Q3 2023 Borgwarner Inc Earnings Call
When you hear us say on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
When you hear us say adjusted that means excluding non comparable items.
When you hear us say organic that means excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market. When you hear us say market that means the change in light and commercial vehicle production weighted for our geographic exposure.
Please note that we've posted today's earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion.
With that I'm happy to turn the call over to Fred.
Thank you Pat and good day everyone.
We're pleased to share our results for the third quarter of 2023 and provide an overall company update starting on slide five.
With approximately $3 $6 billion in sales, we delivered double digit organic growth in the quarter.
Our margin performance was strong.
Our free cash flow was modestly positive in the quarter, which we believe sets us up nicely to deliver on our full year cash flow outlook.
Our challenging forward progress continued on multiple fronts.
As I will discuss in a moment.
Long term scope, one two and three emissions targets were validated by the science based target initiative.
<unk>.
We secured multiple new product awards during the quarter.
I'm encouraged to see these awards across several parts of our portfolio both for beds.
And for several types of the hybrid architectures.
I continue to be impressed by the sourcing pool.
For our products and the strength of our EV and hybrid portfolio globally.
Borgwarner continues to focus on the long term growth opportunities in our <unk> products.
We remain encouraged by the high intensity of the new business quoting activities. In spite of the fact that we're seeing some near term pressures on the industry production ramp up of electrified vehicles.
Gaining scale now and growing profitably on EV and hybrid architectures globally is our strategy and this remains unchanged.
We're proud to be in production all launching E product for seven out of the 10, leading Oems in the electrification area as well as several other Oems outside this top 10.
Now, let's turn to slide six which summarizes our commitments to reduce emissions through the end of the decade.
Building on our previous commitments to achieve carbon neutrality by 2035 late last year, we submitted scope, one two and three targets <unk> BTA.
In August <unk> validated those targets.
Which we have committed to reduce scope, one and two emissions, 85% by 2030 and scope, 325% also by 2030.
For wireless charging forward strategy is expected to play a pivotal role in reducing scope three emissions.
As the portfolio shifts.
<unk> our E mobility products.
We will also focus on how we design and purchase those products and components.
From a design perspective, we're extending our circularity efforts and placing a greater emphasis on late waiting.
Within the supply chain.
One is working to enhance our green material sourcing and supply of contribution to our goals.
We're proud to have our targets validated <unk> as it affirms the direction, we are headed and.
And the positive impact, we're making in furthering our vision of a clean energy efficient world.
Now, let's look at some new E product awards on slide seven.
First borgwarner will supply a bi directional 800 volt onboard charger.
Two a major north American OEM.
This onboard charger, we'd be on premium passenger count best platforms.
With an expected <unk> in early 2027.
The technology Leverages Borgwarner silicon carbide power switches for improved efficiency and delivers superior power density and safety compliance.
This is a big accomplishment for the Borgwarner team highlighting our first major E product win with this OEM and also.
Our first onboard charger win in North America.
Second at the IAA in September we disclosed that Borgwarner will supply silicon carbide in buses for Volvo counts next generation electric vehicles.
Next.
Borgwarner entered into an agreement with a major global OEM to supply its 400 volt high voltage coolant heaters for the automakers European light vehicle program.
We anticipate the start of production in 2026.
This business win marks the second recent contract secured with these global OEM over the course of just a few months with wins spanning different regions.
Yes.
Finally.
Premium European OEM has awarded <unk>, a program to supply our combined inverter and DC DC converter for use in the customers all wheel drive B and C segment hybrid applications.
Production of this program is expected to start in 2025.
By combining the involuntary and convert the elements, we can manage both the electric drive and the accessories system of an electrified vehicle in this case the hybrid.
In a lighter smaller and more cost effective package.
Our knowledge scale and production experienced on Inverters DC DC converters in unbilled charges, or what I would call power conversion technology.
Is a key enabler for borgwarner to be adding value to our customers by combining these technologies into efficient system packages.
Now, let's touch on our E product sales outlook on slide eight.
