Q4 2022 Borgwarner Inc Earnings Call
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Good morning, My name is Catherine and I will be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2022 fourth 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, if you'd like to ask a question. During this time simply press star one.
On your telephone keypad, if you are using a speakerphone. Please pick up the handset before you're 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.
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Good morning, everyone. This is Patrick Nolan I apologize about the technical difficulties. We had this morning, but we're going to kick off today's call.
We issued our press release earlier. This morning is posted on our website Borgwarner dot com homepage, and our Investor Relations homepage.
Before we begin age of appointment on during this call. We may make forward looking statements, which involve risks and uncertainties are detailed in our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business before and for comparison purposes of prior periods.
When you hear say on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
<unk> adjusted that means excluding non comparable items.
Can you hear us say organic that means excluding the impact of FX and net M&A.
We'll also refer to our growth compared to on market. 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 site.
You Pat and good morning, everyone.
I have a bit of an <unk>.
This morning impacting my speech, so Kevin will cover the prepared remarks.
Steve with you and answer the questions Kevin Alright, Thanks, Fred and good morning, everyone.
We're pleased to share our results for 2022 and provide an overall company update starting on slide five.
We continue to be very proud of the strength of our sales relative to the overall industry.
It's about $15 $8 billion in sales, we were up approximately 14% compared to our market, which was up a little less than 4%.
Importantly, our Bev related sales contributed meaningfully to this growth.
We're also pleased with our solid margin performance, which we delivered despite the significant production volatility and inflationary headwinds that we faced during 2022.
This performance was achieved while continuing to significantly increase our R&D investment to support the continued growth in our <unk> product portfolio.
We also delivered record free cash flow, which allowed us to continue to make inorganic investments that support our future while at the same time, returning cash to our shareholders.
Beyond our near term results, we continued to drive our long term positioning during the quarter.
We took several leading steps in our sustainability efforts I'll detail those more in just a moment we.
We made a significant advancement in charging forward with the announcement of the planned separation of the fuel systems and aftermarket segments.
And we also secured multiple new electrification program awards since our last earnings report.
Next on slide six I'd like to give you more color with respect to our progress in our <unk> targets.
In mid December Borgwarner announced its commitment to reduce its absolute scope three emissions by at least 25% by 2031 from a 2021 baseline.
The scope III target along with our previously announced target to achieve 85% absolute scope, one and scope two emissions reductions by 2030 was formally submitted for validation to <unk>.
The science based targets align with charging forward, our accelerated path to electrification by aiming to achieve a net zero carbon emissions future for all.
We've made some meaningful progress in 2022 toward achieving our scope one and two emissions targets as we entitle employee bonus opportunities across our global operations to reducing energy intensity, while also promoting energy management certification and the procurement of renewable energy.
To meet the scope three target Borgwarner intends to focus its efforts on a number of actions in.
Including transitioning the product portfolio to electrification.
Increasing content of recyclable remanufactured material reducing.
Product weight and driving sustainable raw material selection.
We'll also be working with our supply base to do the same.
Next on slide seven I'd like to summarize the planned separation of our fuel systems and aftermarket segments, which we referred to as newco.
We announced this planned separation in December as we believe that now is the right time to separate these businesses and unlock shareholder value.
For Newco, we've driven significant margin improvement over the last couple of years, despite the challenging industry environment.
From a product leadership standpoint, we've solidified <unk> position in the commercial vehicle segment, including with hydrogen injection.
In the passenger car segment with our cutting edge GTI technologies and in the aftermarket business.
We believe these things position newco well for success as a standalone public company.
For Borgwarner, we believe the intended separation accelerates our charging forward strategy and focus as all of our energy towards electrified propulsion.
It enhances all of our management attention, our focus and our flexibility to pursue attractive EV investments and supports our vision of a clean energy efficient world.
The intended separation will allow each company to pursue its own strategies with an overarching focus on maximizing the value opportunity for our shareholders.
The teams are progressing well through the various work streams and we plan to provide updates as appropriate.
We continue to expect the intended separation to close in late 2023.
Now, let's look at some new electrification awards on slide eight.
