its predecessor.
This upgrade increases vehicle range significantly, making it a great solution for long distance electrified commercial transportation.
Lastly, I'm excited to share that the first units of the new Borgwarner fast charging station Hyperion. The 120 has been installed in Italy.
We've been working on the organic development of charging capabilities at Borgwarner since 2017.
And I'm really pleased to see our investments in this space starting to bear fruit.
We will look to accelerate our success in stationary challenging with some inorganic investments as well, which I will discuss on the next slide.
This quarters award activity once again highlights our wide range of products available for electrified vehicles and I agreed to wheel capabilities.
Next on slide nine I would like to discuss the acquisition of Rambus energy solution, which we announced this morning.
We plan to accelerate the challenging business with particular focus on high value DC fast charging hardware all the way out and then <unk> being software.
We believe that we can leverage the local knowledge and footprint of rambus to complement our existing borgwarner charging capability to accelerate organic growth.
Specifically.
<unk> will add in North American regional presence to our existing European footprint.
We plan to leverage borgwarner synergies across product quality engineering supply chain manufacturing and global sales.
We also see potential synergies with battery system customers.
In terms of revenue, we expect rhombus to add approximately $10 million throughout 2022 revenue over the next two quarters, we expect our combined DC fast charging business to approach $175 million to $200 million in revenue by 2025.
As a supplier to the auto and commercial vehicle market.
We are not only delivering innovative products for electric drivetrain, but we also kill that supporting certain key elements of infrastructure for electric mobility, especially.
Especially challenging.
And as we look ahead.
We believe that you will see further success as we continue to strengthen our capabilities in this area.
As you can see we've made progress on key aspects of our challenging forward strategy. So let's look at what this means in the progress report on slide 10.
Starting first with organic electric vehicle revenue growth.
With the award secured as of this call. We now have electric vehicle programs that we believe that council about $2 9 billion of booked revenue in 2020 failure. This is a great achievement by the Borgwarner teams.
Turning to M&A, we have now completed three acquisitions since the start of Johnson forward.
<unk> Central's light vehicle E multiple business and rhombus energy solutions.
Based on our due diligence, we believe those businesses will generate $800 million of additional EV related revenue in 2025.
We're not done here, though.
We expect to take additional M&A steps and we are actively engaged with a number of potential targets, which could enhance various parts of our portfolio.
So less than 18 months since the announcement of challenging forward. We're on track to achieve approximately $3 7 billion.
Electric vehicle revenue by 2025 based on New business Awards and actions announced to date.
So let me summarize our second quarter results and our outlook.
Overall, our <unk>.
Second quarter performance was solid.
Our revenue once again outperformed the industry volume as we delivered strong organic growth.
We also made key.
Progress in the quarter on on the pricing actions necessary to deliver our full year commitments.
As Kevin will detail shortly.
Full year 2022 outlook is unchanged from a topline and margin perspective, despite industry volume pressure in our largest market in Europe and sizable FX headwinds.
Fundamentally our relative revenue performance outlook has improved and we believe we are on track to deliver double digit organic growth this year.
As I look beyond 2022, I'm very proud of the continuing progress on.
Challenging forward.
We're booking electric vehicle revenue across our portfolio and we are successfully executing our disciplined M&A process.
Our booked organic Bev business and M&A completed to date puts us on track to achieve $3 7 billion in electric vehicle revenue by 2025.
Combined with our hybrid business auto.
<unk> product portfolio is now expected to reach approximately $4 8 billion in 2025.
With what we've already achieved to put that in context. This is nearly half the size of the company when I became CEO in 2018.
But we're not done we intend to carry on booking mobile new business and acquiring great assets to become even stronger.
As the world continues to accelerate towards electrification.
And I look forward to sharing additional progress with you in the future.
With that I will turn the call over to Kevin.
Thank you Brad and good morning, everyone.
Before I dive into the financial details I am going to provide you with the key takeaways coming out of our second quarter.
