Q4 2023 Borgwarner Inc Earnings Call
Say organic that means excluding the impact of FX in that manner.
We will also refer to our growth compared to our market.
When you hear us say market that means the change in light vehicle 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 are under discussion.
But that might be to turn the call over to Fred.
Fred: Thank you Beth.
Fred: Good day everyone.
Fred: We're pleased to share our results for 2023 and provide an overall company update starting on slide five.
Fred: With approximately $14 billion in sales, we delivered more than 12% organic growth in 2023.
Fred: Margin performance was strong.
Fred: Coming at the high end of our guide.
Fred: During the course of 'twenty three we adjusted our EP products Top line guide to reflect what we saw in the marketplace.
Fred: It resulted in a slightly lower top line for the company, but higher margins.
Fred: This is a good example is the product portfolio resilience that exists at Borgwarner.
Fred: We delivered $565 million of free cash flow in 'twenty three this free cash flow supported the $177 million of.
Fred: Of share repurchases that we executed during the fourth quarter as well as the closing of the <unk> acquisition.
Fred: Our challenging forward progress continues on multiple fronts.
Fred: We secured multiple new product awards during the fourth quarter, adding to those already announced over the course of the year.
Dan Levy: These awards were across our portfolio.
Dan Levy: Bev and hybrid architectures.
Dan Levy: We continue to see a strong sourcing pool for our product base.
Greg: Based on the strength of our portfolio globally.
Speaker Change: Lastly, we.
Fred: We took steps to enable new business awards by executive several strategic actions.
Fred: To further strengthen our product portfolio like the acquisition of <unk> electronics business.
Fred: As well as the strategic agreement with BYD, Finjan and batteries for NSP packs.
Fred: Outside of China.
Fred: Now, let's look at some new product awards on slide six.
Fred: First Borgwarner has been selected by shell thing separates E motor rotor and stator for the X nine NPV as well as for the next electric B class sedan.
Fred: Production began in January 2024 for the <unk> nine and we're planning to start producing for the B class sedan in Q3 24.
Fred: Our high voltage app into 'twenty E Motor offers high power and torque density and higher efficiency at a competitive cost.
Fred: We're excited to supply <unk> with our proven stay tuned Rota as we believe it continues to position us for long term success in China.
Fred: In EV penetration is already more than 35% of the market.
Fred: Second <unk>.
Fred: Borgwarner secured an award with a major global OEM to extend it.
Fred: Existing business supplying 400 volt high voltage coolant eases.
Fred: Some of the automakers light vehicle best platforms.
Fred: Specifically for its passenger truck and SUV programs.
Fred: This business win is one of the three awards with North American Oems.
Fred: Incorporating both one is high voltage coolant heaters into their vehicles.
Fred: Third Borgwarner are secured in a world with a major Chinese OEM to supply its 1990 kilowatt Julian Volta on a series of the automakers plug in hybrid and range extended electric vehicles.
Fred: Action is expected to begin in.
Fred: In September this year.
Fred: The dual inverter is developed for hybrid vehicles as an integrated solution.
Fred: The product Q2 days is borgwarner as Viper power module platform and Leverages, our in both our product leadership and scale.
Fred: Next on slide seven.
Fred: In addition to securing new business, we took multiple steps to build additional capabilities within our product portfolio driving product leadership and differentiation.
Fred: I would like to highlight three of them today.
Fred: Borgwarner completed its acquisition of the electric hybrid systems segment of vendor.
Fred: This provides us with additional capabilities in the envelope challenges DC DC converters and integrated high voltage Buck loot boxes, all of which are expected to complement <unk> existing product portfolio in hybrid and beds.
Fred: Next fall.
Fred: Borgwarner is continuing to expand its product portfolio for battery electric and hybrid commercial vehicles.
Fred: Our agreement to form a joint venture with Shaanxi fast to drive group a wage a subsidiary.
Fred: We are working together to accelerate the product efficiency and growth in the Chinese CV market.
Fred: With the largest CV powertrain supplier in China.
Fred: Borgwarner will then be able to use these products and technologies for the rest of the world.