First borgwarner will supply a major German vehicle manufacturer with innovative battery cooling plate for the Oem's next generation electric vehicles in Europe , and the United States.
This is our first award for this new organically developed product with an expected launch in 2025.
Compared to alternative solutions, the borgwarner cooling plates provide greater cooling capacity within a smaller installation space as well as reduced weight and cost.
We believe that is a global market leader in exhaust gas recirculation cooler technology Borgwarner has expertise in thermal management and the associated manufacturing processes positions.
Positions the company to be an ideal pioneer of new developments for the battery cooling market.
On the right side of the slide you can see that we're announcing a sizable expansion of our silicon carbide inverter business with a top global OEM with an 800 Volt Award.
After partnering with this car manufacturing on a 400 volt inverter product, we're now being sourced to launch two new 800 volt variance in 2025.
250 kilowatts for an all wheel drive crossover utility vehicle.
And a 350 kilowatt module for the Oems performance vehicles.
This expanded business strengthens our position as one of the strategic inverter suppliers for this longstanding customer as that customer transitions to the next phase of its best strategy.
As you can see we've made further progress toward our charging forward objectives.
So let's look at what this means in our progress report on slide nine.
Starting first with organic electric vehicle sales growth.
With the award secured as of this call. We now have pure Bev programs that we estimate account for about $3 billion of book sales in 2025.
Of note. This estimate reflects about a $150 million headwind versus our prior disclosure stemming from an update to reflect the FX rates underlying our 2023 guidance.
This FX headwind was partially offset by the new business wins I discussed on the prior slide.
Yeah.
Turning to M&A, we've now completed or announced five acquisitions since its start of charging forward Alcosol central Rhombus, FSC and drive Tech.
Based on our due diligence we believe those businesses will generate about $1 $3 billion of EV related sales in 2025.
This is higher than our previous outlook based on our revised projections for ACA saw which is seeing a faster ramp up in sales than we had initially anticipated.
But we're not done here, we continue to expect that we will execute additional acquisitions and are actively engaged with a handful of potential targets that we think will enhance the various parts of our portfolio.
And finally, the planned separation of Newco will address the third pillar of charging forward for which we said in the original goal to complete about $3 $5 billion in dispositions by 2025.
With all that we've accomplished in the last couple of years. We believe we're already on track to achieve about $4 $3 billion of pure electric vehicle sales in 2025, and we believe it puts us within striking distance of our $4 5 billion EV sales target for 2025.
Now, let's move into the financials, starting on slide 10 for a look at our year over year revenue walk for Q4.
After adjusting for the disposition of our water Valley facility last year's Q4 revenue was just over $3 6 billion.
You can see that the strengthening U S dollar drove a year over year decrease in revenue of over 8% or approximately $307 million.
Then you can see the increase in our organic revenue about 21% year over year.
That compares to a less than 1% increase in weighted average market production, which means we delivered another quarter of strong outperformance.
The sum of all of this was just over $4 $1 billion of revenue in Q4, a strong finish to the year.
Turning to slide 11, you can see our earnings and cash flow performance for the quarter.
Our fourth quarter adjusted operating income was $428 million equating to a 10, 4% margin.
That compares to adjusted operating income of 398 million or 10, 9% from a year ago.
On a comparable basis, excluding the impact of foreign exchange and the impact of M&A adjust.
Adjusted operating income increased $74 million on $769 million of higher sales.
The biggest positive driver of this performance was that we converted at approximately 15% and our additional sales.
But this conversion was partially offset by our planned increase in E products R&D.
In Q4, we increased these R&D investments by $38 million relative to last year.
Our adjusted EPS improved by 20 in the fourth quarter.
Driven by the improvement in our adjusted operating income and a nearly 400 basis points lower year over year tax rate.
That lower tax rate was driven by a favorable mix of earnings across taxing jurisdictions.
Qualifying for more favorable tax rates in certain jurisdictions and the impact of ongoing tax structuring initiatives all of which we believe should contribute to a lower tax rate going forward than what we've experienced over the last few years.
And finally free cash flow.
We generated 670 plus million dollars of positive free cash flow during Q4.
The year over year increase was driven by three things.