Today, we are reducing our 2023 E product sales outlook by about $300 million.
The two largest drivers of the adjustments.
Lounge delays and forecasted slower volume ramp ups from customers.
We now expect E product sales to increase about 40% year over year.
As we have seen this continuing near term pressures on electrified vehicle production in the marketplace.
We have taken the opportunity to reassess what that might mean looking out over the next few years.
Looking through that lens.
We do believe this has the potential to impact industry wide new energy vehicle production over the next couple of years.
As such we now expect our E product sales to be in the range of four $5 billion to $5 billion in.
In 2025.
As we have looked at the situation program by program.
It is our view that the headwinds we are seeing are likely to be short to mid term in nature.
As we look further out.
Continue to believe that the long term trends towards electrification remains strong.
That is why our view of overall industry penetration of electrified propulsion is unchanged looking out to 2027.
I would make the following three additional observations.
First.
We have seen no meaningful changes in the world or quoting activity from our customers.
We continue to secure new business awards that are very much supportive.
Of our long term revenue objectives.
The pace of new business development as not slow.
Second.
Our estimated midterm exposure to E product customers and regions is well diversified.
And so we are in the early stages of fee product revenue growth in 2023.
Borgwarner does tend to be currently more exposed to a handful of important announces and ramp ups of customer products, particularly in China.
As we look further out and announced many additional programs over the next two years.
We expect to benefit from more diversity in the portfolio.
Our 2027 E product revenue expectations are fairly balanced across customers.
Across regions.
As well as across vehicles sizes.
Third we believe our long term profitability objectives are still intact.
As we've told you previously the biggest driver of our improving E product profitability is our ability to leverage through rapidly increasing scale of the business.
Since that ramp up is not happening as quickly as we previously anticipated.
The path to our E propulsion segments, achieving breakeven margin is slightly delayed.
As we look at next year.
We will assess what if any actions are necessary to appropriately balance nearer term margins relative to our long term objectives.
Regardless.
Breakeven margins remain insights.
Our 2027 outlook remains unchanged.
Both from a revenue perspective, and a profitability perspective.
The takeaways from today all of this.
Paul Walnuts third quarter results were strong.
We delivered strong organic growth and.
And margin performance.
As we wrap up 2023, we expect to finish with another year of strong top line growth.
Quartile margins and solid free cash flow generation.
As we look at our charging forward strategy, which is focused on accuracy really positioned the company to win in the world of electrification, we do see some near term industry wide challenges that we will manage through.
We remain convinced in the long term prospects for electrification and believe we're successfully executive on our strategy in that regard.
I have stated are multiple locations.
The industry growth in Bev hybrid will not be a straight line.
The near term volatility while frustrating is not entirely surprising given the magnitude of the industry shifts.
As we highlighted in our Investor day in June and.
And as you can see evidenced in our Q3 results and full year guidance, we believe that we have structured.
Our our portfolio to be resilient.
And to deliver strong earnings.
On the wide range of Bev and hybrid penetration scenarios.
That is true today, and we fully expect that this will also be true going forward.
With that I will turn the call over to Kevin.
Thank you Brad and good morning, everyone.
Let's dive right into the third quarter results by turning to slide nine where you can see our year over year revenue walk.
Last year's Q3 revenue from continuing operations was just over $3 2 billion.
You can see that the weakening U S dollar drove a year over year increase in revenue of approximately 1% for $44 million.
Then you can see the angry and our organic revenue close to 11% year over year.
We're particularly pleased that as we look at this growth, it's being driven by E product related growth across all major geographies in which we operate.
Finally, the acquisitions of Rambus, and SFC added $8 million to revenue year over year.
The sum of all of this was just over $3 $6 billion of revenue in Q3.
Turning to slide 10, you can see our earnings and cash flow performance for the quarter.
Our third quarter, adjusted operating income of $349 million equating to a nine 6% margin.
That compares to adjusted operating income for continuing operations of $305 million or nine 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 $46 million on $344 million of higher sales.
This performance.