First our revenue came in at the high end of our expectations driven by strong relative revenue performance in North America and Europe .
Second our year over year margin performance was impacted by our planned increase in any products R&D investment material cost inflation and the sudden production shutdowns in China.
And finally, our guidance reflects more normal underlying incremental margin performance in the second half of the year.
Let's turn to slide 11 for a look at our year over year revenue walk for Q2.
After adjusting for the disposition of our water Valley facility.
Last year's revenue was just over $3 7 billion.
You can see that the strengthening U S. Dollar drove a year over year decrease in revenue of about 6% or more than $220 million.
And you can see the increase in our organic revenue about 7% year over year.
That compares to a 1% decrease in weighted average market production, which means we delivered another quarter of strong outperformance.
The sum of all of this was just under $3 $8 billion of revenue in Q2.
Turning to slide 12, you can see our earnings and cash flow performance for the quarter.
Our second quarter, adjusted operating income was $348 million or nine 3%.
Which compares to adjusted operating income of $421 million or 11, 2% 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 $51 million.
$268 million of higher sales.
There were three primary drivers of this margin performance.
The biggest driver was the planned step up in <unk> products, R&D, where we increased our investments by $56 million.
Second net material cost inflation was a $25 million year over year headwind in the quarter.
And finally, COVID-19 drove disruptions and lower overall production in China.
All of these items were expected when we provided our guidance in early May which is why we anticipated second quarter margins being the most challenged for the year.
Importantly, excluding these items, our incremental margin would've looked more normal for our business.
Although our adjusted operating income was it saw a sizable decline from last year.
Adjusted EPS Macau only three in the second quarter.
That's because our effective tax rate came in below 20% due to the favorable geographic mix of earnings and the benefits of previous tax planning initiatives starting to materialize.
While the Q2 rate isn't sustainable at that sub 20% level.
We are expecting to see some improvement in our full year tax rate for 2022, and beyond which I'll speak about more when I talk about our full year guidance.
And finally free cash flow.
We generated $62 million of positive free cash flow during the second quarter.
Our cash flow continues to be impacted by elevated levels of inventory driven by supply chain challenges and the overall choppiness of global production.
Let's now turn to slide 13, where you can see our perspective on global light vehicle industry production for 2022.
When you look at this slide you can see that our marketing assumptions incorporate a range of potential outcomes.
That's primarily a result of the ongoing semiconductor supply challenges.
European production and demand challenges stemming from the conflict in Ukraine.
And the trajectory of the recovery in Chinese vehicle production.
With that background in mind, we expect our global weighted light and commercial vehicle end markets to increase in the range of $2, 5% to 5% this year, which is flat relative to the assumptions underlying our prior guidance.
Now, let's take a look at our full year outlook on slide 14.
First it's important to note that our guidance assumes an expected $820 million headwind from weaker foreign currencies.
While the appreciation of the U S. Dollar is having a significant top line impact.
Remember that our strategy is generally to purchase and produce 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 two 5% to 5% for the year, which contributed to the organic net sales changed you see on the slide.
But the much bigger impact on that line item is the continued revenue growth, we expect to generate above growth in the end market production.
That's about $1 3 billion of our organic revenue growth or about 9% growth above market.
That current outlet for outperformance is stronger than our prior outlook, primarily due to the impact of estimated pricing recoveries from material inflation and other cost.
Finally, as it relates to our revenue outlook essentially <unk> acquisitions are expected to cumulatively add $45 million to $55 million for 2022 revenue.
The result of all of this is it.
Even though FX rates have deteriorated, our current outlook by $170 million from our prior guidance.
Our overall revenue outlook is unchanged at 15, five to $16 1 billion.
Switching to margin we continue to expect our full year adjusted operating margin to be in the range of $9 eight to 10, 2%, which is also unchanged from our prior outlook.
While higher material cost inflation continues to negatively impact our financials. We're pleased with the progress we've made in negotiating recoveries of a portion of these costs from our customers and that's already started to help mitigate the impact on our P&L.