Fred: Finally, Borgwarner science and international strategic relationship agreement with BYD subsidiary Fin Dreams battery for NSP sales and tax.
Fred: Under this agreement <unk> will be the only non OEM localized manufacturer unaffiliated with FINRA and batteries with rights to localize NSP battery packs for commercial vehicles stipulate in fin dreams batteries blade sales.
Fred: These facts are expected to be sold in the CV markets in Europe the <unk>.
Fred: <unk> and select Asia Pacific regions.
Fred: The F. B battery chemistry is an exciting technology that is cost competitive in comparison with some other sales chemistries.
Fred: We are seeing increased demand from our customers full tax with NSP sales.
Kevin: <unk> is right for Borgwarner in this area with over 20 years of experience in batteries with numerous successful product announcements.
Kevin: Next on slide eight I would like to summarize the growth we expect in our product sales in 2024.
Adam Michael Jonas: We expect 2024 E product sales of $2 5 billion to $2 8 billion, representing a year over year growth of 25% to 40%.
Adam Michael Jonas: One important driver of our 2020 for growth is.
Adam Michael Jonas: It is expected to be <unk> battery system product line.
Adam Michael Jonas: Battery systems demand from our commercial vehicle customers trucks and buses.
Adam Michael Jonas: Continues to outpace.
Adam Michael Jonas: Related to produce.
Adam Michael Jonas: However, we will continuing to increase our capacity to meet the strong customer demand.
Adam Michael Jonas: Both in Seneca in North Carolina and in Europe.
Adam Michael Jonas: We expect this capacity expansion to help drive a $250 million to $350 million increase.
Adam Michael Jonas: In battery system sales in 2024, which equates to 55% to 75% year over year growth.
Adam Michael Jonas: With more to come.
Adam Michael Jonas: When looking at looking at the other parts of our product portfolio, our guidance is 14% to 27% year over year growth.
Adam Michael Jonas: With the mid point roughly in line with our expected Bev hybrid market growth.
Adam Michael Jonas: Overall, we expect 2024 to be a heavy year related to the number of ounces.
Adam Michael Jonas: Cross sell light vehicle portfolio from IBM to motors from power electronics to thermal management globally.
Adam Michael Jonas: For both <unk> and.
Adam Michael Jonas: Hybrids.
Adam Michael Jonas: While we expect another yield volatility embedded in hybrids volume for the industry.
Adam Michael Jonas: We believe our capacity expansions and intense lounge activities will support our outlook.
Adam Michael Jonas: Finally on slide 10.
Ken: I want to take the opportunity to remind you of the intent of challenging fall of 2027.
Adam Michael Jonas: Challenging fall of 2027 has three pillars.
Adam Michael Jonas: One E products growth.
Adam Michael Jonas: Two E product profitability.
Adam Michael Jonas: And three maximize that foundational value.
Adam Michael Jonas: The first two pillars center around supporting Borgwarner as long term profitable growth.
Adam Michael Jonas: We continue to believe that despite near term volatility.
Adam Michael Jonas: Mid to long term trends towards electrification.
Adam Michael Jonas: There's an hybrid remains strong.
Adam Michael Jonas: We believe that Borgwarner is clearly positioning itself.
Adam Michael Jonas: To be amongst the leaders in term of E product business Awards.
Adam Michael Jonas: And to do so profitably.
Adam Michael Jonas: The third pillar of challenging forward is an enabler of these long term growth.
Adam Michael Jonas: Our foundational business brings customer relationship.
Adam Michael Jonas: Technological capabilities and the ability to internally fund our investments.
Adam Michael Jonas: As importantly, with this leading market positions and strong margin profile.
Adam Michael Jonas: We believe our foundational business provides near term earnings resiliency during times of Bev and hybrid market volatility.
James Albert Picariello: As we highlighted at our Investor day back in June.
James Picariello: As Kevin will review it.
James Picariello: That is evident both in our 2023 results and our 2020 for outlook.
James Picariello: The key takeaway is that both our product and our foundational business names.
James Picariello: Play important role in charging forward 2027.