<unk> includes a planned E product related R&D increase of $13 million.
Excluding this higher R&D investment, we converted at approximately 17% on our additional sales.
As it relates to customer recoveries of inflationary cost impacts.
We were able to finalize full year agreements during the third quarter with nearly all of our major customers.
Those third quarter customer recoveries net of material cost inflation from our suppliers did not have a significant year over year impact on our adjusted earnings.
Our adjusted EPS from continuing operations improved by 18 compared to a year ago.
The increase in our adjusted operating income and lower effective tax rate.
Finally free cash flow generation from continuing operations was $36 million during the third quarter.
Okay.
Now, let's take a look at our full year outlook on slide 11.
Our guidance now assumes that weaker foreign currencies will reduce revenue by $110 million in 2023.
This is a headwind of $75 million in revenue versus our prior guidance with the Chinese one and the euro being the largest drivers of the change in our outlook.
Second we expect organic growth of approximately 12% to 14% year over year compared to our prior guidance of 12% to 15%.
The narrowing of this outlook incorporates both an increasing industry production outlook as well as our updated outlook for E product revenue.
As Fred mentioned earlier, we're now expecting E product revenue of between 2.0 and $2 $1 billion in 2023.
Which is up from the approximately $1 $5 billion, we generated in 2022, but that's down from our prior guidance of two three to $2 4 billion.
That decline is due to a number of customer programs that include our E propulsion products experiencing launch delays are ramping up more slowly.
Finally, the Sandra Rhombus, and FSC acquisitions are expected to add approximately $63 million to 2023 revenue.
Based on these expectations, we're projecting total 2023 revenue in the range of 14, 1% to $14 $3 billion, which compares to our prior guidance of $14 2 million to $14 6 billion.
Let's switch to margin.
We expect our full year adjusted operating margin to be in the range of nine 4% nine 6%.
Which compares to our prior guidance of nine 2% to nine 6%.
Our 2022 margin of nine 3%.
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.
Despite the near term E product revenue headwinds, we continue to see significant New award and quote activity.
Therefore, we're investing in E product related R&D to support those growth opportunities consistent with the plan, we outlined at the beginning of the year.
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 high teens.
Based on this revenue and margin outlook, we're expecting full year adjusted EPS from continuing operations in the range of $3 60.
To $3 80 per diluted share.
Yeah.
Turning to free cash flow, we expect that we will deliver free cash flow from continuing operations in the range of $400 million to $450 million for the full year.
This compares to our prior guidance of $400 million to $500 million.
As we expect capital spending to come in at around $800 million in.
In line with the high end of our prior Capex guidance range.
Our cash flow guidance contemplates a strong Q4, which is normal for us due to seasonality and traditionally strong working capital performance.
But in addition to those typical trends in similar to last year, we expect to collect in Q4, a significant portion of the full year customer inflation recoveries that we've negotiated to date, but have not yet collected.
That's our 2023 outlook.
Turning to slide 12, I wanted to provide an update on the company's overall leverage and liquidity profile.
As you know, we traditionally operated with a gross debt to adjusted EBITDA ratio below 2.0 times, which is where we think the business should operate.
And it's where we were operating leading up to the spinoff affinia.
However, when we executed the spin off of <unk> in early July we lost their adjusted EBITDA to support our debt going forward.
That effectively increased our gross leverage ratio to two three times on a pro forma basis, excluding <unk>.
With that in mind during the third quarter, we use the affinia spinoff proceeds to execute a tender offer for $438 million of our 2025 notes.
By executing the tender offer we were able to reduce the company's gross debt to adjusted EBITDA ratio back down to two times.
With respect to liquidity during the third quarter, we extended the maturity of our Undrawn $2 billion revolving credit facility by five years to September 2028.
We're not only pleased with the fact that we were able to renew the facility. But then we were able to do so with pricing spreads unchanged versus the prior facility.
That speaks to Borgwarner is financial strength.
Both of these transactions were important steps in maintaining the company's strong balance sheet and liquidity position, which gives us confidence in continuing to make the necessary organic and inorganic investments that support our expected future profitable growth.
