Q2 2023 Borgwarner Inc Earnings Call
It's been off.
Reflected as discontinued operations.
Our guidance relates to our continuing operations and our commentary on todays call will focus on those continuing operations, which includes looking at some of the results on a pro forma basis to reflect the spinoff.
We will not answer questions related to the performance of the fuel systems and aftermarket segments.
Please direct them to Affinia, who will conduct their earnings call on Monday August 7th.
Please note that we've posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during the discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good day everyone.
Very pleased to share our results for the second quarter of 2023 and provide an overall company update starting on slide five.
Due to approximately $3 $7 billion in sales, we delivered 22% organic growth in the quarter.
Our margin performance was strong and positively impacted by the level and by customer pricing.
Our free cash flow usage in the quarter, reflecting our planned capital spending to support our E product growth as well as the working capital usage.
Importantly, our challenging forward progress continues on multiple fronts.
We received several new product awards since our last earnings report.
As well as securing an additional long term component supply agreement.
In June we unveiled challenging forward 2027, which summarized the next steps in our accelerating E product portfolio.
We also released our 2023 sustainability report, which highlighted the progress we've made towards meeting our environmental stewardship, social responsibility and governance objectives and outlined additional goals for 2023 and beyond.
We announced the planned acquisition of the electric and hybrid segments of <unk> Corporation.
Lastly on July 3rd we completed the spinoff of <unk>.
I would like to wish to financing good luck as they move forward as an independent company.
Now, let's turn to slide six summarizing charging forward 2027, which we unveiled at our Investor day back in June .
Pausing full of 2027 builds on the success that we've had with our installed charging forward strategy that we announced back in March 2021.
Bouncing forward 2027 asset three pillars.
The first pillar is to continue our E products growth.
We're expecting more than $10 billion of E product revenue in 2027 compared to an estimated two three to $2 4 billion in 2023, and an estimated $5 6 billion in 2025.
This 10 billion target for <unk> product was the size of the overall company in 2019.
So this gives you an idea of how purposefully we're moving.
Second pillar is E products profitability.
We continue to move towards breaking even on those products by the end of this year.
On the challenging forward slide 27, we set a target of 7% adjusted operating margin in 2027.
Our way to double digit margins later in the decade.
The third pillar relates to our foundational products that remain after the spinoff of Affinia here, we want to maintain our strong top quartile margins and really maximize the value of those foundational products.
Is three pillar are simple.
Our clear and measurable.
As in the past, we will update you on our progress over time.
On slide seven.
I would like to discuss the planned acquisition of the electric and hybrid segment of Agile Corporation, which was announced in late June .
We believe <unk> portfolio of high voltage boxes.
<unk> charges will be a great complement to Borgwarner E propulsion portfolio, particularly as it relates to expanding in high voltage power electronics beyond the inverters.
Relative to our charging forward 2027 targets, we expect the acquisition to generate about 250 million euros in additional 2027 sales after synergies.
The acquisition is as much about the portfolio and engineering capabilities as it is about short term projected sales.
We expect the LDR acquisition to augment our existing resources with additional scale capacity and capabilities with more than 100 engineers, two facilities and more than 125 million euros of R&D investments.
It has been deployed by <unk> over the last five years.
We estimate that power electronics outside of Inverters is a $31 billion addressable market by 2030.
Unbilled chartered market is more fragmented and is trending towards high voltage and combination Boston.
Until this point Borgwarner success in Inverters as largely consumed our power electronics engineering resources.
<unk> experienced engineering team will now provide the base.
For borgwarner to grow even faster and onboard charges and other polyclinics.
We will build upon the strong base to accelerate our program pursuits.
Next on slide eight.
Look at the long term agreement that we announced with <unk> during the quarter.
The resiliency and flexibility of our supply base will become even more important as we rapidly grow our product portfolio.
Based on the growth of our power electronics products, we expect to purchase close to 200 million semi conductor days annually by 2027.
By the same year, our Inverters business is expected to be 70% silicon carbide based with almost 50% of our inverters being 800 volts.
This really highlights the need to partner with quality semiconductor suppliers.
Over the last quarters, we've taken several steps to secure the long term supply agreements necessary to support our growth.
In late 2022, we announced a significant capacity corridor for silicon carbide supply with won't speed.
We're now extending our strategy collaborations full silicon carbide with on semi.