The improvement in operating income the timing of collection of a meaningful amount of inflationary price recoveries from our customers.
And the non recurrence of a onetime $130 million warranty payment to a customer last year.
Let's now turn to slide 12, where you can see our perspective on global industry production for 2023.
When you look at this slide you can see that our market assumptions continue to contemplate the types of macro uncertainty we've been experiencing over the last few years.
With that background in mind, we expect our global weighted light and commercial vehicle markets to be flat to up 3% this year.
Looking at this by region, we're planning for our weighted North American markets to be up about 2% to 5%.
In Europe , we expect our blended market to be up 1% to down 2% year over year.
And in China, we expect the overall market to be roughly flat to up 3%.
Now, let's take a look at our full year outlook on slide 13.
First it's important to note that our guidance assumes an expected full year headwind from weaker foreign currencies of $285 million.
Second as I previously mentioned, we expect our end markets to be flat to up 3% for the year, which contributes to the organic net sales changed you see on the slide.
But more important than that slight growth in end markets. We expect our revenue to continue to grow well in excess of industry production, driven by new business launches and higher electric vehicle revenue.
In fact in 2023, we're expecting to deliver between one five and $1 $8 billion in EV revenue, which is up significantly from the $870 million we generated in 2022.
Finally, the essential and <unk> acquisitions are expected to add approximately $35 million to 2023 revenue.
Based on these assumptions, we're projecting total 2023 revenue in the range of 16, 7% to $17 5 billion.
Which equates to organic growth of approximately 7% to 12%.
Switching to margin, we expect our full year adjusted operating margin to be in the range of 10.0 to 10, 4% compared to our 2022 margin of 10, 1%.
We do expect some variation in the margin level across the quarters in 2023 <unk>.
Specifically, we believe that Q1 is likely to be the weakest reported margin during the year as we work with our customers and suppliers on finalizing the extent to which inflationary pricing actions negotiated in 2020 to carryover into 2023.
In the end our current expectations are that the year over year impact of inflationary pressures on full year margin is likely to be negligible. However, we could see some negative impact in Q1.
As it relates to R&D, our full year 2023 guidance anticipates, a $60 million to $70 million increase in E products related R&D investment.
With our continued success securing new electrified business wins, we're continuing to lean forward and invest more in R&D to support our E products portfolio.
But importantly, as you see on the slide the year over year increase in 2023 is expected to be lower than the year over year increase in 2022.
Excluding the impact of this increase in heat products related R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid teens, which we view as a solid conversion given the amount of product launches and ramp ups occurring this year.
Based on this revenue and margin outlook, we're expecting full year adjusted EPS of $4 50 to $5 per diluted share.
This EPS guidance contemplates two slight headwinds relative to 2022.
First we expect an effective tax rate of approximately 25% up a couple percentage points relative to last year. However.
However that rate remains far lower than what we've experienced in recent years and we think it's a rate that's likely to be sustainable on a go forward basis.
Second our EPS guidance assumes a 13th per share negative impact coming from higher net pension expense as a result of higher discount rates.
Turning to free cash flow, we expect it will deliver free cash flow in the range of $550 to $650 million for the full year.
This cash flow outlook includes a one time cash cost of approximately $150 million related to the intended spin off of our fuel systems and aftermarket businesses.
Arising from outside advisor fees cash tax payments to facilitate the separation and it cost to create a standalone it environment for newco.
Excluding these one time costs, our cash flow guidance would be $700 million to $800 million, which is only slightly lower than the record free cash flow of $846 million, we generated in 2022.
That's our 2023 outlook.
So let me summarize this morning's remarks.
Overall, we delivered strong performance in 2022, despite a volatile end market environment and significant inflation headwinds.
In the face of this environment, we outgrew the market significantly we maintained our adjusted operating margins above 10% by delivering incremental margins on our higher sales and successfully completing commercial negotiations with our customers. While also investing $150 million more in R&D to support the future growth of our business.
And finally, we delivered a record year of free cash flow.
As we continue to successfully manage the present.
We were also continuing to successfully deliver on our future by making significant progress on our charging forward plan.
