Q1 2023 Borgwarner Inc Earnings Call
So 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.
<unk> adjusted that means excluding non comparable items.
When you hear us say organic that.
Excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market.
When you hear us say market that means the change in light and commercial vehicle production weighted for our geographic exposure.
Please note that we've posted today's earnings press release and 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 in France.
Thank you Pat and good day everyone.
We're very pleased to share our results for the first quarter of 2023 and provide an overall company update starting on slide five.
With approximately $4 $2 billion in sales, we delivered double digit organic growth in the quarter.
And we outperformed the market in both Europe and North America.
As we expected going into the quarter.
<unk> performance was negatively impacted by our planned R&D investment.
Net inflationary costs and the impact of lower production in China.
Our free cash flow usage in the quarter reflected our planned capital spending to support our product growth.
As well as working capital usage.
Our normal annual payout of incentive compensation.
Importantly, our charging forward progress continued on multiple fronts.
We secured multiple new product awards since our last earnings report.
We also announced multiple new product capacity investments during the quarter.
And as I will highlight.
Our battery pack expansion in Seneca South Carolina shows our ability to utilize our foundational assets.
And people.
Lastly.
We continue to work towards the intended separation of finnair.
Since our last call, we announced Phineas name as well as the key leadership roles.
Brady Erickson will serve as president and CEO .
As Chris Grubb will serve as the CFO for <unk>.
Both Brady increase have been at Borgwarner for more than 20 years.
Served in numerous important roles across a variety of both on the business units.
Teams are progressing well through the various work streams, we now expect to complete the separation of <unk> by the end of the third quarter.
Now, let's look at some new product awards on slide six.
First <unk> has been selected to provide E motors to a leading automotive manufacturer in China.
The E motors will be used in the Chinese automakers dedicated hybrid transmissions and range extended electric vehicles with mass production expected to start in August 2023.
We're excited to supply this leading Chinese OEM with a new motor application strengthening our partnership.
By providing them with the support needed to.
To meet the growing challenges.
In new energy vehicles.
Next Borgwarner has partnered with a Pontiac, Michigan, Michigan School district to provide direct con fast charges to support the district Electric school buses.
This program will utilize borgwarner sequential charging technology that allows up to five dispense to charge from a single power control system.
This greatly reduces the initial investment and lowers installation costs.
While providing the ability to charge it DC fast charging levels.
Thanks, but one has been selected by a global commercial vehicle manufacturer.
To provide defense.
For battery electric trucks in both the North American and the European market with production expected to begin in 2025.
For this project Borgwarner was the blades complete E fan or 10 system.
Which includes a fan and E motor and an integrated high voltage inverter.
Notably the.
The high voltage and involuntary utilizes the expertise and capabilities of dry stake.
The company acquired in December of last year.
Now, let's look at the growth and expansion of our battery pack business on slide seven.
One has been selected by global power Technology Company.
<unk> battery packs for a series of electric buses.
With production beginning earlier this year.
This battery pack contain state of the art safety features including current Overcharged protection cell.
Cell level passive propagation resistance.
And electrical disconnect at the individual sale wire bond debt.
That satisfy the industry's strict electric vehicle battery safety standards.
During the quarter Borgwarner announced plan to expanded Seneca South Carolina production facility.
By adding battery module production to the facility.
After this expansion Borgwarner is expected to have annual U S battery module capacity of approximately three gigawatt hour.
This is this investment will contribute to the growth of the company's battery module and pack production in the United States focused on commercial vehicles trucks and buses.
Our battery pack business is exceeding our initial expectations.
Last quarter, we increased our 2025 revenue outlook for this business to approximately $1 billion.
Five years ahead of us.
Our <unk> business case, when we announced the <unk> acquisition.
We expect volume demands from our largest battery pack customer.
Customers to continue to grow and we have secured multiple new product awards for our battery pack business over the past two years.
We are also making organic investments to support this growth.