As a result, we have agreements to date you can see the strong mix of semiconductor suppliers. We now have in place to support our strong growth.
Now, let's look at some new product awards on slide nine.
First borgwarner has been selected by a leading Chinese OEM to supply ADM for hybrid vehicles expected to start production in 2024.
But provided.
M comprises jewel in Virtu units dual E Motors, and then aeaea, ensuring reliable durability.
We're pleased to continue our collaboration with this leading Chinese OEM.
Further strengthening the partnership through supplying our IBM product.
Next Borgwarner has been selected by a major East Asia East Asia, and OEM to supply E motor and inverter for the automakers New electric vehicle platform very pleased to continue our longstanding relationship with this major East Asian OEM.
And finally <unk>.
<unk> secured a contract with a third law and energy management solution supplier to deliver high voltage coolant eases.
For us on a series of three electric vehicle platforms for a major OEM.
Our heater will be added to the suppliers heating and cooling module and will be used to provide heat to the battery pack and Kevin in bps.
The takeaways from today all of this.
Borgwarner second quarter results were strong.
We delivered strong organic growth and margin performance.
We expect another year of strong top line growth in 2023.
Our top line guidance is also increasing modestly based on our industry outlook and customer pricing actions.
Looking beyond the near term we believe we are successfully executing on our long term strategy.
Challenging forward Slide 27, it's now laid out the path forward for Borgwarner over the next four years and we plan to continue to share our successes along this journey and with that let me turn the call over to Kevin.
Thank you Brad and good morning, everyone.
Here are the two key takeaways from our second quarter financial results.
First we reported double digit organic revenue growth driven by higher industry production and outgrowth in Europe and China.
Second our margin performance was strong driven by solid conversion on higher revenue and customer recoveries of material cost inflation more than offsetting higher input costs coming from our suppliers.
Let's turn to slide 10 for a look at our year over year revenue walk for Q2.
Pro forma for the spinoff Affinia last year's Q2 revenue was just over $3 billion.
You can see that the strengthening U S dollar drove a year over year decrease in revenue of approximately 1% or $33 million.
Then you can see the increase in our organic revenue about 22% year over year.
That compares to an approximately 15% increase in weighted average market production.
Finally, the acquisition of the SaaS Hauke, Robert and FSC added $18 million to revenue year over year.
The sum of all of this was just under $3 $7 billion of revenue in Q2.
Turning to slide 11, you can see our earnings and cash flow performance for the quarter.
Our pro forma second quarter, adjusted operating income was $369 million equating to a 10, 1% margin.
That compares to pro forma adjusted operating income of $258 million or eight 5% from a year ago.
On a comparable basis, excluding the impact of foreign exchange and the impact of M&A adjusted operating income increased $126 million and $667 million of higher sales.
The biggest positive driver of this performance was that we converted at approximately 18% on our additional sales.
In addition, our customer recoveries in the second quarter net of material cost inflation from our suppliers were an $11 million tailwind year over year.
You'll recall that last quarter, we were incurring supplier cost inflation with very little in the way of customer recoveries to offset that headwind.
In Q2, we negotiated a number of settlements with our customers the contemplated recoveries of material cost inflation for both Q2 and Q1.
Because we essentially under recovered inflation in Q1 and over recovered in Q2, when you think about the jump off for our go forward margin performance you should really be looking at the total first half performance not any individual quarter.
Pro forma for the spinoff of <unk>, our adjusted EPS improved by 31 cents compared to a year ago, driven almost entirely by the increase in our adjusted operating income.
Turning to free cash flow, excluding one time spent.
Our free cash flow was $42 million usage during the second quarter due to higher capital spending to support our growth in <unk> products.
And increased working capital related to our sequentially, increasing revenue and the customer recoveries that we booked late in the quarter, but have not yet collected.
Now, let's take a look at our full year outlook on slide 12.
First as Pat mentioned, our full year guidance now reflects the spinoff affinia and treats the prior period results of those particular segments as discontinued operations.
Which importantly is not reflected in many of the external estimates within the street consensus.
Starting with foreign currencies, our guidance now assumes an expected full year headwind from weaker currencies of $35 million.
This is a headwind of $111 million in revenue versus our prior guidance with the Chinese one being the largest driver of the change in our outlook.
Second we expect organic growth of approximately 13% to 16% year over year compared to our prior guidance of 10% to 15%.