Now as we look ahead to 2023, we'll be keenly focused on continuing to manage the present by sustaining strong high single digit revenue outperformance compared to industry volumes and driving conversion on this revenue growth.
Successfully executing the intended spin off of our fuel systems and aftermarket businesses.
And continuing to make disciplined investments, both organic and inorganic that will help secure our growth and financial strength long into the future.
With that I'd like to turn the call back over to Pat.
Thank you Kevin.
Operator, we're ready to open it 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.
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.
And we'll take our first question from Colin Langan with Wells Fargo. Your line is open.
I just wanted to follow up on the comments on inflationary costs. I think you said the guidance implies a negligible impact I mean, so far it seems like other suppliers have kind of guide, it's a pretty large headwinds, particularly around labor.
Any color on the underlying growth impact that you're expecting that you'll need to get price concessions to offset it.
And any color why youre not seeing as big of a factor as other suppliers, it's just the business structure or some other benefits.
Yes, I think our expectation right now is that we're going to continue to manage inflationary levels at the way. We exited 2022, so to the extent that we continue to see elevated levels of input inflation from the supply base. We would expect to continue to maintain the pricing in place with our customers on a go forward basis to mitigate that so that's really what's underlying the guidance.
Thanks for your comments.
Sounds like you are really just renegotiating what you've got in last year or are you seeing more increases in these costs this year too or no.
Well I think we're expecting that we're going to enter the year much. The same way, we exited last year and the focus of the negotiations last year was really about how we address the inflationary environment in 2022, and then we essentially aligned with the customer base that we would look at ahead to 2023 as we were entering the new year and see what types.
Pricing levels were appropriate to continue to mitigate those impacts and so as you can imagine we'll have those discussions here as we enter the new year.
The pricing and cost environment.
Got it.
And your outlook based on your market guidance looks like it's about 8% over market and I believe it used to historically talk about more four to five so what's driving the strong growth over market. This year is that sustainable how should we think about it going forward.
Yes.
The outgrowth next years, you're right around the midpoint of 8% and very proud of that.
About two third of it has been for products and other products will plug in hybrids.
So next.
Next year will be between one and a half to $1 8 billion of <unk> revenue.
Would she is approaching 10% of our revenue.
I'm very proud about this acceleration.
And is there anything onetime in nature and the growth for this year or.
None at all this confirms that we are on on track marching towards our target of $4 5 billion fueled move revenue in 2025.
And you see a two X increase this year versus prior year.
Pretty much part of the plan.
Got it alright, thanks for taking my questions.
And we'll take our next question from Emmanuel Rosner with Deutsche Bank. Your line is open.
Alright, Thank you very much.
I was hoping you could give us a little bit more color around the.
The year over year walk in puts and takes in terms of your margin outlook.
You mentioned yourself.
At midpoint. This basically just slightly better than flat sort of like operating margin, despite what seems to be.
Incredibly strong.
Organic growth I guess gross overall I understand.
E R&D piece of it.
But anything else going on there and then can you just maybe talk about R&D overall, Okay York City some of the R&D increase by cutting back on the ice R&D or was that sort of like how much R&D will be going up right.
Yeah, I mean, though the walk going from 2022 into 2023 is fairly simple it's really as we look at that organic net sales change we're converting on that effectively in the mid teens call. It in that 15%, 16% range. But then we're also investing incrementally in E products related R&D of about 60 to 70 million.
On a year over year basis, which is what brings the overall conversion down and shows only been a slight improvement in our margin profile on a year over year basis, but we're pretty pleased with that mid teens conversion given that the bulk of the revenue growth. We're seeing in 2023 is really related to product launches and ramp up not recovery in end markets and so with some of the startup costs you see.
We're pretty pleased with that performance Fred did you want to comment on that.
Good morning on the R&D side.
As Kevin mentioned, we expect to be up again this year year over year. We're also looking at a lot of R&D efficiency on the combustion side.
And I think we would expect that meet them.
And he's going to stay between 5% and five 5% of our revenue working in not constraining the growth, but also making sure that we're doing the right thing on the on the foundation products.
Okay and then following up with this and so is this year within this range is rolling through R&D.