We expect that the customer recoveries were continuing to negotiate and put in place will continue to partially mitigate the impact of the inflationary headwinds that we're facing.
For the full year, we now expect net material cost inflation to negatively impact our results by $145 million to $155 million.
As it relates to R&D investment our guidance anticipates that $145 million to $160 million increase in E products related R&D investment in 2022.
This is at the higher end of our prior guidance driven by continued new business wins.
Excluding the impact of material cost inflation and key products R&D investment, our 2022 margin outlook contemplates the business delivering full year incrementals in the high teens.
And that effectively implies that as volumes recover in the second half of the year, we expect them to flow through at normalized conversion.
Which supports the sequential step up in the second half operating margin implied by our guidance.
Even though our revenue and margin outlooks are unchanged, we're now expecting full year adjusted EPS of $4 to $4.40 per diluted share.
This is an increase versus our prior guidance, reflecting two things.
First we're expecting a lower full year tax rate of 27% down from our prior guidance of 28% driven by our mix of earnings and the benefits of previous year's tax planning initiatives.
Second we are benefiting a bit from a lower average share count as a result of the stock buybacks, we executed during the second quarter.
And finally, we continue to expect that we'll deliver free cash flow in the range of $650 to $750 million for the full year.
That's our 2022 outlook.
So let me summarize.
Overall, we had a solid quarter.
We delivered positive organic growth despite industry volume declines.
Our team successfully negotiated pricing recoveries with several key customers and we're making progress on other key customers, which we believe helps to position us for a sequential margin improvement in the second half.
And we believe we're positioned to deliver our full year guidance, including a step up in adjusted EPS. Despite additional external headwinds.
And as we've said in prior quarters, while we focus on managing the present, we're also working to drive profitable growth and invest in our future.
To that end, we had another quarter in which we secured meaningful new business awards for electric vehicles across multiple parts of our portfolio.
And we deploy cash to create value for shareholders through the acquisition of Roberts and the repurchase of $100 million of stock during the quarter.
Our ability to balance near term commitments with our long term objectives is the key to our ongoing success.
With that I'd like to turn the call back over to Pat.
Thank you Kevin Chelsea, we're 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 speakerphone please pick up the handset before asking your question.
Interest of time, please limit yourself to one question and one follow up question.
Pause for just a moment to compile the Q&A roster.
Your first question comes from John Murphy with Bank of America.
Good morning, guys.
I just wanted to ask.
Question on slide 10.
Yes.
You look at this you're outperforming on organic EV sales.
Not yet underperforming on the M&A, but as you look at these two bars together.
You consider if you keep outperforming on organic that you might not need to do the M&A that you have targeted here and you look at this as sort of a total target as opposed to one that's specifically split between organic and M&A.
John I think the way we look at M&A is very strategy, we look at technology and product leadership and scale and so I would I would say those are.
Independent kind of work streams.
We're not we're not.
Looking at revenue for revenue sake, and even if at one point, maybe we collapsed those two bonds, because we're not going to keep.
<unk>.
The March 2021 is a jump off which is the capital market day, where we announced charging forward I think those two things are somehow.
A little different.
Okay, if I could ask a follow up and follow up just on the.
Pricing and commercial settlements or Youre getting from your customers to help out with cost inflation.
Curious how those are being structured because we're looking at what might be.
Cost inflation on raws and other the other input costs and the automakers are playing ball right now, but if we saw some easing it's inflation or God forbid an actual reversal.
Would that benefit go to them the way things are being structured right now or would you be able to capture some of that benefit.
As spreads would open up again.
Yes, as we look at the material cost recovery that we're negotiating with our customers. We're generally trying to drive a meaningful portion of those through price adjustments in the portfolio, but undoubtedly there is a linkage between those price adjustments that we're making in the material cost inflation that we're experiencing such that if there.
Continued movement of inflation higher than we would expect to have further discussions with our customers just like as if we thought or if we experience inflation is starting to unwind I think it's fair to think that we would expect to have to unwind. Some of those price increases. So I think that's the right way to think about it.