The increase is driven predominantly by our higher production outlook, reflecting the stronger first half volumes.
However, our assumption for inflation cost recoveries from our customers is also increased modestly.
As it relates to product revenue, we are expecting to deliver between two three and $2 4 billion in 2023, which is up from the approximately $1 $5 billion, we generated in 2022.
As you can see we've adjusted the high end of this outlook versus our prior guidance primarily related to two things.
First we're experiencing a slower than anticipated ramp up in our battery pack production.
Demand for our commercial vehicle battery pack is increasing rapidly however, our capacity installation to support that demand has progressed a little more slowly in 2023 than we planned.
Second we're currently seeing lower customer volumes on our North American EV program that is already in production.
Finally, the <unk> rhombus, an SSC acquisitions are expected to add approximately $75 million to 2023 revenue.
Based on these expectations, we are projecting total 2023 revenue in the range of $14 2 million to $14 6 billion.
Which compares to our prior guidance of $14 zero to $14 6 billion.
Let's switch to margin.
We continue to expect our full year adjusted operating margin to be in the range of nine 2% to nine 6%, which compares to our 2022 margin of nine 4%.
Looking at the net impact of inflationary costs versus customer recoveries. Our current expectations are that the net year over year impact of material cost inflation on full year margin is likely to be a 10 to 20 basis point headwind.
As it relates to R&D, our full year 2023 guidance continues to anticipate a $60 million to $70 million increase in E product related R&D.
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 planned increase any product related R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid teens.
Based on this revenue and margin outlook, we're expecting full year adjusted EPS from continuing operations in the range of $3 50 to $3 85 per diluted share.
Turning to free cash flow, we continue to expect that we'll deliver free cash flow from continuing operations in the range of $400 million to $500 million for the full year, excluding approximately $150 million in onetime cash costs related to the spinoff affinia.
That's our 2023 outlook.
Turning to slide 13, you can see an update for our E propulsion segment.
We were pleased with the sequential improvement in second quarter revenue as compared to the first quarter.
The improved margins you see on the slide benefited from that higher revenue.
Absolutely flat E R&D sequentially, and second quarter customer recoveries of first half material cost inflation from suppliers.
Despite a modestly lower full year revenue outlook for our E. Propulsion segment, we continue to expect a slightly positive segment margin in Q4.
E propulsion second half revenue growth is heavily weighted towards program launches and volume ramp up in the Chinese market.
As you can see on the right side of the slide our Chinese any of the customer base is quite diverse as we supply many of the leading any of the manufacturers in the country.
This customer diversity is a critical element of why we believe will ultimately be successful in the world of electrification and.
And it doesn't apply only to China.
At Borgwarner, we currently have E product business with seven of the 10 largest global light vehicle manufacturers of electric vehicles and high voltage plug in hybrids.
So let me summarize my financial remarks.
Overall, our second quarter financial results were strong we achieved organic growth of approximately 22% year over year.
We generated a 10, 1% adjusted operating margin based on a 19% all in conversion on incremental revenue.
And we delivered strong revenue growth year over year and bottom line adjusted EPS.
As we look ahead to the second half of 2023 and beyond we continue to expect to deliver strong organic growth to drive improved profitability in our <unk> products as we leverage our topline growth and to continue to make the necessary investments to support the long term profitable growth of our <unk> product portfolio.
With that I'd like to turn the call back over to Pat.
Yeah.
You'll see we're ready to open up for questions.
Yes.
At this time I would like to remind everyone. If you would like to ask a question press star.
One on <unk> Telekom keypad.
Thank you you are using a speakerphone please pick up the handset before asking your question.
In the interest of time, please limit yourself to one question and one follow up question.
Well pause for just a moment to compile the Q&A roster.
Your first question comes from Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my questions.
Any color how should we think why the second half.
You imply based on guidance a bit of moderation in margin I think you're sort of running at 96 in the first half.
I think to get to the midpoint of guidance you'd be more like nine two in the second half on what should be slightly higher sales.
Any factors that are driving that weakness are you, including some risk from UAW strike in the second half any color there.
Yes, I think you have the numbers right there Colin it's 96 in the first half and the midpoint of the guide is about 92 in the second half of the year. The biggest things that are happening if you're really looking sequentially like on a first half second half basis.