255% and I guess in the past you've spoken about.
Tail end of 2020 to risks are we'd like to think this turning point, where it looks like your EV business is essentially.
Breakeven, we're getting profitable basically fully loaded as you have.
Revenue scale.
Match the size of these E. R&D is that still the case or whether these additional investment goes that push out the timeline a bit.
Okay.
A couple of things on the on the question about R&D I mean, we're really only guiding at the moment to the products related R&D, which we are seeing an increase in investment that we're choosing to make a $60 million to $70 million. The overall R&D budget or I'll say the foundational R&D is just being managed in totality with the way that we manage the profitability of those foundational.
As it relates to EV the the trajectory of profitability you know as you see the growth that we're generating generating this year and the incremental margin that we're generating on that revenue growth. This year, two thirds of which comes from our <unk> product portfolio. You can see that the growth in contribution margin is effectively outpacing the growth of new products.
Related R&D, which means that 2023, we are seeing improving profitability coming from that portfolio until <unk> and continue to believe that we're on track that as we exit 'twenty three and head into the beginning of 'twenty for that portfolio is approaching breakeven.
Yeah.
It sounds good thank you very much.
Okay.
And our next question will come from James Picariello with Bnb Paribas. Your line is open.
Hi, good morning, everyone.
Just back back to the growth over market.
In 2022, there was almost like a four point benefit from commodity recovery that'd within your revenue growth. So I do just want to.
Clarify that the 2023.
High single digit eight points of outgrowth that that does not include any ongoing commodity recovery cost recovery type benefit.
That's correct I mean pricing is not a net tailwind in that effectively that organic growth number as you look at the 2023 guide.
Okay.
Okay, all right understood.
Understood and then.
Just back to the EV profitability timeframe any given the $60 million to $70 million R&D step up I think.
Obviously, you guys had talked about maybe late 'twenty three early 'twenty four in terms of achieving breakeven for the business.
What is that timeframe look like now given better visibility on the R&D commitments yeah.
I think as I was just mentioning to Emmanuel it's essentially unchanged I mean, we think last year and heading into the beginning of this year was really the inflection point of the business from an electrification standpoint, we lean forward pretty significantly last year with 150 plus million dollars step up of need products related R&D and now as we <unk>.
Into 2023, and you're seeing all that EV related revenue growth coming through and the contribution coming on that revenue growth that contribution margin growth. This year is outpacing the growth in knee products R&D and continues to put us on pace as I mentioned to Emmanuel for us to be approaching breakeven as we exit 'twenty three in <unk>.
At the beginning of 2024.
Got it and just any clarity on what the spin coast targeted net leverage could be I know you previously communicated we'll have a healthy cap structure, just curious if theres a finer point on that thank you.
Im not going to provide any more color on that at this point I mean, we're still on target to execute the spin in late 2023, and as we approach the spinoff date get closer to that you should expect that both companies are going to hold investor days at which point in time, we'll provide more clarity around the financial outlook and capital structures of both businesses, but the overall.
Concept is as it relates to both newco and and Borgwarner on a go forward basis that we're going to continue to maintain moderate levels of leverage in a way that supports the ability of both companies to execute their respective strategies.
Thanks.
And our next question comes from Rod Lache with Wolfe Research. Your line is open.
Good morning, everybody Fred.
Fred Hope you feel better Kevin I think I have a few questions for you.
First of all is is it correct that.
I guess I'm understanding that you reflected already a significant amount of additional inflation in your numbers in 2023.
But you are not assuming any real recovery in terms of incremental pricing on that and that if you do achieve incremental recovery that would actually be accretive to your revenue forecast in your your your earnings forecast.
Understanding that right.
I think I mean, the way to think about it we exited 2022 at a level of pricing from the supply base in pricing with the customers that we think is likely you're going to continue at or around that level heading into 2023, and that's effectively what's underlying the guide.
Okay.
<unk>.
So in other words, you already had this from the beginning of the year. There is no like spillover effect from negotiations that you had a.
Fitted from over the course of the year or in the middle of the year last year.
I think the spillover effect is what I mentioned and with respect to my comments about the potential volatility in margins in Q1.