So it does sound like there could be a period where.
If raws actually reversed as volumes are going up you may actually be able to capture rate for some period of time and there could be a real upward pressure on margins for a period of time is that a fair statement that there is some lag that would go on there.
I'm not sure I guess, we'll have to see when we get to that point I mean, I think it's a discussion that will ultimately have with the customers is not necessarily an automatic mechanism. That's in place in terms of how those things are just additionally, upward or downward and it will lead to further discussions. So we'll have to see if and when we get to that point.
Okay. Thank you very much.
Thank you. Our next question will come from Emmanuel Rosner with Deutsche Bank.
Alright, Thank you very much good morning.
Good morning, good morning.
Yeah.
Can you.
Make our lives easier and maybe talk a little.
Data by the first half to second half for that what you see is based on.
What's implied in your outlook.
Certainly I think puts and takes assuming we see volume volume is higher but this growth over market.
Higher how those materials play out and then mostly recoveries is there are you expecting more of those.
The second half than the first.
Yes, I think the right way to think about it big picture a 50000 foot level is as you look at the first half versus second half the material cost headwinds that we're expecting kind of on a year over year basis. When you look at both the commodities had any equation and the other inflationary costs coming through from our suppliers and the recoveries were getting it.
Somewhat of a push first half the second half in terms of the total magnitude on a year over year basis and same with E. R&D as you think about going from first half to second half.
I would put it in Nevada, similar ZIP code, it's not a substantial headwind going from one half of the year to the next which means what it means what's happening is as we continue to drive those pricing recovery with our customers to mitigate the impacts of what we're seeing coming through inflation and supports our ability to allow the incremental volume to drive conversion.
And that's effectively what's happening volume is stepping up in the back half of the year, we're getting the incremental conversion on that than we would ordinarily expect and we're managing the rest of the cost structure similar to how we're managing the first half of the year.
And then in terms of growth second half versus first half I think you mentioned, 9% growth over market for the year does that mean sort of like double digit in the back half.
Yes, I think what it implies im not sure I mean, thats somewhere in that that high single digits, maybe low double digit ZIP code. When you look at the second half of the year, depending on if you're at the low end or the high end of our guidance, but on an overall basis, 9% or so for the full year.
Okay.
Ill.
When I look at your implied second half outlook.
To what extent is that a good base.
To try to.
Forecast for your 2023 outlook is there.
Second half margin run rates seems like a clean way to look at it as an exit rate.
Yes, I think what we're trying to do as we negotiate the price recoveries with our customers.
Along with the inflationary impacts we're seeing from our supply base and to get to the point, where we have a stable jump off points using the second half margin profile as we head into 2023, that's really our objective and so we go into 2023, and we can have hopefully a more normalized year from a conversion standpoint, but obviously, we're going to need inflationary.
Pressures to cooperate with us and that create more noise as we head into next year.
Okay. Thank you very much.
Thank you.
Your next question will come from David Kelley with Jefferies.
Hey, good morning, guys. Thanks for taking my questions, maybe just starting with the rhombus acquisition, meaning.
Meaningful revenue step up to 2025, obviously, a lot of charging infrastructure to build out here in North America. So can you talk about the visibility to their build pipeline.
Maybe segments, where they're winning and then kind of the makeup of.
That revenue trajectory.
Yeah.
Their focus is essentially right now in North America, and especially on commercial vehicle electric buses trucks they pose.
Which as you can imagine we see quite some synergies what we're doing from a.
From a battery pack standpoint kind of the same customer profiles and vectors of growth.
We really like the synergies both on topline and bottom line that we can bring with our current footprint in Europe , which is more.
Focused on DC fast charging pads.
Year more commercial vehicle in the post pre pretty excited about.
The.
The.
Outlook for this combination.
Okay got it thanks and then.
For charging expertise and Europe's more light vehicles, North America is more in the commercial space. So.