This year, we expect to invest approximately $100 million of Capex.
This business growth.
Which is a big driver of the step up in our Capex outlook for 2023.
This was last year.
So in our opinion the castle acquisition from two years ago, you supposed to deliver well above our initial expectations.
But now I'd like to turn our attention to how last year's Central's acquisition is performing on slide eight.
Similar to our battery pack business the revenue rate Central's E motor business abstract ahead of the expectation we add at the time, we announced the transaction.
In 2024, we expect this business to generate approximately $250 million of product revenue.
About 40% higher than our original acquisition planning.
If you recall a key pillar of the transaction was for central to improve our cost competitiveness.
Through improved E motor design and manufacturing capabilities.
As a result of the improvements that we are achieving we expect this business to already approach.
Walnuts average profitability levels by 2024.
We expected this business to increase our speed to market and increase our scale in E Motors.
Booking which are shown on the right side of this slide.
The takeaways from today's how this.
Borgwarner as first quarter results were broadly in line with the directional guidance that we provided on our earnings call last quarter.
Importantly, our sales growth once again outperformed the industry and we continue to make investments to support our growth.
As Kevin will detail, we expect another year of strong top line growth in 2023.
Specially driven by strong demand of our products.
Our guidance is also increasing.
Based on the FX tailwind.
We continue to expect our <unk> product portfolio to approach breakeven in late 2023 early 2024.
And our new segment disclosure will help provide evidence of this.
Looking beyond the near term we believe we are successfully executing on our long term strategy challenging forward.
Which we expect will deliver value to our shareholders long into the future.
Before I turn the call over to Kevin I would like to again share. Thank you to the <unk> team.
Proud to see both our product and our foundational businesses supporting our profitable growth in 2023.
The progress made in just over two years since announcing charging forward is truly remarkable.
With that let me turn it.
Over to you Kevin.
Thank you Brad and good morning, everyone.
Before I dive into the financials I'd like to provide a brief overview of our first quarter results.
First we reported double digit organic revenue growth.
Driven by outgrowth in Europe , and North America, and higher industry production, despite weaker production in China during the quarter.
Second our margin performance reflected a planned increase in any product related R&D investment and net inflation headwinds both of which we had indicated would be margin headwinds during last quarter's earnings call.
Let's turn to slide nine for a look at our year over year revenue walk for Q1.
Last year's Q1 revenue was just under $3 9 billion.
You can see that the strengthening U S dollar drove a year over year decrease in revenue of over 4% or approximately $162 million.
Then you can see the increase in our organic revenue about 12% year over year.
That comparison, approximately 7% increase in weighted average market production.
Finally, the acquisition of central and Rhombus added $22 million to revenue year over year.
The sum of all of this was just under $4 $2 billion of revenue in Q1.
Turning to slide 10, you can see our earnings and cash flow performance for the quarter.
Our first quarter adjusted operating income was $396 million equating to a nine 5% margin.
That compares to adjusted operating income of $389 million or $10 zero percent from a year ago.
On a comparable basis, excluding the impact of foreign exchange and the impact of M&A.
Adjusted operating income increased $32 million and $446 million of higher sales.
This performance includes our planned <unk> product related R&D increase of $26 million.
And about $28 million of net commodity and other material cost inflation headwinds.
We expect to largely complete these discussions over the next couple of quarters, which is one of the reasons. We thought we would have a lower margin in Q1 relative to the remaining quarters of 2023.
Excluding these higher costs, both E R&D and net material inflation.
We converted approximately 19% on our additional sales.
Our adjusted EPS improved by <unk> in the first quarter compared to a year ago, driven by the increase in our adjusted operating income.
Our free cash flow was $290 million usage during the first quarter.
Due to higher capital spending to support our growth in <unk> products.
And the annual payout to the Companys incentive compensation for the prior year's performance, which we normally make in Q1.
Youll note that the rate of capital spending during the first quarter was ahead of the pace implied by our full year guidance.