James Picariello: This was true when we unveiled our plan in June and it remains true today.
James Picariello: As I look back on 2023 might take as this.
James Picariello: Borgwarner successfully manage another challenging environment during 2023.
James Picariello: We delivered solid margins and strong free cash flow, which is a sign of the product resiliency that we built.
James Picariello: We successfully completed the spinoff of Affinia.
James Picariello: We secured new business awards that are supportive of our long term revenue objectives in all types of electrification.
James Picariello: Australian architectures.
James Picariello: We also secured some critical alliances, especially on the CV side.
James Picariello: With subsidiaries of <unk> for Inverters and BYD for battery packs.
James Picariello: We also continued to return capital to shareholders.
James Picariello: Warner has repurchased about $600 million of stuff since completing the.
James Picariello: The Delphi acquisition in 2020.
James Picariello: And over the last four years, we have also returned about 600 million to shareholders in dividends.
James Picariello: Borgwarner as return about $1 2 billion to shareholders since 2020, and Thats before considering the tax free spin.
James Picariello: Of finance.
James Picariello: Moving into 2024 and beyond.
James Picariello: We are balancing near term margins relative to our long term objectives were.
James Picariello: We expect to manage our incremental margin holistically, while continuing to invest in our future growth.
Adam Michael Jonas: As we've always said.
Adam Michael Jonas: The industry growth invest in hybrids will not be a straight line.
Adam Michael Jonas: The near term volatility is a long term opportunity for the companies with the final show strength.
Adam Michael Jonas: Earnings resiliency and the great product physician focus that core one of processes.
Adam Michael Jonas: Our product portfolio is built for resiliency such.
Adam Michael Jonas: Such that the longer combustion sale will help margin and cash generation.
Adam Michael Jonas: As a company we are executing our challenging forward 2027.
Adam Michael Jonas: Which we expect will deliver value to our shareholders here and now and long into the future.
Speaker Change: This is kevin's last earnings call with the company and I wanted to take a moment to personally thank him for his tremendous contribution to our company over the past years.
Emmanuel Rosner: Kevin has played an instrumental role in all of Borgwarner recent major strategic initiatives ranging from the acquisition of Delphi through the creation and execution of challenging forward as well as the speed of Affinia.
Speaker Change: On behalf of the entire board of directors and the management team.
Speaker Change: Kim for his contribution to our company for his friendship and wish him a fantastic retirement.
Speaker Change: I look forward to Craig Allen stepping into the CFO role next month.
Speaker Change: Im confident Craig is delay skills.
Speaker Change: Deep knowledge of Borgwarner in our industry to execute our next chapter of profitable growth with that let me turn the call over to Kevin.
Speaker Change: Thank you Frank and good morning, everyone.
Speaker Change: Before I dive into the financials I'd like to provide a quick overview of our fourth quarter results.
Speaker Change: First revenue was at the midpoint of our guidance supported by stronger than expected industry production in the quarter.
Speaker Change: Second our margin performance was at the high end of our guidance driven by strong conversion on higher revenue.
Speaker Change: And finally, we delivered strong free cash flow performance to finish out the year.
Speaker Change: Let's turn to slide 10 for a look at our year over year revenue walk for Q4.
Speaker Change: Last year's Q4 revenue from continuing operations was just over $3 $3 billion.
Speaker Change: You can see that the weakening U S dollar drove a year over year increase in revenue of almost 2% or $55 million.
Speaker Change: And you can see the increase in our organic revenue, which was roughly four 5% year over year.
Speaker Change: The reason why our growth was stronger than we were negatively impacted in the quarter by customer launch and ramp up the place of key product programs in China.
Speaker Change: Lower customer volumes on our North American EV program.
Speaker Change: And lost sales due to the UAW strike in North America.
Speaker Change: Finally, the acquisition of Eldar, and SFC added $5 million to revenue year over year.
Speaker Change: The sum of all of this was just over $3 $5 billion of revenue in Q4.
Speaker Change: Turning to slide 11, you can see our earnings and cash flow performance for the quarter.
Speaker Change: Our fourth quarter adjusted operating income was $332 million.