We exited as we negotiated with our customers in 2022, the focus was really on how we make sure that we're recovering a fair share of the inflationary impacts we were seeing in 2022 and as we head into 2023, we would discuss with our customers and our suppliers the extent to which some of those pricing increases.
<unk> need to continue to offset the inflationary environment and so we could see a little bit of Choppiness in Q1, as we go through some of those discussions but overall our outlook for the full year is that we don't expect to see a material impact from the.
The net pricing environment on a year over year basis relative to 'twenty two.
Understood.
Can you maybe clarify what the magnitude of the inflationary burden is for you that is already embedded in your numbers and your seemingly offsetting.
In part through additional productivity is it correct that the scope of that inflationary burden is beyond.
Parts and materials like it's extending to things like energy labor and other factors at this point yeah. That's that's fair to say right I mean, what we've disclosed to date is that the the biggest impact we see is really on the material cost inflation side and the net impact on our P&L on material costs from last year the cost net of <unk>.
Coverage from customers was about $90 million of headwind, but obviously, we have other productivity issues that we're managing through from a labor freight and other things.
Thank you.
Okay.
And our next question comes from John Murphy with Bank of America. Your line is open.
Good morning, guys I just wanted to I just wanted to follow up on something you had in your other investor deck, that's outside of the slides you show here.
It sounds like the content per vehicle opportunity on Evs.
0.5, and developed through acquisition, but I'm just curious I mean, that's what I'm looking at a big chunk of the business.
You'll still being ice just curious if you had a view.
How you think about the content per vehicle on an ice vehicle developing into 2025 and 2030 in similar ways of being shown.
Content vehicle.
Yeah.
The ice products.
Whether in pure combustion powertrain on the on the hybrid offering all of them are a positive contributor to the outgrowth.
So we see still a lot of pool from the market, who are energy efficient ice types of products.
Okay and also I mean, it looks like in the slide that you're kind of indicating that breakeven on an.
The operating basis in Evs starts occurring sometime between 23 and 'twenty four roughly just staying in the slide that you showed.
When do you think that the returns on that business start to become in return on invested capital starts to come.
Some sort of adequate immune and it looks like it's 'twenty four 'twenty five 'twenty six.
Writing the margins might get closer to it.
Unquote normal and when do you think the return on invested capital, it's sort of an adequate level for you.
So John maybe I'll start and turn it over to Kevin the EV products that we are booking announcing all going through the same our IC threshold appropriation request processes than any other products.
So the RAC program by program use of data, there's no doubt about that not from a timing standpoint.
I mean, I think that's the key point, we price all of these programs shows that on a standalone basis, theyre profitable, but as we've mentioned in the past that what makes the business a little bit different than some of our other businesses. Our foundational businesses today is that to drive the revenue growth in these product categories. We have to invest a lot in upfront E products related R&D.
And so that provides an overhang to the in year margins any given year and you see that this year, even in our 23 guide where we have good levels of conversion that we're pretty happy with but we're continuing to invest another $60 million to $70 million to support new business wins, three four and five years out and so as long as we continue to see the prospects for.
Growth in this business, we're going to continue to invest in the products related R&D to make sure that we have long term viable business here and again as long as those programs are all individually meeting our ROIC targets on a standalone basis, we're very happy to continue to invest in that E. R&D.
And maybe just lastly, I mean, just kind of putting this all together I mean, it looks like the margins on the ice business in 'twenty three will be.
12% to 13%, maybe maybe even better.
If you think about you know the aggregate margins being in the 10% range. I mean do you think we're at a point, where those ice margins may improve a bit on her time and this transition is kind of hitting sort of a low points on margins and returns you'd be twenty-three or.
Do you think that's still in front of us because I mean, you mean that chart that you show on the EG business getting to breakeven sometime between 23 and 'twenty four roughly.
There are indications that we may be hitting a low point and then as we get through 'twenty and into 'twenty two more things may actually turn them on an average basis start to improve.
We're kind of looking far out and people are just trying to really understand what's transition.
But you mentioned.
And returns.
John our product leadership and scale in the foundational products.