One is you have to look at the mix of our revenue as we go to the second half of the year. Our E products revenue is ramping up and our guide about $450 million to $550 million first half to second half and so we're converting on that nicely at about 15% on an all in basis.
Which is good for our business that can really ramping up and including the coffee would normally expect for startup of production.
At the same time when you look at our revenue keep in mind, our sequential outlook is that markets are effectively down first half the second half about 6%.
Not unusual its just the way that our market assumptions work, which means that underlying that the rest of our revenue are foundational revenue is seeing a decline in first half the second half and that tends to come with higher decrementals. So when you look at that revenue mix going first half the second half that's a bit of a drag on the margin that takes it down a bit there is also a little bit of incremental <unk>.
<unk> first half the second half a little bit of incremental R&D, but thats really the overall picture, but bottom line from our perspective, we're pretty pleased with the fact that we're driving 13% to 16% full year organic growth year over year, and sustaining that 90% to 96 margin outlook.
Got it and any UAW in the second half risk there or is that sort of guidance.
We haven't put anything in the guidance I mean, it's hard for us to sit here and guess what the crystal ball what that might look like what I can tell you is just so you can dimension may be your assessment of the exposure that we have if we look at our north American exposure to forged Atlantis and GM across Mexico, and U S. As we supply them.
Our production runs about little less than $250 million a month. So you can look at that however, you want in terms of assessing what you think some scenarios might be but we haven't embedded anything in our guidance as it relates to potential.
Strike.
Got it and just lastly.
You highlighted some slowing demand for at least one of your products.
One of your <unk> products.
Obviously, there are some concerns from automakers about UV adoptions flowing and I think at your Investor Day, you talked sort of longer term sort of being de risked on the sort of sales versus margin.
But how should we think about that near term if <unk> starts to flow into already doesn't see the high adoption for next year does that put pressure on your overall profitability. How should we think about the puts and takes on sort of potential slowing.
And packaging.
So we've adjusted the topline two main reasons.
First is we have issues keeping up with the demand on battery pack and despite a 50% year over year increase on our <unk> fleet that we need more output. So.
We have all hands on deck, especially from a manufacturing engineering perspective, and remember 1000 buses or trucks is $100 million revenue for Borgwarner.
Also we see the production of the current North American EV.
Output not as high as expected those are the two main the two main factors.
<unk> question is around does it change to our long term outlook our answer is absolutely not.
It's not going to be a steady up nine right.
<unk>.
It is going to be with.
Yields or quarters going higher and some going.
I am still going to grow.
But don't expect the strike <unk> from them from a from a.
<unk> high voltage plug in hybrid growth.
Got it alright, thanks for taking my question.
Mhm.
Your next question will come from John Murphy with Bank of America.
Good morning, guys I just wanted to follow up on that question Colin was asking.
Do you think about this in the short run Evs are ramping a little bit slower.
Than folks were expecting still ramping so like the long term strategy still make obviously makes sense, but I mean could this benefit margins.
Here in the short run and as those Evs arent producing more ice vehicles are produced and Youre getting better margins. There. Just curious you know in the next one two years, if that might drive better cash flow and help reinvest into that transition to the future.
What John what I can tell you is that we see strong customer pool.
We see a very steady drumbeat on product wins globally.
And remember we're both.
Then on.
Hybrids, and especially the high voltage plug in hybrids, but I would agree with you. This in <unk> and in fact is the importance of maintaining strong margin on our foundational business and Thats. The third pillar of challenging full in 2027.
So that's what I would tell you.
Okay, and then just a follow up on the on semi.
Announcement I'm just curious what this means for the Wolf B deal.
Or is this really just dual sourcing that might even go to triple sourcing over time as this sort of just standard course or is there something specifically youre getting Adam on semi you wouldn't get it it will speed or disposables re deal at risk I mean, how should we interpret all of this.
It's all about supply chain resiliency, we're happy with the world speed capacity corridor, and we will see these are launching silicon carbide supplier.
Putting in place additional agreements, it's all about security and supply chain resiliency.
Okay, great. Thank you very much guys.
Thank you John .
Your next question will come from Noah Kaye with Oppenheimer.
Thanks for taking the questions I appreciate all the reconciliation details for the Affinia spin can you just update us on where net leverage actually fits post spin and how much dry powder you have in your view for M&A.
Yes.