And can you just elaborate on the leverage ability of the two businesses do you expect to go after the light vehicle charging market.
In North America.
We expect to harvest the synergies on the top line and technology on manufacturing. So it's fair, it's fair to assume that.
Our goal is to be local as far as the demand and the product definitions is concerned both global and leveraging the global scale of the company as far as the backup is the technology and the modularity of the design is concerned.
By the way there is a supplemental deck on the IR.
Website, where you will see a little bit.
More granularity around the acquisition of Rambus.
Okay got it thanks guys.
Thank you David.
Thank you.
Your next question comes from Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my question.
Theres been some talk about automakers moving to more of a sole source model for internal combustion engine components in the future is that kind of trying to be more sort of focused on their <unk> investments.
Are you seeing this at all and does that change any of your view on.
What to do with those assets.
It seems like kind of.
Positive trends, if youre going to be one of them in position to be a core supplier for those components.
I think going forward you will see a focus on efficiency for those combustion product and also cost competitiveness.
I E. What we can.
Product leadership at Borgwarner.
And if you are a tough one.
One of the key Oems you need four four suppliers for one commodity combustion maybe not.
So similarly, youre going to see we think youre going to see some consolidation in the supplier panel in some of those key Oems.
And again I think in this case competitiveness.
Full front of product through the ship from an efficiency standpoint, and scale will be important to support our customers around the globe with maybe fewer suppliers for that for that combustion market.
Got it.
And then on the target for $3 5 billion in ice dispositions.
I mean any update on the timeline there it just seems like a pretty rough market to be trying to divest assets given the uncertainty out there.
Yes.
I think it's fair to assume that given the current market environment, our disposition projects right now are temporarily on hold.
Simply put in Youre alluding to are calling the debt financing markets are not open to finance transactions of this nature right now.
Okay, we're not a desperate seller here. These are cash flow generating business is that we're happy to hold for the time being and then when the debt financing market to do reopen which they eventually will then we will resume our disposition processes, but I think it's fair to think right now, it's just not practical to execute those transactions and so yes, we will continue to drive the perform.
Are those businesses and generate the cash flow to continue to support our investment strategies.
Got it alright, thanks for taking my questions.
Thank you your.
Your next question will come from Rod Lache with Wolfe research.
Good morning, everybody.
I believe on the inflation side.
You mentioned $60 million in Q1, and then $25 million in Q2.
Im understanding this correctly there is another $65 million in the second half I just was hoping maybe you can.
Tell me if that's about right.
Based on just the pricing negotiations.
<unk>.
Benefit kind of spills over into 2023 on a net basis.
Secondly, you mentioned the R&D increase was the overall R&D.
Similarly, or did you reduce the other R&D.
Yes, so on the.
Net material cost inflation the cost net of the recoveries first quarter I think we talked about $55 million, if I'm not mistaken in the second quarter of 2005. So we're actually at about $80 million year to date on a year over year basis, which implied now that we're seeing about $145 million to $155 million for the full year.
Another $70 million year over year headwind in the back half of the year, so roughly comparable to the headwind in the first half of the year and similar to my comments that I was responding to Emmanuel his question on that.
Maybe the first point in terms of the spillover effect I mean, our focus is really on.
Addressing the P&L issues, we're seeing from the material cost inflation addressing those with our customers. This year and so thats whats embedded in our guidance and effectively allows us to mitigate the incremental headwinds that we are seeing in the back half of the year. So we can manage that year over year headwind somewhere in that $65 million to $75 million Zip code.
And then the.
And then what that allows us to effectively do and have more normalized conversion as revenue comes back into the P&L in the last six months.
On the R&D question.
The second quarter, we were up $56 million in E products related R&D, which means we're up a little over $80 million in the first half of the year, which is right in line with our guidance for the full year of being up $145 million to $160 million on a full year basis.
With respect to the other R&D in the corner. The other R&D was actually down $15 million, but total R&D was up 41 of which <unk> products was up 56% and call. It combustion based R&D was down 15.