This was in line with our internal planning as we're putting in place the capital that we believe is necessary to support the ramp up in our product revenue.
Let's now turn to slide 11, we can see our perspective on global industry production for 2023.
We expect our global weighted lightened commercial vehicle market to be flat to up 3% this year, which is unchanged compared to our prior guidance.
However, within this overall outlook our regional expectations are mixed.
Specifically in North America, we're planning our weighted market to be up about 1% to 5%.
In Europe , we expect our blended markets to be roughly flat to up 2%, which is a bit higher than our previous forecast based on the stronger start of the year.
And in China, we expect the overall market to be down approximately 3% to up 2%, which is slightly worse than our previous expectation due in large part to the weaker than anticipated production. We saw during the first quarter.
Now, let's take a look at our full year outlook on slide 12.
First it's important to note that our guidance now assumes an expected full year tailwind from stronger foreign currencies of $55 million.
This is an improvement of $340 million in revenue versus our prior guidance.
Second as.
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 change you see on the slide.
But more important than the modest growth in end markets. We expect our revenue to continue to grow in excess of industry production.
Driven by our expectations for a modest increase in inflationary cost recovery from our customers.
And various expected new business launches, especially in our <unk> product portfolio.
As it relates to a product revenue, we're expecting to deliver between two three and $2 6 billion in 2023, which is up significantly from the approximately $1 $5 billion, we generated in 2022.
Finally, the central Rambus and SFC acquisitions are expected to add $70 million for 2023 revenue.
Based on these expectations, we're projecting total 2023 revenue in the range of $17 1 million to $17 9 billion.
Which equates to organic growth of approximately seven 5% to 12, 5%.
This is higher than our previous revenue guidance of $16 seven to $17 5 billion.
Due to foreign currencies the impact of the recently completed acquisition of SFC.
And our slightly higher customer recovery expectations.
Switching to margin we continue to 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%.
As it relates to R&D, our full year 2023 guidance continues to anticipate a $60 million to $70 million increase in <unk> product related R&D investment.
With our ongoing success, securing new electrified business wins, we're continuing to lean forward by investing more in R&D to support our product portfolio.
Excluding the impact of this increase in product related R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid teens inclusive of net inflationary headwinds of around $65 million.
Based on this revenue and margin outlook, we're expecting full year adjusted EPS in the range of $4 60.
The $5 15 per diluted share.
Turning to free cash flow.
We continue to expect that we will deliver free cash flow in the range of $550 to $650 million for the full year.
As a reminder, this cash flow outlook includes one time cash cost of approximately $150 million related to the planned spinoff of our fuel systems and aftermarket businesses.
That's our 2023 outlook.
Turning to slide 13, you can see our new segment disclosure for E propulsion.
In an effort to increase transparency into our product profitability. We've made the decision starting with the first quarter to break our previous E propulsion in drivetrain segment into two separate external reporting segments.
He propulsion and drivetrain and battery systems.
<unk> drives IBM and other power electronics, such as onboard Chargers.
We expect these products to account for roughly two thirds of the segment's revenue in 2023.
In addition, the E propulsion segment is expected to account for approximately two thirds of Borgwarner as total product revenue in 2023.
As you can see the business reported a negative operating margin in the first quarter.
But it is expected to have a slightly positive margin by the fourth quarter.
We believe a significant driver of this improved margin outlook will be the conversion on the growth in <unk> product revenue at quarterly segment revenue is expected to grow to $750 to $850 million by the fourth quarter compared to $487 million of revenue in Q1.
Isn't expected to keep pace with the growth in revenue and gross profit in the coming quarters.
The result is an increasing operating margin for the E propulsion segment.
Importantly, we expect profitability to continue to improve as we look forward beyond 2023.
We believe this is a very good illustration of the profitability trajectory of our E products more generally.
That's because we expect that as each product starts to see acceleration in revenue growth.
The conversion on that growth starts to overcome the upfront cost of R&D and other investments, thereby leading the profitability.