I'd say as you can see some of the metrics, we have as of quarter end, but the one thing that doesn't get reflected in the quarter end numbers is that when we executed the spin off there was an inflow of cash the borgwarner. So effectively on July 3rd of about $450 million and that was because <unk> issued $800 million of debt and then retained.
About $360 million for its cash balances are made at the respect that borgwarner. So when you look at our balance sheet you can see with the balance sheet looks like and you have to think theres another $450 million out there from our perspective the way we think about our leverage profile is we will continue to manage that in a way that we drive toward keeping below two times on a.
Gross debt to EBITDA basis, and we will look at.
Whatever actions, we might need to take over the coming quarters to get there, but I think overall what it means is it doesn't slow down our ability to execute from an M&A perspective, opportunistically as we think the opportunities that might be able to help strengthen our product leadership position in electrification.
And a follow up to that I mean, good commentary on al Dor.
You've done quite a lot of M&A over last year and change, but just give us a view of the pipeline now and there.
There have been some comments on this call and others around.
What the puts and takes of the slower than expected EV adoption rate might mean for industry curious to know how that might be impacting the pipeline in terms of potential candidates for acquisition.
No we continue to look at opportunities.
In a very disciplined way as we've done in the past I think with the portfolio that we have.
If those opportunities and strengthen.
Vacation capabilities and accelerate the transition we will look at them again in a very disciplined way.
Okay. Okay, maybe just one more you mentioned.
The pace of battery production ramp.
Again very high growth so.
It's not necessarily getting to the full level you expected, but can you help characterize that.
I don't believe Seneca expansion was factored in that right now.
And until next year. So what are the gating factors is it labor is it process equipment.
Cathode or other materials.
Trying to understand the gating factors on production.
It is equipment it is related to manufacturing equipment.
Take us about 18 to 24 months to get to the 2027 capacity that is required the announced about $1 3 billion dollar revenue and battery packs in 2027, and we working on ramping that up as fast as we can for all our customers, especially in the west.
In the world.
Very clear thanks.
Thanks, Brett.
Thank you.
Your next question will come from Emmanuel Rosner with Deutsche Bank.
Alright, Thank you very much.
My first question is on the E.
The propulsion margin progression for Gucci, CEO with sequential improvement as well as your confidence in getting to slight positive margins in the first quarter.
Will that benefit.
From timing Eagle or recoveries in the fourth quarter or can we think about it.
It's.
Sort of like a solid exit rate on which to build further progress in 2024.
Yes, I mean, the way we're looking at it is is achieving that breakeven is actually positive margin at the end of the fourth quarter is a solid jump off into 2024.
Remember, we talked about it before if you look at our quarter end Q4, 2022 E propulsion was actually slightly positive, but we know is on the back largely of AV increased recoveries from an R&D perspective, and so at that moment. It wasn't really a sustained positive margin profile as we get to the end of this year.
And achieve that positive margin profile, it's more because of the scale that we're generating in the business and the conversion on that incremental revenue. So I think it positions us to have a.
2024, that's also positive and growing from there.
That's very clear.
And then.
One follow up on the NIM.
The small change in the full year guidance. So the organic growth is.
Outlook is somewhat better thanks to better production, but then you left your operating margin range essentially unchanged with now Suezmax and most of the puts and takes.
Yes, I mean, we didn't we didn't move the upper end of the range. Obviously, we kept the $14 $6 billion of revenue. So we didn't really move much there we do have a little bit of incremental conversion coming on the increase at the bottom end of the range.
But theres not a significant amount of move into really comment also on a nine 2% margin at the bottom end of our range held I mean, if youre looking at it from a pure operating income perspective, you've got a little bit of incremental conversion and then you have a little bit of FX headwind, that's impacting us as well.
Thank you.
Your next question will come from Luke Young with Baird.
Yeah. Good morning, Thanks for taking the question.
Fred for starters, just be great to get your perspective on the competitive landscape for power electronics outside of Inverters. If you could just talk about the fragmentation you see right now and the level of synergy that you would expect or even that customers have told you with the fact that youre already a major player in inverter and bringing that to.
Things like onboard charger and other related products. Thank you.
Luke will or what we're doing with inverters with onboard charges with EC <unk> <unk> and.
Also.
From a charging perspective is power conversion.
You can convert DC to AC to DC DC to DC, but at the end of the day the Glorious power conversion so the synergies from.