Very strong.
And I would say the margin we remain self quarantine and strong as you've seen in the past.
Also.
Don't forget that the foundational products that we have a an impact too on our EV growth.
And one of the announcements that we made this morning around the battery recruiting is a great example of that.
Bridging product foundational knowhow.
With cooler application in the world of combustion.
We are leveraging processes knowhow around brazing.
Oh around leakage control from our <unk> technology into the battery cooling plate.
So this is a great example of using foundational knowhow to create a new organ he can lead them.
Well the EV world.
Okay.
Okay.
Is it fair to say to me given the volatility that's going in the markets right now and just transition and just kind of being the last year, and where you might be using money based on what you're showing on an operating basis. We may be looking at sort of a point in time there were 2003.
Hard to say, but just in the transition conceptually may Martin one of the.
It might mark in a low water mark in.
Margin expansion was transitioning all else equal.
John as we are approaching breakeven.
Is it end of 'twenty three is at the beginning 24, I mean, it's tough to say.
But it is absolutely clear that now.
Now turning point both from a revenue.
And a path to breakeven or breakeven that's absolutely pretty visible.
Okay, that's exactly what I want thank you so much guys.
Yeah.
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And we'll take our next question from Luke junk with Baird. Your line is open.
You mentioned today does that animate this industry wide dynamic at all.
Uh huh.
The two little disease will really leave.
And have a space in the market.
800 volts.
Leads to a few efficiency improvements, but also comes with additional features and cost and we believe that depending on the end application the vehicle type price points.
That oh, he wants to set the vehicle at in both technologies will remain active.
And what.
What we're doing at Borgwarner, he's really focusing on the module design.
Nine of those in <unk>.
So that we have building blocks.
Being on level of Volta Jesus Silicon the silicon carbide the level of outputs. This theory.
We are using a modular approach that would be pretty agnostic to the voltages.
Okay I appreciate that and then for my follow up I was just hoping you could comment on the we'll see partnership that you announced in November specifically around your ability to compete incrementally and ensure supply four and after that partnership and most importantly, what is it.
You think your supply chain position now could be advantaged versus peers in silicon carbide.
So very happy with the fact that we've we've secured a.
A corridor of supply there is pretty significant and can meet our expectations.
Going forward, and then I'll pass growth too.
Two points one this this supply agreement is not exclusive.
We can work with other silicon carbide supply them.
Should we wont, but also if our OEM want us to work with other silicon carbide surprise the doors absolutely open to so I think we've secured a significant capacity corridor, but we also have the ability to be fixable.
To decide who we work with them down the road.
Okay I'll leave it there thank you.
And our next question will come from Adam Jonas with Morgan Stanley . Your line is open.
Hey, Thanks, everybody and Fred Hope, you're feeling better, but I hope you feel better.
Yeah.
I noticed on slide eight the cooling plates.
Got it so beautifully nationally that 46 80 cylindrical cell.
I'm curious, what you're thinking about pouch.
<unk> and prismatic versus cylindrical because it seems like given some reports around GM maybe.
Maybe not doing their fourth plant or possibly changing form factor and Tesla.
Ramping up $46, 80, and getting others to make it that that might be.
Become more of an industry standard even though there's still a lot of form factors I I was curious whether you are witnessing a bit of a.
Gravitational shift or momentum not just from Tesla to 46, 80, but but others as well does that possibly what's going on because it because.
I thought there was the argument was pouch and prismatic was more energy dense but are some of your products like you're calling plate able to get around that where the cylinders and get them.
Better energy density with a cylinder and that's versus the pouch.
Yeah.
So first what I would say that.
First in the commercial vehicle side, where we are really active from a battery pack manufacturers at that point, we should cylindrical as as the mainstream in Pascal, where we won that business with a major German OEM, we have different technologies that we'd be in the marketplace.
What we've created here is a focus on cylindrical and I've got to comment on on the applicability to other technologies, but to answer your question simply on CV, which you've seen in vehicle going mainstream and.
Different different views.
Hum.
Again different technologies will be.
You know hitting the market.
They all have their pros and cons.
Okay, Fred I appreciate that and just the.