Overall, our first quarter results were broadly in line with our prior outlook.
We outgrew the market with growth driven by various products and foundational products.
And our incremental margin performance, excluding planned E R&D investment and net inflation was strong.
In addition, we continue to take steps to increase the financial transparency of our E product businesses.
As we look ahead in 2023, we continue to expect to deliver strong revenue outperformance compared to industry production.
To complete the work to successfully spinoff Affinia, which we now expect to happen by the end of the third quarter.
And to continue to make the necessary investments to support the profitable growth of our <unk> product portfolio.
With that I'd like to turn the call back over to Pat.
Great name are 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.
We are using a speakerphone please pick up your handset before asking your question.
<unk>, please limit yourself to one question and one follow up question.
Pause for a moment to compile the Q&A roster.
Your first question comes from Logan Laden with Wells Fargo.
Thanks for taking my question of column.
I just wanted to follow up on the comments I'm not sure if I misheard you.
Youre expecting $65 million of inflationary costs for the year I thought that your initial guidance was reflecting something that it would be not material for the year.
That's correct, we have effectively increased the expectation of the net inflation cost of 65, it was relatively small and our <unk>.
Previous guidance, but the increases we've seen the continued escalation of supplier costs predominantly non commodity related costs.
But despite that we're continuing to expect to hold our margin guide 10.0 to 10, 4% for the full year.
Got it okay, and it's actually it's not related to the steel price, that's actually related to yourself supplier cost pressure coming through.
It really is I mean, if you look at indices commodity end of the season, a little bit all over the place you have certain indices certain steel indices aluminum are down on a year over year basis, you have copper, which is actually up relative to the second half of the year and you have nickel and stainless steel that are actually up on a year over year basis. So commodities are a little bit of a mixed story.
But the bulk of what we're seeing come through is really non commodity related the other inflationary costs coming through the supply base.
And what helps you keep your guidance.
I guess actually slightly up okay for himself, but with the $65 million incremental headwind, what's offsetting that.
The continued performance of the business and conversion on incremental revenue. So we continue to have confidence in our ability to deliver on that conversion, which mitigates the impact of that $65 million.
And just lastly fuel systems.
Weak in the quarter anything unusual going on in Q1 and should that sort of bounce back or is that.
Okay stay at these kind of levels.
Higher R&D costs, but as we look at the business on a full year basis, we do expect much like the rest of Borgwarner to see sequential improvement over the balance of the year and fully expect that business will continue to perform in line with where it's been performing the last couple of years.
Got it alright, thanks for taking my questions.
Your next question comes from Noah Kaye with Oppenheimer.
Polson.
Would it be fair to say that getting to the high end of the revenue guide for E propulsion really depends on production cadence in supply chain and would that primarily be a function of your own supply chain for electronics and other components or is that more David by the Oems.
No I would say that yes, it's not demand.
<unk> related.
If we get if we get the chips, we will be at one eight if we don't get enough chips, we'd be at one five so it's essentially linked to the ability to get what we need.
With the demand.
And your thoughts on line of sight to getting the chips the start of the year.
Well, that's what we.
We have teams of people working really hard with our suppliers and so far so good I would say, but we see the volatility and as you know the supply chain.
As no buffer whatsoever. So.
Do you have a little.
The blip somewhere.
Thanks.
And our ability to ship. So that's why you have to use that band of of revenue that is steel.
Open from one five to one.
And then just the last one I mean, the margin trajectory in E propulsion.
Should we potentially extrapolate similar incrementals moving in.
2024.
<unk>.
The dynamics here of the gross profit contribution more than offsetting the R&D increases.
Is what we're seeing here from <unk> to <unk> kind of a fair trial.
In line to continue.
I think it's a fair way to think about it I mean, that's that's why we've been suggesting all along is that as we start to get the scale and start to see the revenue ramp up that revenue ramp up drives gross margin in the pace of that growth is outpacing the growth in R&D you can see the R&D starting to flatten a little bit more relative to that growth. So as we get beyond 'twenty three and into 'twenty for Mb.