Speaker Change: Equating to a nine 4% margin.
Speaker Change: That compares to adjusted operating income from continuing operations of $321 million or nine 7% from a year ago.
Speaker Change: On a comparable basis, excluding the impact of foreign exchange and the impact of M&A adjust.
Speaker Change: Adjusted operating income increased $16 million or $145 million of higher sales.
Speaker Change: This performance included a planned E product related R&D increase of $15 million.
Speaker Change: Excluding this higher R&D investment, we converted at approximately 21% on the organic sales increase.
Speaker Change: Our adjusted EPS from continuing operations was down <unk> <unk> compared to a year ago at higher adjusted operating income was offset by a higher effective tax rate.
Speaker Change: Recall that our adjusted effective tax rate in Q4 of 2022 was only 18% lower than our typical tax rate.
Noah Kaye: And finally free cash flow from continuing operations was $679 million during the fourth quarter, which allowed us to deliver full year free cash flow of $565 million.
Speaker Change: On slide 12, I'd like to take a moment to look at our 2023 results compared to the post <unk> spin off guidance that we provided in June because I think it provides a helpful look at the resilience, we believe underlies our current product portfolio.
Speaker Change: You'll see that overall sales came in modestly below the midpoint of that guidance.
Speaker Change: While product sales fell short by about $400 million relative to the midpoint of our two three to $2 $6 billion guide.
Speaker Change: Foundational sales largely offset this coming in about $300 million higher than the June guidance.
Speaker Change: However, the real evidence of our earnings resilience is in our adjusted operating margin performance.
Speaker Change: Despite the shortfall in sales relative to the midpoint of our June guidance.
Speaker Change: Adjusted operating margin and adjusted operating income dollars.
Speaker Change: In above the midpoint of that June guidance.
Speaker Change: This demonstrates precisely the resiliency, we've been speaking about since our Investor day.
Speaker Change: If he products are weaker than our revenue I think going to grow as quickly.
Speaker Change: Our margin is likely going to be stronger.
Speaker Change: And that's what happened in the second half of 2023.
Speaker Change: Okay.
Speaker Change: Let's now turn to slide 13, we can see our perspective on global industry production for 2024.
Speaker Change: We expect our global weighted light and commercial vehicle markets to be flat to down two 5% this year.
Speaker Change: Looking at this by region, we're planning for our weighted North American market to be down 1% to up 1%.
Speaker Change: In Europe, we expect our blended market to be down 2% to 4% year over year.
Speaker Change: And in China, we expect the overall market to be down 1% to up 1%.
Speaker Change: Now, let's take a look at our full year outlook on slide 14.
Speaker Change: First it's important to note that our guidance assumes minimal impact from foreign currency full year sales.
Speaker Change: Second as I previously mentioned, we expect our markets to be flat to down two 5% for the year.
Speaker Change: Despite that we expect to continue to deliver year over year organic sales growth driven by growth in our <unk> product sales.
Speaker Change: Specifically in 2024, we're expecting to deliver between two five and $2 8 billion in <unk> product sales, which is up significantly from the approximately $2 billion, we generated in 2023.
Speaker Change: Finally, the LDR acquisition is expected to add approximately $40 million for 2020 for revenue.
Speaker Change: Based on these expectations, we are projecting total 2020 for revenue in the range of 14, 4% to $14 9 billion.
Speaker Change: Which equates to organic growth of approximately 1% to 5%.
Speaker Change: Okay.
Speaker Change: Let's switch to margin.
Speaker Change: We expect our full year adjusted operating margin to be in the range of nine 2% to nine 6%.
Speaker Change: It is important to note that this guidance includes a negative operating income impact due to the LDR acquisition.
Speaker Change: Lasalle door, we purchased strong engineering capabilities that we believe more clearly puts us on a path to achieving product leadership and an addressable market that we expect will approach $30 billion by 2030.
Speaker Change: However that business has very little revenue today, which means we'll be generating operating losses for the next few years.
Speaker Change: Excluding the impact of those eldar related losses in 2024.