So let me summarize my financial remarks.
Overall, our third quarter financial results were strong.
We achieved organic growth of close to 11% year over year, we generated nine 6% adjusted operating margin based on a 17% conversion on incremental revenue excluding higher E R&D.
And we delivered strong year over year growth in bottom line adjusted EPS.
As we look beyond 2023, we continue to expect to deliver strong organic growth despite near term volatility in the global energy markets.
To drive improved profitability in our products businesses, as we leverage our topline growth and prudently manage costs.
And to continue to leverage the resiliency in our financial performance and our balance sheet to make the necessary investments to grow long term earnings under a wide range of Bev market scenarios.
With that I'd like to turn the call back over to Pat.
Thank you Kevin.
Leo 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. If you are using a speakerphone. Please pick up the handset before asking your question in.
In the interest of time, please limit yourself to one question and one follow up question.
We'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from Colin Langan with Wells Fargo.
Oh, great. Thanks for taking my question.
If I look at the full year guidance, it implies a pretty low margin or a step down in margins into Q4 around nine 2%.
Anything unusual going on in Q4, driving that weaker margin should be thinking about the.
Run rate into next year or is there something more one off going on in Q4.
No I mean, as we look at it overall, we're pleased with the fact that our margin percentage on a full year basis. We took the bottom end of the guide up and held the top end of the guide. Despite some of the product revenue pressure as you look at it what it implies at the high end of the range as Q4 is right in line with where we've been on a year to date basis at nine 6% and at the bottom end of the range we are.
Seeing effectively a sequential decline in revenue and we're just generating negative conversion on that so I don't think theres anything out of the ordinary on that.
Got it.
And there's obviously a lot of focus in the last couple of weeks off.
You would be delayed.
And I do remember Premier Investor Day, you highlighted I think it was more in the 2030 timeframe that you're somewhat derisked, because if EV penetration was a bit higher you'd have higher sales, but lower margin.
And if it was lower than you would have lower sales, but higher margin dollar wise that might be similar how should we think about that more near term. I mean are you is there a good hedge offset or with all the engineering. That's required ahead of these EV launches that's going to be a bit of a burden if EV volumes or pull back a bit in the near term.
I think youre right the portfolio is resilience and that's exactly why we structured it that way.
And that's what we presented in the capital market day.
And its resilience under a wide range of scenarios.
I think what you see also this year is an example of what happens is going down and actually.
Margin is slightly going up and.
And you see the top line is somehow resilient too. So this is this is absolutely the purpose of the portfolio the way it's laid out.
We have a great portfolio too.
Enable growth in E.
But if you see a slowdown.
The products that we have in combustion saw ongoing to generate.
Proceeds cash and earnings.
Your next question comes from John Murphy with Bank of America.
Good morning, guys, maybe I could follow up on Collyns question in three big time.
Stinker ways.
Slide eight.
Curious why you've taken down $23 25, maybe not reconsider 27, and then also as we look at this.
To your point.
I mean, you guys have set yourself up well to deal with the volatility here. So.
Kudos to you for doing that but is there an opportunity potentially on the ice side of the business.
Two.
Maybe get better economics, because there maybe.
<unk> is direction of investing.
In EV products and then also on the product side is there.
Could you just talk about sort of the structure of those contracts and you know they are buying guarantees.
Why is it missing youre pushing programs out are you protected in some way shape or form on those contracts.
A lot of questions on and one question, let me take it in pieces so far.
First <unk>.
23, 25%, 27% that's a bit of your question. So 23, when you look at the reduction is mostly in our E. Propulsion segment, it's coming from as you mentioned timing of amounts shoes, and volume reduction volume reduction and ramped up and since we seem to announcing a lot of new.
<unk>, a delay has a big impact in the quarter and in <unk> and.
Ramp up changes would be impacted in the quarter.
We are also impacted by.
Programs in North America continued to see volume pressures.
But if you take a step back it was still growing 40% year over year and and as you mentioned a good resilience.
No.