And we do expect to see that continued improvement in the margin trajectory.
Thanks to the continued growth in the <unk> product related revenue.
Okay. Thanks, so much.
Your next question comes from James to Gary of PMT. It correctly. Your line is open.
Hi can you hear me okay.
Yes.
Good morning, good morning, everyone. So the fitness spin is now targeted by to be completed by the end of the third quarter.
And any color.
Any thoughts or color on the timing of.
The CMV and the.
The capital structure potentially four four for failure.
Yes, I think nothing.
Nothing has changed really we're getting more precise the teams are doing great job and we'll come back to you when we have even more precision on those dates but we're marching towards.
End of <unk>.
End of the third by the by the third quarter and.
And it's a lot of work, but people are working really diligently in and.
Just wanted to give you more precision.
We get more more honed in on a particular date then we'll be in a position to talk about windows investor days might be for both companies and at that time, we'll also talk about the capital structure of both businesses.
Got it and then on the commodities front.
So the net impact now for the year at $65 million headwind.
And then as you think about the top line recovery component of this last year I believe it was roughly $580 million flowing through your revenue in terms of commodity recovery what is that number now look like.
And your revenue guidance.
On a year over year basis, it contributes about one point to our revenue.
So that and net of that recovery, we end up with $65 million of headwind.
Yeah.
Understood. Okay. Thank you guys.
Okay.
Your next question comes from Emmanuel Rosner with Deutsche Bank.
Thank you so much so just to clarify again.
Inflation headwinds, so you're expecting $65 million.
On a full year basis is a net number and then.
$28 million of that happened in the in the first quarter is that correct.
That's correct.
And the I guess the.
The general drivers of sort of an improvement in.
Sort of like totally incremental margins from the first quarter through the rest of the units. So you would have a higher proportion of recoveries I guess on the gross headwind inflation headwind what are those drivers would you point to the.
Fundamentally the two things that really drive the performance over the balance of the year. One is we do expect to start to generate some of the customer recoveries linked to the inflationary headwinds. So the biggest headwind is really in the first quarter, but second we do see sequential improvements in revenues and converting on that over time I mean, if you look at our Q1 revenue.
4 billion 180, if you look at the midpoint of our guide it suggests that the average quarter for the last three quarters is higher by 260 million of revenue. So so there is there's still revenue growth coming over the balance of the year, particularly driven by the growth in our product portfolio, so converting on that as well as mitigating some of these inflation impacts over the <unk>.
For the year are really what drives the conversion and gets us to that 10 points of ROE to 10, 4% margin for the full year.
And this is tied to the.
Timing of new launches.
Correct Thats really the ramp up of our <unk> product revenue over the balance of the year and you can really see it in that E. Propulsion segment disclosure that we had in the deck that.
The primary driver of that growth growing from $487 million of revenue in Q1 to $750 to $850 million in Q4 is <unk> products and so really capitalizing on that growth.
Is what we're looking for over the balance of the year.
Thank you so much and then follow up is just on the disclosure.
So E products expected to be about two thirds of segment sales.
I guess what else is in E propulsion.
Predominantly electronics.
Understood.
Thank you so much.
Your next question comes from John Murphy with Bank of America.
Good morning, guys.
Alright, I just wanted to focus on slide 13.
Can you kind of alluded to that.
Two thirds of actual product will be in this E propulsion segment and that kind of.
You sort of indicated there's about $1 3 billion.
In 2023, that's outside of this segment and I'm presuming that that's all in drivetrain and battery.
If that's correct or are we looking at a similar.
Progression in the profitability in that one other $1 3 billion.
Any money right now and they will get the break even or better by the end of the year.
Yes, I mean, I think your $1 3 billion as a little bit high when youre doing the math on that and because of the guiding to overall.