Okay.
Thank you and then just secondly on the M&A side.
Obviously, just in light of the <unk>.
Challenges and.
Divestitures I was hoping you might be able to just pass along.
Just high level thoughts on scenario, so what would the.
The impact be on kind of mid decade targets, if you wound up holding onto.
Some of those businesses that you were considering selling.
Divesting of them and then just lastly, really quickly any kind of high level thoughts on what the competitive moats are.
Robert.
Now I'll have Fred talk about the competitive most let me take that first question I mean to be honest, we view this as a temporary halt in the execution of the disposition strategy and all of US, including you have lived through these types of markets perform.
Net financing markets can shutdown and become cost prohibitive for a period of time, but they are generally not closed for years and so from our perspective, we've got multiple years before we really want to hit our objectives and deliver on the priorities that we laid out at our Investor day, a year and a half ago and we expect to execute on that so we're not looking at <unk>.
Scenarios, where we're unable to dispose of these businesses through the middle of the decade, we still have plenty of time and our process is still ready I mean, thats ready to go when the debt markets reopen we'll resume those processes.
And maybe I'll turn it to Fred for your second question, What's your question Ron.
My question was just if you could just describe the competitive moats, where this rhombus acquisition.
Okay, Yes.
We know we know that.
Market, we've been in that market organically since quite some time and we are selling.
Products in Europe .
The market is growing.
Domestically.
In the regions that we now addressing with Borgwarner footprint, it's around $9 billion in 2030.
It's still very fragmented and I think we should expect consolidation in this in this field to again I think technology is important in <unk> one of the first one with.
Bi directional challenging with UL certified techs.
Knowledge is in this field, which we really like and fully.
Help them grow with these with these products.
We feel we think that this market will need.
Our strong local presence, but also a very strong back office in purchasing technology in Novo <unk> manufacturing. We also are very used to low volume manufacturing without commercial vehicle products around the world.
And we also see quite some pool from our customers related to CV trucks and buses will offer complete solutions for their customers and we can be an enabler for them to be able to do that.
Thank you.
Thank you.
Our next question comes from Noah Kaye with Oppenheimer and co.
Thanks for taking the questions maybe just a follow up here I think.
First of all it's good to see you get deeper into the EV charging space growth opportunity.
You've already got in house.
Very high quality domain expertise around efficient power conversion rate and utilizing advanced materials.
Electrons flow into.
And EV or an electrified powertrain.
And then there's really as we think about charging.
Kind of the software.
Side of it and the efficient dispatch.
The charging at certain points in time in reading signals from the grid. So is what.
From a technology perspective is what rhombus springs.
More of the latter or more of the former or a combination thereof in terms of augmenting your core competence around power electronics.
I think it's both of them and also.
Helping us and we can help them.
We have I think a substantial knowledge of the bill of material that goes into those challenging devices.
Our global reach we see some trends in power electronics, where we can leverage all knowhow.
To those to those particular products.
We see.
Synergies with our sales.
And.
<unk>.
Governor fails relationship around the globe really excited about bringing borgwarner to these challenging business.
Stationary challenging business I think we can bring a lot of technology in and a lot of competitiveness in this field.
Okay very helpful. And then a financial question I guess, perhaps for Kevin.
Whats implied in the free cash flow outlook in terms of working capital in the back half.
You guys have been paying your bills pretty timely and receivables.
Inventories have built here in the first half of the year, So where do you expect that to trend in the back half.
Yes, fundamentally we are expecting that the inventory that we've built in the first half of the year that we were able to unwind that in the back half of the year as we start to see volumes ramp up and consume some of that inventory. We also saw a little bit of elevated receivable balances because with the China shutdowns, we saw some of our China customers paying a little bit later than the ordinary.
What can we expect that to reverse as well as we get into the third quarter here. So we're expecting to get back to effectively where we were to start the year from a working capital perspective.
Okay Super helpful. Thank you.
Thank you.
Our next question will come from James Picariello, with BNP Paribas vaccine research.