All of those too.
Gross margin.
When you look at beyond 2023.
We've looked at program by program.
At 25 and from what we see.
Looking at old announces that we are executing and remember we announced 29 programs in June and we booked more programs. Since then so we're launching a lot of programs.
What we see is 2025 it at around $5 billion.
And if we layer on top additional potential delays in downside thats, what gets us to $4 5 billion.
If you look at the CAGR of 23 to 25, it's about 45% to 50% CAGR, which is pretty much. The CAGR that we enjoyed 22 to 'twenty three.
In 2007, we have a strong new business. So we're very comfortable with that we see a lot of launches like the full we've announced today does not announcing pre 25, the launching 'twenty five 'twenty six 'twenty seven.
And so we see a path to $10 billion.
But also we've structured the portfolio to be resilient in the wide range of scenario again, when you look at the CAGR of 25% to 27, if you take out $1 7 billion of acquisition that we've also taken into account in the 10 billion CAGR is about 35%, which is a little lower than 20% to 23.
That's why we feel comfortable about the fact that the long term prospect is unchanged.
I think you had a question then I can I can talk about the others. I think you had a question about on the foundational and if theres a longer tail on that are there opportunities. There I think you may be alluding to pricing I mean overall, our objective as part of charging for a 2027 is to sustain that strong March.
<unk> profile, we've had in the business and that means we look at all aspects of the P&L, whether it's on the cost side of the pricing side to make sure that we're driving toward that and so we'll continue to work with with our suppliers will work with our customers to make sure that we're executing successfully on that.
And then the last thing I think you asked about was on EV contracts and.
How they are structured particularly.
Particularly in light of some of these volume shortfalls as we've talked about in the past one of the things that we have made a particular area of focus when we book new business on <unk> because of a lot of the uncertainty around the ramp up of the programs is to make sure that we put volume clauses in those agreements and those volume clauses traditionally work like they've worked historically.
For us in a way where if volumes are outside a certain band then there is a discussion that happens between us and our customer about how we ensure that we recoup.
<unk> or pricing or some other adjustment to make sure that we're not out for the fact that the revenue came in significantly short so as we head into 2024, we're going through our planning process right. Now you can imagine thats something we are thinking about.
Very helpful. Thank you guys.
Your next question comes from.
Emmanuel Rosner with Deutsche Bank.
Thank you very much.
One follow up on the.
The ramp up in <unk>.
Product revenue, maybe actually a couple of follow up if I may.
First of all how did you go about.
The assumptions upon now.
Underpinning gang Yu.
In the revenue walk.
Assume obviously for 2023 direct production.
<unk> schedules and commentary from from the automakers, but as you move into sort of that mid decade is this sort of that.
Top down approach or like easy adoption of penetration curve or assumption that you could share with us or how they compare with previous one.
And then so for 2020, please obviously.
Linked to <unk> and schedules.
Discussions with our customers. It's the same full 'twenty five 'twenty.
<unk> five is a bottom line by line in the disease of programs by programs and lounge.
Timing accuracy and discussion with our customers.
25 revenue is just around the corner, so we know really well.
We see pretty well through.
When the customers are going to actually announce those programs and the impact that these as 2025.
I guess, if I could follow up on this and I do have another question after that but just following up on this one.
Struck by the fact that some of the large north American OEM. For example have obviously pushed off meaningfully some volume in the near term and certainly next year as well being pushed out.
In some cases sort of like pretty forcefully sort of left unchanged store like some of the midterm mid decade targets and so I'm sort of wondering how could you give investors confidence around the amount of Derisking that you have now embedded in your.
If I can get mid decade revised outlook.
This re launching globally.
The system at the North American Oems as we mentioned before we're launching programs.
35, new programs that we've announced over the past quarters with seven out of the 10 largest Oems in the electrification area and a few others outside of the top 10. So the view that we have is a real global view.
<unk>.
As you remember we were.
Pretty relevant in China on SEDAR, we're launching a lot of new products in Europe, and we're announcing in North America, but our view is very global.