Two five to $2 8 billion at the product revenue. So when you do a third of that it's going to be a little bit less than that number, but where do you see any other pockets of <unk> products related revenue are really the battery pack business, which is in the drivetrain.
And battery systems segment, you have a lot of our thermal products, which is in the air management segment as well as the charging stations, which are in the air management segment as well. So that's really where you see the other components of the product related portfolio in terms of the trajectory I think it's right to think that.
What you see on slide 13 is the right template or way to think about the progression of margin in any one of those E product businesses. They start off by generating losses. When they don't have much revenue scale, because we're making a lot of upfront investment, particularly in R&D and other startup costs and as we start to get the scale and we.
To grow revenue to the point, where the revenue growth outpaces the growth in R&D, we start to drive profitability. So when you look at the product portfolio within E. Propulsion, we're already starting to get to that scale point. Some of the other businesses are simply a different points of maturity along the way, but as they get to the same levels of maturity as what we see any proportion.
We expect the exact same type of trajectory.
Okay, and then just to follow up on that I mean, the midpoint is $2 six so thats two thirds of your total E product that would indicate as another 1 billion three outside of.
Thats the math I mean is there something else.
But I misunderstanding something.
I mean $2 six divide by three gets you about $850 to $900 million. So.
Are you, saying that the total okay. That's okay because the way. These are shown as if that's what you need.
The propulsion segment, Youre, saying, thats, so youre, saying thats the full.
Number.
The expected net debt at two 5% to $2 $7 billion. That's the E propulsion segment revenue two thirds of which.
Is the E product related it also happens to correspond to being two thirds and Borgwarner is total product revenue is also in this segment.
So basically we should be thinking about $866 million out outside of outside of this segment is that correct ballpark.
Okay.
Okay, just to make sure we got that right.
Second question, when we think about finian it sounds like this is going faster.
Than expected so it sounds like as good progress.
How should we think about post set.
Separation potentially stranded costs and opportunities to work those down.
I mean from a cost per cycle, we'll talk about that more when we get to the <unk>.
The Investor day that we expect to have closer to the date of the spin and when you think of the potential dis synergies, we see from the transaction and one of them is just as youre alluding to some of the incremental costs associated with establishing our corporate cost structure for a new public company.
So we will give more details on that and the impact overall of that the synergy, but as we look at it the value creation opportunity of creating two separate companies both focused on pursuing their independent strategies more than offsets the potential dis synergy associated with setting up the corporate cost structure for <unk>.
John the affinity is made of two reporting segments that will run under the bowater decentralized operating model. So besides the creation of a tough go there is not much stranded costs.
That's very helpful. Thank you very much guys.
Your next question comes from Adam Jonas with Morgan Stanley .
Thanks, everybody so for your internal combustion businesses across air management and within.
Drivetrain given there some.
Let's say early stage of a runoff phase I would imagine.
That the capital requirements for these businesses.
Run off over the next 10 or 20 years, maybe very different versus the past 10 or 20 years can you confirm.
The Capex and R&D spends for example, as a percentage of sales for the ice focused products can decline versus history.
And can you quantify that.
Yes, Thanks, first I would say that.
What we're doing with the plant in Seneca, which is our biggest clients in North America is a good proxy of what we're doing to utilize the capital in the human capital that we have in our foundational products, putting battery pack in there.
If you look at.
He does and we announced more than $4 million in 2025, we will using plants in Michigan and in Portugal in China for Motors, Ibms, we using Wuhan and Tianjin and Gloria in North America.
Also in Mexico, we have about two level program. We're already at about 300 engineers have gone through and they are.
I would say now very.
Up to up to.
Their task in the in the <unk>.
So we are focusing on utilizing both capital and human capital and when we also make the transition from.
From Cte.
From a capital standpoint R&D standpoint.
<unk>.
We think that.
Q1 is a good proxy to E. R&D goes up see R&D goes down pretty much equally or proportionately.
Capital is very very limited in what we do and since quite some years.