Hey, good morning, guys.
Just a quick quick follow on.
This energy in the charging infrastructure.
How much.
Factored a scale play into the competitive landscape.
In this in this space.
In the space and.
Any color on just what the what the content per charging unit opportunity is so that we can maybe start to work through.
The Tam.
So today I would see that.
It is still very regional.
Still require some regional specificities.
Certification is concerned as far as sales channel as far as government contacts or concerns.
But when the business ramps up like Disney businesses related to quite significant electronics and power electronics content scale will matter and scale always matter.
As far as the Tam I think that maybe you.
Yes, I was going to say I think that will come back to you maybe.
Ways to think about CTV, but as we've mentioned the market looking out through 2030, we think its about an $18 billion global market opportunity of which about half of that is in North America and in Europe , where we're positioned to play right now.
Pat can you give me a little bit more detail on how to think about the different elements.
CPB there.
Okay.
And then China, China normalization in ice programs called out in the quarter to what extent is this just tied to weaker commercial truck production.
Dynamic thats expected sustained in the back half and that's how we're thinking about.
John Your line is open.
Okay.
Last year, when we were talking about some of our programs actually exceeding our expectations last year, because we are having higher customer penetrations on a few programs than we were anticipating as being steady state and then we started to see in the back half of last year in particular that I'll say outsized penetration unwound, a little bit and so that's what we're calling a normalization.
Effectively of.
A key program or two in China. So we start to lap that benefit now as we head into the third quarter.
You Shouldnt see that headwind materially anymore in our in our outgrowth.
Okay understood. Thank you.
Thank you.
Our next question comes from Luke junk with Baird.
Good morning, Thanks for taking the question wanted to start with your 2025 organic revenue outlook. So in so far that you gave us an updated look at that this morning also provides a window into bookings for the first half of this year and I'm just wondering how you'd characterize the bookings environment right now, especially as it relates to electrification.
And how do you think the second half that's up on that front. Thank you.
I think there is a lot of momentum into the EV related.
Request.
And request for quotes and quotation globally.
What we also see us.
Accelerated demand for capacity increase on what we have launched and also funny enough, where we have not announced yet, but where there is higher demand in the coming years.
Overall.
See on the acceleration in the EV booking and request for quotation.
Second half versus first half.
Okay. Thanks, and then my follow up question several questions about the impact of current market conditions in terms of dispositions, which I understand I wanted to flip it though and ask in terms of M&A to what extent if any the volatility.
We are seeing in the equity markets right now rising rates.
Things in the current environment does that change the quality of assets available to you and the market does it change competition for deals and does the ROM and steel in particular signal anything different that you got it. Thank you.
Yes, I think generally speaking if you think about the types of companies, we look to acquire they had.
Generically like one or two companies either one a company that has a little bit more mature income statement are two one that tends the infancy of its growth trajectory and still doesn't have much in the way of.
Our P&L.
Those businesses that have a more mature income statement are much more exposed to the current market environment and the inflationary environment that we're seeing and that creates a lot more uncertainty in due diligence about the ability to recover on some of those customers from customers the pricing inflation issues that that business has seen which sometimes can create.
A bid ask spread between the buyer and seller until there is clarity and resolution around those topics. So those types of companies are a little bit harder to transact on in the current environment and we saw that like we talked about last quarter, where we walked away from a particular transaction, we simply couldnt close the gap on some of those issues. When you look at companies that are earlier in their <unk>.
Trajectory and we're really focused on developing their technology driving new business wins that come into the P&L, Let's say 'twenty four 'twenty five 'twenty six.
Those are the types of companies that we're more apt to execute out in the near term given the environment and that's a lot like <unk> a lot like Rob it's companies that have more of a profile of that and on the margin. It helped by the fact that because of the challenging capital markets there tends to be.
More limited options for those companies to secure capital to fund their growth objectives, whereas we have the ability to provide that kind of funding so the strategic.