Understood.
<unk> can you just remind us sort of these new products how.
How much is in there.
Hybrids in terms of revenue contribution and.
Importantly are you seeing any movement from importance.
Customers in the automakers.
Towards essentially maybe growing hybrid faster than previously expected as a way to better respond to market demand right now with the slowdown.
We've always been.
<unk>.
A player in the hybrid.
Powertrain in essentially high voltage plug in hybrids.
A few range extender programs in China.
This is our product portfolio is absolutely relevant for valves and hybrids.
And in hybrids.
Most of the combustion products that we have also.
C C you path because there is no hybrid.
Without a.
And efficient combustion engine.
Our content per vehicle in hybrid it's pretty similar than the ones that you have on Bev so electrification accelerates our growth.
Whether it's <unk> or hybrids.
We've always seen attraction on hybrids and we're happy to be on some key platforms globally on hybrid powertrains.
Your next question comes from Luke junk with Baird.
Good morning, Thanks for taking the questions a couple of Bottomline related questions around E product first.
First one for me would just be how we should think about the trajectory of the product ardine going forward I'm thinking over the next couple of years, maybe and how you might be able to manage that relative to the lower forecast volumes that youre looking at as well as I guess, the offsetting pressure from the continued high level of RFP activity that youre seeing in the Mark.
Right.
Yeah, a couple of things on that I mean, one of the things that we showed at Investor day and it continues to be our plan is that the pace at which the investments are growing.
<unk> for US, which is why we expect to get the scale benefit flowing through the P&L as E product revenue ramps up and you can actually see that happening this year, even while were seeing a year over year increase in <unk> product related R&D as we've talked about in that range of $60 million to $70 million as you look at it sequentially.
Each of the last couple of quarters, it's actually been only growing about 2% to 4%. The last couple of quarters and it'll be relatively flat to slightly up in the fourth quarter on a sequential basis point being the pace at which we're seeing the growth and the investments isn't growing as quickly as the pace, we expect revenue to grow and that's the path to profitability.
In terms of what we might do going forward.
Just it's important to keep in mind, we're in the midst of our annual budgeting and long range planning process right now and as we're going through that process. We will continue to look at what if any adjustments we need to make to manage the profitability of the business over the near term and the medium term, but importantly balancing it to the point you made making sure that we're balance.
It with the need to ensure we're executing on the long term because we continue to believe that the long term outlook and trajectory for electrification looking out through 2007 and beyond remains intact. So we'll go through that process and we'll provide you more insight on on how we're seeing that when we get on the Q4 call in February.
One thing I would add is as we presented in our capital market day with the scale that we have and the number of programs that we're launching and developing globally. Then allows us to really implement a very modular design approach that builds from.
From previous.
Developments and also very flexible and modular production strategies and that's very important when we grow and scale up.
Thank you both for that and then for my follow up question, just hoping you could speak to the flexibility in your manufacturing footprint to protect margins given.
But all comes around product and I'm thinking specifically of the fact that flex between foundation and EV products in shared facilities, just how much that can help to protect any leakage midwood looks like a or EV volumes from here, both maybe what we saw in the quarter and how that might look over the next couple of years.
Thank you.
Yeah.
And we are we are leveraging the existing footprint that we have as we discussed before so far we are leveraging 25% of our existing facilities around the globe to announce E product.
And that gives us some flexibility from a from a from a facility from a full perspective, but we also.
Focusing a lot on flexible manufacturing, where we're not investing.
Production equipment for a particular program at a particular customer, but having several types of products flowing through production lines, whether it is power electronics related motor related or or.
I would say transmission of Ibm's related. So we are we are pretty pleased with what we are doing as far as leveraging the existing capacities and capabilities, including human capabilities.
Your next question comes from Dan Levy with Barclays.
Hi, good morning, Thanks for.
Taking the question.
One just wondering on the ice business itself to the extent that.
The EV uptake is a little lighter in the near term than what some had anticipated.
And ice is a little heavier should we just think of the benefit to you as purely incremental sales flowing through at a normal incremental.