Speaker Change: We expect adjusted operating margin to be in the range of nine 6% to nine 9%, which compares to our 2023 margin of nine 6%.
Speaker Change: That implies the rest of the business delivering full year incrementals in the mid to high teens, including our planned growth in R&D.
Speaker Change: We believe this margin performance is a reflection of the underlying earnings power of the company with the ability to manage cost and drive conversion even in the face of volatile Bev and hybrid markets.
Speaker Change: Based on this revenue and margin outlook, we're expecting full year adjusted EPS from continuing operations in the range of $3 65 to $4 per diluted share.
Speaker Change: Turning to free cash flow, we expect will deliver free cash flow of $475 million to $575 million for the full year.
Speaker Change: Midpoint of this outlook is slightly lower than the $565 million, we generated in 2023 due to a modest build in working capital that supports our revenue growth.
Speaker Change: That's our 2020 for outlook.
Speaker Change: So let me summarize my financial remarks.
Speaker Change: Overall, we delivered a solid 2023 result, despite volatility in EV markets and our associated in product revenue.
Speaker Change: Our adjusted operating income and free cash flow performance shows the resilience of our portfolio.
Speaker Change: Specifically when a product growth is under pressure, it's likely to be offset by stronger performance in the rest of the portfolio.
Speaker Change: Now as we look ahead to 2024, the company will be keenly focused on delivering organic growth. Despite near term volatility in the global Bev hybrid market and the expected softening of industry production.
Speaker Change: Delivering strong incremental margin performance on an all in basis, including our spending to support growth.
Speaker Change: And continuing to make the prudent investments both organic and inorganic that we believe will help secure our growth and financial strength long into the future.
Speaker Change: This will be my last earnings call. After five years, working with Fred and the team to drive that transformation of Borgwarner.
Speaker Change: I'm proud that I can leave the company in a moment I truly believe it's positioned to be a winner in the world of electrification across a variety of <unk> products, which is probably not the case when I joined in 2019.
Speaker Change: With a resilient portfolio I believe the company is poised for long term success no matter, how the progression toward electrification plays out in the coming years.
Speaker Change: And as a result, I expect that will translate into value creation for our shareholders.
Speaker Change: I'd like to thank Fred and the team for the opportunity to be part of this journey and I know I am leaving the finance function in good hands with Craig.
Speaker Change: Finally, thanks to all of you in the investment community for our engagement over my last 11 years as a public company CFO.
Speaker Change: It's been a fun ride and I've enjoyed the relationships I've had the chance to build with many of you over the years.
Speaker Change: With that I'd like to turn the call back over to Pat.
Pat: Thank you, Kevin Nevada, we're ready to open up for questions.
Pat: Thank you and 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 and the interest of time. Please limit yourself to one question and one follow up question, we will pause for a moment to compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: And our first question will come from John Murphy with Bank of America.
John Murphy: Please go ahead.
John Murphy: Good morning, everybody and congrats Kevin look for the crossing paths sometime in the near future.
John Murphy: Yes.
John Murphy: Just a first question here.
John Murphy: And you have to run a business.
John Murphy: And sometimes it makes sense in the volatile world that we live in a slightly conservative tact. If I were to tell you you instead of your volumes being flat to down two 9% year, they might be flat to up two 5% at the midpoint of the range that would add about $355 million.
John Murphy: In revenue.
John Murphy: Outlook would it be reasonable.
John Murphy: You can sort of assume that those could be sort of a 15% to 20% incremental margin in that we've kind of really translates to about 5% upside to earnings potentially cash flow is that.
John Murphy: A reasonable way to think about it is that would happen.
John Murphy: It's a reasonable way to think about it.
John Murphy: Our guidance premise at our expectation that our markets are flat to down two 5%, but if markets come in stronger we fully expect that we would execute on that deliver the revenue and convert on it and you can see the conversion on an all in basis implied in our guide in the mid teens conversion and so if we see upside in revenue you should expect to see us.
John Murphy: <unk> on that incremental revenue.
Speaker Change: Okay, and then just a quick follow up.
John Murphy: The market is shifting all over the place, although it's not moving as quickly as.