<unk> business is our quoted with the amortization of the full capital in the length of the program with volume closes. So I think we're doing everything that is.
Honorable to limit that risk.
That's great just as a follow up on your EV backlog I would be very interested.
And your comments on how you see the Chinese based.
Domestic China EV players growing in your book.
These are the legacy European Asian, and U S. EV products or is that how is that backlog tilting. Thanks.
Yes.
Just give you a high level set of numbers.
So this year, we guiding to three to $2 6 billion of <unk> products and in 2025 about $5 6 billion.
And Thats, 50% CAGR just to give you a perspective on how fast we are growing in this field.
In China, our business is 70% with the local Chinese it was actually the other way around five six years ago.
But the vast majority of our business is with the.
The Chinese Oems and out of that 70%, 50% of those are with the big the big guys. The tough China sub Chinese Oems.
That helps.
It does thanks.
Your next question will come from Dan Murphy with Barclays.
Hi, good morning, Thanks for taking the question.
I wanted to just start.
On the incremental margins. So I appreciate the really sure that equity inflation in R&D in 2019%, which is.
In light of an environment, where some of the supply constrained seem to be dissipating and you are coming off on.
Relatively.
Easier comps.
The more difficult situation a year ago is it possible that as the year progresses ex R&D ex inflation that that incremental margin goes higher.
Yes, I think we're pretty comfortable with where the guidance right now.
When you cut through the math and you look at the full year guide, excluding the product related R&D.
Expecting to be converting at about 16 plus percent.
Year over year, and that's inclusive of the $65 million net material inflation headwind that suggest without that headwind, we'd be converting even higher so we're pretty pleased with that level of conversion in spite of the fact that we're seeing material inflation pressures in the year.
Okay understood. Thank you and then.
Follow up I wanted to just ask about.
Silicon carbide.
Could you just remind us.
All of your <unk> backlog, how much of that is silicon carbide.
Hi, GDP and then.
We heard a comment from <unk> capital at its Investor day plan to reduce silicon carbide content by three quarters.
And just wondering in the future how youre looking at the design of your <unk> weather.
Do you think that.
You can reduce silicon carbide content.
Okay.
And in general what the direction.
Matt.
I'll start with the second half of your question on the.
The way, we use silicon carbide and if you do Teardowns and then that is.
We use silicon carbide with a.
A cooling on both sides and the more power you can get through silicon carbide.
Is related to how how smart you cool those those chips.
<unk>.
We think do we that we actually more.
Competitive from a power density standpoint, thanks to our thermal management on the cooling on both sides than some of the competitions.
Thats item one item too.
<unk>.
Some people are talking about reduction of usage of <unk> calibre and when we do exactly the same.
This is this is something that we we all do and all those all those things are part of our product roadmap.
It doesn't mean that the need for silicon carbide is reducing.
It's still increasing and we're very happy to have secured the <unk> corridor.
With with speed.
In order to deliver on our long range plan.
The first part of your question was around what's the share of Silicon carbide versus silicon now invest in the inverter business.
I would say that if you look at.
The announcement that we've seen we mold tilted towards high end.
High voltage silicon carbide.
Then then the lower voltage.
Silicon.
Type of products with.
Average price around $700 a pop.
So that's what I would say remote towards the most advanced inverters in the marketplace.
And within the context of automakers trying to drive costs down to make even more affordable is there are you seeing a push from automakers does it reduce the silicon carbide content to make the inverters more affordable.
Yeah.
The puts and takes are a little bit more complex than this.
You need to take into consideration.
The power output.
Level of battery pack, the range et cetera, and it all depends about I think it all depends upon the what the company wants to do with giant Tiger Woods Woods and products. They wanted to put in the marketplace.
The push for efficiencies such that we don't see a slowdown in the usage of silicon carbide.
And most of the things that we've seen the marketplaces pushing for more efficiency and more efficiency.