Margin is there any any offset we should be thinking.
King.
About that.
Yes, I mean, I think it's fair to think about it in the short term much the same way we characterized it in the long term and at Investor Day, I think the.
With the content opportunity per vehicle that we have on electrification.
The pace of electrification accelerates it provides us an opportunity to grow our revenue more quickly, but it probably puts a little bit more pressure on the absolute margin percentage that we are delivering but if if electrification.
Across the industry slows down a little bit it probably slows the revenue growth, but it probably improves our margin profile you saw that a little bit maybe here in Q.
Full year 2023 guidance that we have but that's consistent with our long term view as well I think overall, taking a big step back we feel like that's why we think our portfolio is really resilient from a financial perspective, because whether EV adoption is accelerating or decelerating. The portfolio is positioned to deliver comparable levels of adjusted operating income.
Over the long term under any of those outcomes.
Got it. Thank you and then as a follow up I wanted to go to the question on sourcing that's been asked in the past.
And I think one of the commentary commentary that we heard.
You know from some out from some of your OEM customers is that with a lighter <unk> outlook. This may change the way they are thinking about vertical integration with it and.
Evs EV components et cetera.
Are you seeing any impact in your discussions on automakers that previously made in a bit more keen on vertical integration that are now realizing maybe they don't have the scale.
At this level of volumes that are more willing to engage with you as a partner on the EV powertrain components that they need.
Then we starting seeing that.
Tom.
And as you mentioned I think this makes sense.
Have a very solid and recognized portfolio.
Really incumbent that many customers and we have the final strength to support them.
So I would not call it a trend.
But.
I would I would say that we're seeing.
Beginnings of discussion along those lines and I would say that.
The major onboard charger business that we have announced today that we booked with.
Our global North American OEM.
As a sign of of that.
Great. Thank you.
Your next question comes from James Picariello with BNP Paribas.
Hi, everyone.
Can you just put a finer point on what the potential range in margin benefit benefit could be associated with the lower product revenue now slated for 2025.
Should lead to additional ice and hybrid business, assuming there's decent overlap in your and your customer basis on both sides of the propulsion mix.
We are not prepared to address a specific margin in 2025 I think we showed you the long term trajectory of what it could like aging look like as you head out to 2030, we tend to think that we're going to operate into the mid nines trending towards 10% margin as we look through our planning horizon, and then being plus or minus.
Is that depending on where the E propulsion markets actually go but not prepared at this point to comment on 25.
Okay and then just on this year's guidance, Yeah, we could of course quantify the impact that the lower your products revenue, but just high level what else is driving the lower growth.
Both over market because the cuts about four points, but what element of this could be attributed to lower recoveries due to lower inflation.
Customer and regional mix factors.
Yes, I mean overall as we've talked about in the past, we're really focused on the organic growth and before we were guiding to 12% to 15% effectively in our 12% to 14%. So we feel pretty good about that.
Biggest driver of the drop in revenue and any sort of outgrowth math that you would do is really that $300 million drop in the <unk>.
Products revenue outlook. We are also factored in some element of the impact of the UAW strike.
Incurred to date and assume that that doesn't recover through the end of the year, it's less than $100 million, but it's still an impact on the company and embedded in the numbers as well.
Thanks.
Your next question comes from Joseph Spak with UBS.
Thank you Kevin.
Follow up on that that 100 million.
Fourth quarter impact from the strike or a full year impact.
Both it's less than 100, but it's still an impact on the guy, but it's in the fourth quarter, we didn't really have any impact any material impact in Q3.
Okay, and then I just wanted to.
Circle back to sort of this whole slew.
Lower your products ramp in about the profitability like.
It seems like you've communicated that a lot of your launches.
Our in China, a lot of new business in China, where we really aren't seeing some of that slower growth. Obviously, there is some lower volume with some some north American products, but I guess I'm wondering why there would be such a meaningful impact to the profitability ramp if that is the.
Case or are you also sort of taken a more cautious view on some of the.
The pace of those Chinese and Asian.