Speaker Change: Some of the commentary would lead you to believe if we saw a greater hybrid penetration not just in 2024, but maybe in 2025 and beyond Fred is there potentially a shift.
Speaker Change: Cap allocation in slightly in strategy.
Fred: You can execute.
Fred: Lead capital screen did I mean, how sensitive are you to <unk>.
Fred: Shifting between Evs and.
Fred: In hybrid.
Fred: How much would your acquisition strategy and capital allocation.
John Murphy: The products for the beef side of libraries are similar than the products from Dev.
John Murphy: At the same motors the same power electronics, the same transmission cases.
John Murphy: The same high voltage Couldnt heaters.
John Murphy: From an R&D perspective, it's extremely fungible the same engineers.
John Murphy: And from a capital standpoint, it's pretty fungible too. So we've developed the product portfolio that is.
John Murphy: I would say very fungible across hybrids in Bev.
John Murphy: So.
Speaker Change: That's helpful. Thank you guys.
Speaker Change: Thank you John.
Speaker Change: It's a battle ready for next question.
Speaker Change: Yeah.
Speaker Change: So that INR.
Speaker Change: Yes, I hear you Manny.
Manny: Yes. Please the next question please.
Speaker Change: Question will come from.
Speaker Change: Okay.
Speaker Change: Oh, great. Thanks for taking my question and congrats Kevin as well.
Kevin A. Nowlan: Thanks, just looking.
Speaker Change: Knocking on contribution margin it does come out with something like a 16, if you exclude al Dor.
Speaker Change: Any other puts and takes you mentioned your R&D how much of a headwind is there any commodity or labor issues that we should be thinking about and then when we think about outdoor when does this start to go away or is that sort of going to be here for several years.
Speaker Change: With respect to the year over year conversion in 'twenty four there is nothing unusual to really think about I mean, you're right. We're looking at the mid teens and that is on an all in basis. If you look at we are investing a little bit more on the product R&D again in 2024, it'll be up organically about $40 million to $50 million, but thats embedded within.
Speaker Change: That conversion so we're looking at our conversion now given the scale of the business from a product perspective on an all in basis.
Speaker Change: And we expect to contribute in the mid teens.
Speaker Change: With that in mind.
Speaker Change: Okay.
Speaker Change: And al Dor any thoughts on that.
Manny: Alright.
al: So let me take a step back here.
al: I think board is very good at taking great technologies, and commercializing them and globalizing them look at what we've done with tensile because what we've done with <unk>, which was which literally no revenue.
Manny: <unk>.
Manny: $750 million at the midpoint.
Manny: The plan with Elong DC DC converters onboard Chargers is is exactly that and so.
Manny: Very.
Manny: Optimistic about.
Manny: The drive that we can generate.
Manny: The profitable growth that we can generate from the engineering base that we've acquired with <unk>.
Speaker Change: And maybe I'd just add to that Collyn.
Speaker Change: This is something we anticipated when we gave guidance back at our Investor day, as well and because Eldar was well in flight and we knew that would have an impact on our margin in the short term, but position us for long term success in a $30 billion addressable market in 2030. So it is impacting the near term, but over time as we start to have some success in that business look into the next few.
Speaker Change: Years out it will start to be a positive.
Speaker Change: Positive for us, but that's still several years away, we expect to have operating losses in that business for the next couple of years as we support the R&D necessary to support our capitalizing on that business.
Speaker Change: Okay that makes sense.
Speaker Change: Just you touched today on.
Speaker Change: This year's guidance being sort of flexible between EV and profitability and at your Investor Day, you talked about 27 same dynamics on the EV mix is higher to sort of offset higher or lower you'd add a dollar basis to be similar in 2007.
Speaker Change: But youre still forecasting like a fivefold increase in your E E powertrain sales.
Speaker Change: 27.
Speaker Change: That would imply probably a lot of E. R&D as you kind of prepare for those launches so is that flexibility going to be consistent over time.
Speaker Change: Or is there going to be some puts and takes because.
Speaker Change: You have some pretty chunky.
Speaker Change: R&D needs to get ready for that.