The only thing that I would add to it I mean is it you know those those battery cooling plate for those types of battery architecture.
Oh, generating a pretty significant market opportunity and we estimate that market opportunity to be around $335 billion in 2028 already so.
Difficult.
Got it Fred Thanks, just a follow up.
The world's really changed.
Continues to change in terms of cost of capital and interest rates.
Consumer slowing.
Tesla.
Aromatic price cuts et cetera, and your electrification portfolio gives you a really long dated view into the forward.
Are you seeing any hesitation.
Or maybe pushing out.
The commitment from Oems on EV investment at the margin I know theres still committed but I didn't know if there was a rate of change that might have you might have picked up on your forward over the last.
Quarter or so.
No I would say to the contrary I see.
The ratio of those program a tremendous focus on management, both sides Oems, you'll want to lounge, and Ah and also as I mentioned in prior calls.
When we when we book a program a few months after we were really talking about capacity increase.
What we see those that also from a customer side.
What we see is that they want to partner with someone who can be impactful on the east side, but also on the foundational side, so that we pivot together.
Great Fred Thanks.
Our next question comes from Noah Kaye with Oppenheimer. Your line is open.
Thanks, I'll stick with a battery theme for a minute or so just given bev is driving majority of the organic growth outlook for this year. You mentioned battery is a significant contributor this quarter and then you also called out higher growth expectations at ACA, So I guess over the medium term.
Help us understand what's driving your increased expectations for your own battery business is.
Is it really just higher sell through on the commercial EV side or are you picking up share gains and new platforms.
So it's simple we have we have multiple customer awards put us higher volume from our core customers and.
And that's leading to ACA, so moving slightly from <unk> 300 million last year.
Two to about $1 billion in 2025.
And the impact that you see this use as part of the glide path.
Hum and very pleased with our inverted world too and also very pleased on all motor on all the wins across the portfolio, but on that Guy. So yeah. It's about a 1 billion already in 2025.
Yeah.
Okay.
And then just a follow up I'm curious how much of your 2023 capex might be allocated to.
Battery manufacturing in the U S.
And how the 45 X production tax credit benefit you, if you're making any investments.
Yeah, I mean because of the acceleration we're seeing in the revenue enact I saw as Fred mentioned, even up through 'twenty. Five we are accelerating some of the investments that we're making both in Europe and North America related to that business and then we're also seeing part of the increase in capital expenditure on a year over year basis related to our other electrification businesses on the light vehicle side.
So definitely a contributor.
And as it relates to North America, we're looking at the tax credits and how those might apply to us.
From a production standpoint, as we go through 'twenty three and beyond.
Waiting for Treasury guidance to get full clarification.
I mean, theres some of that making sure that we understand that any clarifications that need to be had but we're pursuing the credits that we think were that are available to us.
Based on the production that we are.
Executing here in the United States.
Thank you.
We have time for one final question and that question comes from Mark Delaney with Goldman Sachs. Your line is open.
Yes. Good morning. Thank you very much for taking my question when you speak to your auto OEM customers. What do you think the gating factor is to light vehicle production volumes in 2023 and to what extent is volume gated by supply as opposed to demand.
Semiconductor visibility steel.
Life. Unfortunately.
I would say to answer your question it's more.
Cat.
On the supply availability standpoint, and then from a demand standpoint in 2023.
Thanks, Brendan Youre second question was just in terms of how customers have responded to the announced separation of the business. You know you spoke about all the great momentum Borgwarner is having on the product side.
I'm wondering though have you seen any change in customer engagement to design in newco products with the announced separation.
No not at all no. We've obviously talked to a almost all of our customers are and they understand and they actually happy to see those two strong companies being able to execute their own respective strategy.
And and they're happy with our the IP with a with a with the with the announced spin off there's no no noise from that anvil.
Thanks, so much.
Now I'd like to thank you all for your questions. Today again, we apologize for the technical difficulties earlier in the call. If you have any of the snowfall.
Out directly to me and my team.
With that operator, you can conclude todays call.
Yeah.
That does conclude the Borgwarner 2020 to fourth quarter results Conference call you may now disconnect.
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