Ramps or.
<unk>.
Maybe some.
Challenges could given given the.
Quantity of ramps and making sure you execute all those flawlessly.
Yeah.
Yeah, Joe I think the.
There is there is a difference between wood.
What we see in <unk>.
In.
The fine tuning the timing of <unk> and ramp up and overall, what you see in the Chinese market. What you can read in the Chinese market.
And so the impact of the quarter.
The lounge.
Is 100% of impact in the quarter.
And so that's why it's a little it's a little volatile.
Volatile.
That's what I would tell you. This is this is this is what we see on the ground with slightly slower ramp up of a few programs that are delayed by a few months.
Yes.
Go ahead sorry.
I'll just add to that I mean, yes. If you look at we're still in the early days of growth from an electric electrification perspective at Borgwarner and so those quarterly moves right now until we get to more scale have a significant impact and as you look at right now through really 2025, maybe even into 2026, it's a big ramp up phase.
For Borgwarner, while we're still at a relatively modest level of revenue.
So some of those movements in launches and ramp up timing can have a meaningful impact on the numbers in a quarter or for a particular year.
Maybe just to follow up in light of the reduction to the 25 products.
Can you give us a sense of regionally.
Where that's coming from is it predominantly in North America, and maybe a little bit of Europe or or is it.
Broad strokes across all the launches.
In terms of the $300 million Youre, saying no yes exactly.
No the 25 reductions in the 25.
It's really across regions I mean, we've gone back and as Fred mentioned, taking a look program by program and looked at what we think the cadence is likely to be for some of those launches in light of some of the things that we're seeing in terms of near term headwinds and as we look at that and assess what we think the likely ramp up is we think it probably puts us more on track towards that 5 billion.
Level, but as Brett also indicated the reason, we're giving a range now as we've we've layered on and an incremental risk to say what if there are further delays, particularly on the E propulsion portfolio in terms of those launches getting delayed another X number of months and that's what we've layered on to get to the $4 5 billion is a downside to that range.
Okay. Thank you.
Yeah.
We have time for one final question and that question comes from Noah Kaye with Oppenheimer.
Alright, Thanks for getting me in here.
Just first.
To follow up on that one for Nick color just on the product mix in terms of programs being delayed or pushed out.
You're thinking about the product mix for 25 in the adjusted revenue number does this still skewed heavily towards power electronics skewed even more so.
As power electronics.
Less represented versus some of the other program just trying to understand where in the portfolio youre expecting relatively strong sell through.
Yes, I mean, I think as we look at where we think the biggest pressure is most of it is really hitting in the E propulsion segment.
As we look at the battery pack business for instance, we actually think continue to see really strong demand there relative to our prior planning assumption and it's really more of a supply constrained situation there than a demand constrained situation at the moment. So it does tend to be more in the E propulsion segment, where were seeing some of the headwinds.
Okay, that's very helpful.
And second just to.
Such on your M&A outlook.
How does the dynamic that you're describing today impact your appetite to do further M&A what is sort of assumed M&A contribution.
Now to the 25 outlook.
You know at the Investor Day, you had indicated there would be some additional M&A to be completed to support the outlook.
Do take a pause there.
Do you assess what you have in the current portfolio I'm just trying to understand.
So we will always assess M&A from a technology standpoint.
I would say that.
We are the verge of closing a transaction that we've already announced that will give us even more strength.
<unk>.
Yes.
Extra Surry power electronics.
I'd say that the market does not change our appetite on M&A towards E.
And.
I would say the kind of environment might also.
Help us Tom.
From a valuation perspective, and we don't always going to stay very opportunistic along those lines, but also very very.
Disciplined as we've always been.
Thanks Rod.
Yes.
Thank you Noah.
Thank you all for your questions. Today, if you have any additional follow ups feel free to reach out to me or any member of my team with that Leo you can conclude todays call.
That does conclude the Borgwarner 2023 third quarter results Conference call you may now disconnect.
Hmm.
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Hum.
Okay.
Hum.
Mhm.
[music].