And engineering.
Active a purchasing perspective and a product similarity perspective is fairly high.
Okay. Thank you for that and then for my follow up just wondering if you could comment or could comment on what the geographic mix of product revenue looks like sitting here in 2023, I guess I'm thinking of.
Of the downside risks.
Customer delays in North America, which showed up in the revisions numbers. This morning relative to China, pushing higher in the back half of the year. How should we just think about that mix between I guess broadly North America, Europe , and China and a product. Thank you.
Yes, I would say, what we're really seeing it particularly as you look at that $450 million to $550 million of ramp up going first half the second half in <unk> products.
An important important piece of that ramp up is really coming in the E propulsion segment, which is really being driven by product.
Product launches and ramp up in China. So we have a healthy mix of product revenue across the globe, but as we ramp up here in the back half of 2023, China is a big piece of that ramp up.
Got it thank you.
Your next question will come from Dan Levy with Barclays.
Okay.
Hi, Good morning, Thank you for taking the questions.
One of the first.
Start with a question on your growth dynamics and I know you have.
I've walked away from providing an explicit growth over market target, but the implied number for the year, it's 9% to 12% you just did 7% in the second quarter. So.
If you could maybe just give us a sense of what's driving acceleration.
And to the back half of the year it sounds like part of it is <unk>.
<unk>.
But to what extent is it also that you are seeing further.
<unk> on the foundational business.
You then youre right.
At the midpoint our growth our growth is a 1000 basis points.
60 basis points.
It's driven by your product.
It's a significant driver for these algorithms that actually the second half is even higher than the first half.
2021 was also well.
Above about one basis points outgrowth.
It's difficult to time it.
Customer pricing played also enroll in a full year basis, 11 70 basis points.
Since this is what I will tell you in the products plays significant role in this and and you see you can see that also.
And second half.
And the foundational business is that is that playing enable here or this is purely driven by E product.
I mean, the foundational business is continuing to outperform overall is low but but the biggest driver of why the second half was so much stronger than the first half. If you do the math of what's underlying outgrowth, if that $450 million to $550 million increase sequentially first half the second half any products revenue may keep in mind.
We're making that that's what we're expecting when sequentially. If you look at it that way markets were actually down globally during that period, but revenue any products is up $450 to $5 50, So it's a big driver of alcohol.
Okay, great. Thank you and then.
As a follow up Relatedly I was wondering if you could just talk about your hybrid business.
Within the foundational piece we heard.
Last week from.
One of your large customers.
<unk> efforts.
Accelerate hybrid.
Outside of the plug in hybrid so maybe you can give us a sense for the latest that you're hearing on the high grade within the foundational piece, how accretive that is CPD.
All accretive at the margin, but maybe if you could just frame within foundational how large it is today.
Okay.
I don't think we've disclosed that.
What we've disclosed is 120 billion of hybrid in 2025 on the east side.
And on the foundation on say that we've come off that would come on top.
Most of the next generation of current generation I voltage plug in hybrids that make a difference from <unk>.
Meeting the regulatory environment, especially.
Especially in Europe and in China.
Do carry turbos do Gary G on other products that.
We're making so.
It is it is an important part and we've always told you that the products that we retained play a key role into the growth of.
Of hybrid, especially in the high voltage plug in hybrids, which are part of the <unk> environment in China.
So.
The extended range EV.
Is that somewhere where you play.
Meaning the non program.
Replay replays all kinds of Emirates, we play more in high voltage plug in hybrid hybrid which are making a big difference from a from a.
Cute efficiency overall fuel efficiency standpoint, but we do play into what we call range extend those whether you call those types of powertrain.
Thank you.
As a reminder of that.
One last quick question.
And your next question will come from Rod Lache with Wolfe Research.
Good morning, everybody.
Good morning.
Wanted to ask maybe.
Maybe just two.
Strategic questions one is.
A week ago, we saw platform sharing agreement between Volkswagen and Xiaopeng I know that shop hang is a significant customer of yours.
The lantus on their earnings call talked about countering the Chinese invasion of Europe , with better utilization of low cost country sourcing.
Was hoping you might just.
It's relevant to talk about weather.
Significant.
For Borgwarner, whether you see this as a global or a local phenomenon.
Just the utilization of these Chinese lower cost Chinese platforms, whether that.