Speaker Change: Yes.
Speaker Change: In 2007.
Speaker Change: Yeah, and when you look at the <unk> product related R&D as we've mentioned in the past we thought the real peak and that was going to be in 2022 in terms of the growth in the <unk> product R&D you might remember it stepped up a $150 million that year, but then we said we expect the pace of the growth in the R&D to step down year over year, and you can see that happening.
Speaker Change: Last year, it stepped up about $60 million, so not as big an increase as what we saw in 2022 and as we look ahead to 2004, it's going to step up about 40% to $50 million organically. So the pace of the growth in R&D is definitely slowing but still growing because it's supporting our ability to successfully launch and ramp up programs as well as the catheter.
Speaker Change: Thanks.
If these are sort of late decisions I would imagine they might accelerate.
Yes.
For customers I think.
Most probably it's less than I think there is some flexibility we are hearing commentary as you do that in the U S. There is some attention to Russell hybrids outside of the U S. Hybrid is a big portion of the new energy vehicles in China, 30% to 40% its Europe, its a big percentage to what's important to me.
Fred: Is that we build a product portfolio that is totally fungible across hybrid and Dev.
Fred: R&D, it's the same engineers power electronics Motors transmission third on that it's the same thing for us.
Fred: Meta we can support our customer to wherever they want to grow.
Speaker Change: So just to clarify.
Fred: Are you actually seeing that we're reading about it we're hearing about this increased interest in the U S are you or your customers now.
Fred: Accelerating activity with you in that area.
Fred: Brian I think it's I think it's a little too early to see the communication and the <unk> materializing on the hybrid.
Fred: But I would say that with the scale that we have in OE products that Casa Grande hybrid different types of hybrid and Bev.
Fred: It can be one of the.
Fred: One of the enablers of a rapid.
Fred: Launch of hybrid powertrain for those customers.
Speaker Change: That makes sense. Thank you.
Speaker Change: Thank you Rob.
Fred: Your next question will come from Dan Levy with Barclays.
Dan Levy: Hi, good morning, Thanks for taking the question.
Dan Levy: Hi, congratulation.
Dan Levy: Kevin.
Dan Levy: Greg.
Speaker Change: I'm going to go.
Speaker Change: And maybe we could just start with the broader M&A strategy specifically.
Speaker Change: No.
Fred: How are you managing I guess, we can say the integration deals you have done.
Fred: A lot in the way.
Fred: M&A what is the process for.
Fred: Integration, how do you manage any integration risk and then maybe you could just remind us on al Dor.
Fred: Are these losses in line with what you originally anticipated or is this a function of maybe a weaker environment than when you originally did the deal.
Speaker Change: So first of all.
Speaker Change: The financial profile available was fully comprehended, when we where are we.
Speaker Change: Did the due diligence.
Speaker Change: And it was fully comprehend is into the views of our financials.
Fred: Integration integrating companies, becoming I think a real trend.
Fred: Overall.
Fred: And.
Fred: We do that in a very disciplined way.
Fred: And we're doing it with a very disciplined way with Alto <unk> III.
Fred: <unk>.
Fred: We are locating borgwarner people on location.
Fred: We are we are managing the business starting day, one, but we've owned <unk> for a couple of months now but.
Fred: <unk>.
Fred: We are going to just manage the business as we manage the pull on the business with financial discipline.
Fred: There are attractive businesses in envelope charter DC DC converter and one box.
Fred: Which again.
Fred: <unk> is totally.
Fred: Totally the same products, either it's a hybrid or a bev.
Speaker Change: We see.
Fred: A lot of pools.
Fred: All other than from our customers in those in those power electronics.
Fred: Technology is too.
Speaker Change: And maybe I'll just piggyback on.
Speaker Change: Dan back to the philosophy being in line.
Speaker Change: Keep in mind, if you look at what's implied in our guidance. This year, we're at $9 69, 9% without Eldar and you know as we look at the 2027 and we thought we were on track to be a 10% margin business. So we'd already be on the cusp of that.
Fred: Without doing outdoor by Al Dor was contemplated.