Capital that we can bring to bear actually gives us a bit of an advantage in working with companies like that in this type of an environment.
Alright, thank you.
Our next question will come from Joseph Spak with RBC capital markets.
Thanks, Good morning, everyone.
So I just wanted to go back to chartering in which I guess is the.
The theme of the day, but you did have the installation in Italy.
<unk> acquisition and you talked about.
This is still.
A pretty fragmented segment.
You talked about the importance of scale.
I mean should we expect that this will be continue to be an area you look to build capabilities or do you think between what you have organically and what youre getting via this acquisition.
That's enough to sort of really begin to scale.
And the two theaters, you mentioned North America, and Europe , and also maybe if you could add like how much of the $3 7 billion do you expect to come from charging.
So first yes, you should expect us focusing on both organic and inorganic growth in this field of stationary challenging focusing on.
High power.
This is challenging.
And the second question was.
Out of the $3 7 billion, we expect I think in my prepared remarks it was about.
<unk> hundred $50 million.
Four.
Rambus and overall, I think $175 million to $200 million overall, including our organic exposure in these devices.
Okay. Thanks.
Thanks for that.
Then secondarily.
I'm just curious if you could if you could tell us.
Sort of almost in real time, what you're.
Conversations are like with your particularly with your European customers.
Sort of.
Had been concerned about energy shortages, maybe a little bit lesser than sort of at the peak but.
How.
They are sort of planning.
For the balance of the year here.
You are preparing and are you seeing any evidence of maybe moving some production into the third quarter or maybe fewer summer shutdowns to get ahead of what could be a more difficult winter.
I think it's honestly too early to say I have not been.
Expose discussions along those lines I think this will come.
Actually Europe comes back after the summer break I would say.
Early September intervals or early September we know more about the profile of production around is in the winter.
Okay. Thank you.
We have time for one final question and that question comes from Mark Delaney with Goldman Sachs.
Thanks. Good morning, I. Appreciate you fitting me in here question on the <unk> business and nice to see the momentum both in terms of the additional M&A as well as the organic bookings when we started thinking about what that May mean for your prior comments for the EV business, reaching breakeven I believe in the $23.
Four timeframe is there any change in when do you think you may reach that breakeven when you consider some of these changes in terms of.
The M&A organic revenue and also some of the Opex comment you made.
Yes, I think at this point, we haven't really updated that guidance.
But I think it's fair to say it in the same ZIP code as to where we were from a breakeven perspective.
But there is a couple of key variables to keep an eye on one is as we continue to invest more in E products related R&D that can become a headwind to that near term breakeven, but on the other hand as our revenue grows like we're seeing now $850 million our expectation for the full year 2022 that gives.
This incremental contribution which is a tailwind. So those are the two key variables to keep an eye on it.
Both of those items grow, but I think directionally. There is no real significant change in our outlook, even though we're not going to provide a specific update today.
That's helpful.
More conceptual on the pricing recovery. Thanks for all the comments you already made around your expectations for net pricing this year.
More high level, though a lot of companies are trying to manage expenses more tightly given some of the macroeconomic risks that are out there and you are you seeing that all reflected in your ability to get that pricing is that potentially going to be harder to the extent some of the macroeconomic challenges to persist. Thanks.
We always focus on staying lean and looking at any room for.
Four.
Cost reductions overall.
And I think the action the actions that we've taken in two three years ago.
It allows us to manage through this right if you compute.
We have about 100 million benefit this year from.
From restructuring and cost reduction planning that we've started two three years to three years ago. So.
I think we're doing that it's part of what we do in the position of strength.
Without.
Compromising the long term trajectory.
And.
We won't do anything that compromises this and we're not going to constrained and you won.
Borgwarner to grow in the field of battery electric vehicle.
Well. Thank you all for your great questions. Today, Chelsea you can go ahead and wrap up the call.
Ladies and gentlemen, this does conclude the borgwarner 2022nd quarter results Conference call.
You may now disconnect.
Okay.
[music].
Okay.
[music].