That actually has implications for you.
Rob one of the key element of the strategy was to scale of SaaS and I think we've done a pretty good job and we've done a pretty good job in Shanghai and see what producing the products for the BYD Shanghai into cherries.
Expanding legal tools, great wall extent royalties will.
And.
This.
We will also begin North America, and Europe , and I'm not going to comment more but this thing is going to be I think.
Beneficial for suppliers that have technology and scale, which I believe we are part of.
So just to clarify that.
Fred.
These kinds of platform sharing agreements does that represent an expansion.
Of your existing business or is it.
Does it have no effect on you and is it kind of a global thing or is this more of a China local thing.
I think.
That always in the detail in your question Rod It depends on the platform and I don't think we have.
Yes.
The granularity of what will happen across those different Oems from the platform sharing standpoint.
We'll let you know if we can and when we can.
Okay.
And then just maybe at a high level just given all the focus on UAW discussions now just taking a step back how are you thinking about the implications of higher labor costs for these Oems.
Do you see that is.
As a net positive from a from an outsourcing perspective over time or is it.
Kind of unclear because Oems ultimately have to commit to.
Greater Union labor utilization.
But I'm not going to comment on this topic.
Okay alright, thank you.
Our last question will come from James Picariello with BNP Paribas.
Hi, guys.
Can you just confirm what the net commodities impact was in the quarter and what you're baking into the full year and then also with respect to the new slate of our restructuring efforts that you outlined at the analyst day targeting $60 million to $70 million savings by 2025 tied to erase operations is.
Is there anything hitting in the second half here. Thanks.
Yeah.
Yeah with respect to the commodity impact in Q2.
Net when you take pricing minus the net material inflation costs coming from the suppliers. There was a net positive about $11 million in the quarter and remember that's because in Q2, we were recovering for Q1 as well because we had very little in the way of recoveries in Q1. So thats why it was a net positive number in Q2 and overall.
All the pricing element to that in Q2 was a little bit north of two 5% of our revenue. So obviously it had a meaningful impact on the quarter and contributed about 10 basis points to margin when you cut through that math. When you look on a full year basis, we expect pricing the pricing side of the equation to be somewhere.
Between one five to two points.
Pricing all in year over year, and we expect the net impact on our P&L to be at 10% to 20 basis point headwind all in year over year. So thats the way to think about net material inflation cost impacts.
Us.
In terms of the restructuring there is nothing unusual as you look in the back half of the year, we're progressing along that trajectory of what we laid out in the in the June Investor day, and generating some of the savings each quarter. This year associated with what we laid out on that slide.
Got it and then just a high level question.
Some acres begin to slow down their <unk> ambitions in some fashion over the coming years, whether it's demand related or production constraint I don't imagine borgwarner is seeing any change in OEM intentions as of now.
But if this does play out with the simple response to be for the company to flex R&D spend.
Could this entail.
<unk> and inefficiencies down the road for Borgwarner.
Curious on your high level thoughts here on the topic.
Gaining some traction that's all thanks.
The first thing I would tell you that we play as a global player.
<unk> seen the impact that we have in China, Europe , and North America. So we looked at the acceleration of EV and <unk>.
Vacation overall on the global scale on a global scale, we see momentum again. If you think this is going to be a straight line I think it's a wrong assumption.
And we're ready to flex.
<unk> already.
To maintain strong margins on our foundational business, which is absolutely part of.
One of the three simple pillars of charging forward and this is this is going to be important no matter what.
And maybe the last thing I would add to that change that's why we laid out the scenarios at Investor day with like we did is because.
While we have our expectations on how the market is going to evolve over the coming years and we're marching towards that we recognized that there could be some.
Final upside to the market's growing an additional downside to that and Thats why as you look at the portfolio and the way we've constructed its resilience on any of these scenarios and drives operating income performance that we think is relatively comparable under lots of different outcomes like that so thats why the portfolio is constructed the way it is.
Thank you.
With that I'd like to thank you all for your great questions. Today. If you have any follow ups feel free to reach out to me or my team.
With that Chelsea you can go ahead.
Today's call.
Thank you ladies and gentlemen, this does conclude the Borgwarner 2023 second quarter results conference call.
You may now disconnect.
Hum.
Hum.
Hmm.
Hmm.
Oh.
Mhm.
No.
Sure.