<unk> range or smaller batteries is sometimes that ink to usage of so you can tell by but overall you should ask the Oems that question because the strategy that we have that there is more more more linked to their system and how they wanted to put.
Their differentiation into the marketplace.
Great. Thank you.
Your next question comes from Luke junk with Baird.
Hi, Good morning. Thanks for taking my question first started I was hoping we could just unpack what's currently reflecting in your portion gross margins are about 15, 5% this quarter not far off from overall and what's inherent in the incremental gross profit in terms of the margin assumption as you look through the rest of 'twenty three.
Especially what you anticipate gross margins to look like as you ramp volumes and launch new product new product business should we expect that margin percentage to move higher as well. In addition to just the higher GP dollars.
Yes.
Should expect the gross margin percentage to be improving if you cut through the math of what's on that slide 13. It implies that there is improvement in gross margin and one of the main reasons you see that as we're growing into the fixed assets as well because there is depreciation in the gross margin, it's not fully up to scale yet. So by the time you get to Q4, you would expect to see an improvement from that.
15% level Youre calculating.
And then.
Follow up question just quickly did you say youre expecting now slightly higher recoveries. If you just speak to what's driving that and how that aligns with the remaining price execution this year versus what you've already achieved.
Yes look it is it is obvious that those negotiation takes some time.
Last year, we expect that it's not going to take as much time as last year. Since we have a pretty robust framework that was used last year to negotiate the inflationary.
Anyways.
And the negotiations are happening pretty pleased with the pace that it's growing.
Just not happening in Q1, it's going to take Q2, maybe early Q3 to get to.
Where we wanted to be.
I'll leave it there thank you.
We have time for one final question. Your last question comes from Mark Delaney with Goldman Sachs.
Yes, good morning, and thank you very much for taking the questions.
First one sticking on the semiconductor side I was hoping to better understand the flexibility that Borgwarner has as you think about.
For procurement and supporting your customers either in terms of having multiple silicon carbide supply sources or being able to perhaps flex between <unk> and silicon carbide, you know and I ask in part because you guys have made public your announcements and we will speed I think a few weeks ago. When you talked about a slower ramp up of there.
Other Mohawk Valley Fab. So anything you can help us understand around your ability to perhaps de risked from.
From one supplier.
Good thanks for the question, yes, so the.
We have full flexibility from a design standpoint, 400 volts 800 volt silicon silicon calibre very modular.
Is that is clear and we are pretty relevant in all those individual types full flexibility from a manufacturing standpoint also.
Regarding the agreement will speed. This is not an exclusive agreement. So we can get silicon carbide from other sources and we can also work with directed sourcing the OEM wants to us to work with a particular particular silicon carbide maker.
So we feel pretty comfortable about the different level of support and Optionality that we have related to our growth in inverters.
That's very helpful context, and then there was just on the design and environment and you guys have had for a number of quarters that some some good traction in designing and your <unk>.
The powertrain products, given how competitive the market is for Oems in terms of the prices in the market.
Are you seeing any incremental interest from Oems turning to Borgwarner.
For some of your powertrain product sale, perhaps is a way for them to be more efficient in the near term using borgwarner as opposed to maybe trying to do some of their their own work in house.
We're very happy with the cadence of.
Discussions that we have.
Development advanced development and bookings that we have with a lot of customers around the world and that drumbeat is only increasing.
It is absolutely clear that when we produce at a little over $3 million versus in 2025, and $2 3 million voters scale matters and scale brands competitiveness and scale brings the ability to design and manufacture in a very modular and flexible way.
So we are happy with the scale that we've gained pretty rapidly in and what we hear from our customers is that as usual with borgwarner our products solve the forefront of efficiency, we're talking about fuel efficiency, but we're talking about.
In a trance efficiency and low power losses, and I think we're doing a pretty good jump there.
Okay.
With that I'd like to thank you all for your great questions today Brittany.
Today's call.
This does conclude the Borgwarner 2023 first quarter results conference call you may now disconnect.
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