Fred: Impacting us to the tune of 30 to 40 basis points in the short term because we knew we were investing in a strong engineering shop that doesn't have a lot of revenue today and so that was contemplated in our original guidance.
Speaker Change: Okay, Okay, and then maybe just.
Fred: Follow up on that.
Fred: Given we've seen some shifts.
Fred: Product plan, maybe you could just.
Fred: Give us a sense of what the go forward capital allocation and Fred you mentioned.
Fred: A moment ago that.
Fred: $2 billion of M&A assumed in the 2027 targets I know, we're not going to get an update on that today, but maybe you can give us a sense of how this environment shifts what your appetite is for.
Fred: Assets, how does the capital allocation changed and what else is remaining still isn't in your portfolio from a.
Fred: Capability or product.
Fred: <unk> customer exposure standpoint, that's still.
Fred: It would require some M&A.
Fred: I would say that the capital.
Fred: The capital allocation strategy is pretty much unchanged.
Fred: We are looking at.
Fred: M&A as is.
Fred: That's an important part of strengthening electrification capabilities.
Fred: We are very disciplined in the way we look at M&A.
Fred: We are looking at way more companies than we actually pulling the trigger on.
Fred: And.
Fred: We think that the constant environment could provide could provide some attractive buying opportunities.
Fred: And be rest assured that we will include in Kosovo, the near term impact in the valuation assessments.
Fred: We are looking at M&A as with discounted cash flows and we're taking those near term impact.
Fred: Really importantly.
Fred: The the.
Fred: As a policy on capital allocation also includes the dividends that we've left unchanged even during COVID-19.
Fred: We've repurchased stock buyback as a start of.
Fred: The strategy.
Fred: I alluded to in my prepared remark on how much we've given back to our shareholders.
Fred: And and and the spinoff of <unk>, which I think was a great success.
Fred: It is also part of the capital allocation strategy, Kevin do you want to add anything.
Kevin: Good.
Kevin: Yes.
Kevin: And have a rainfall.
Kevin: Our next question will come from Adam Jonas with Morgan Stanley.
Adam Michael Jonas: Hi, everybody and perhaps Kevin.
Adam Michael Jonas: Four questions first one what portion of your.
Adam Michael Jonas: 2020 for budget.
Adam Michael Jonas: Capex and R&D.
Adam Michael Jonas: In.
Adam Michael Jonas: Allocated.
Adam Michael Jonas: <unk>.
Speaker Change: Yes, we don't we don't really break that out publicly in terms of what we've been disclosing in terms of an overall R&D or capex allocated that way, but what I would tell you is if you look at R&D first and foremost we.
Adam Michael Jonas: Invested about $475 million of any product related R&D in 2023 versus the $700 million or so 715 or so of R&D in total as we look ahead to 'twenty four organically, we'll add another $40 million to $50 million of there from a product R&D perspective, and you can expect that the foundational based R&D will probably come.
Adam Michael Jonas: Down a little bit on a year over year basis as it's been doing the last few years. So the R&D will continue to be increasing fleet weighted towards E products and it is the majority of the investment from a capital perspective, and you can see we stepped up our capital investment last year pretty meaningfully a couple hundred million dollars relative to two.
Adam Michael Jonas: <unk> thousand 22, and that was really focused on investing in some of the.
Adam Michael Jonas: The product portfolio ramp ups that we needed, particularly within our E propulsion segment as well as our battery pack business.
Adam Michael Jonas: Youll see a comparable level of investment in capital in 2024 going toward that and it'll be a couple of the peak years of investment from a capex perspective, particularly on that battery pack business and then you'll probably see it come back down a little bit to more normalized levels as we hit 25 and beyond.
Adam Michael Jonas: And then what's really important is to understand that.
Adam Michael Jonas: R&D Capex outflow EV and hybrids and again in St. Maarten full time the products are the same for us in light vehicle, whether it goes in a hybrid or a base. It's the same people. The same R&D is the same capex.
Speaker Change: Thank you and then just going to add Ken.
Ken: That point Brad.
Speaker Change: There are there are many aspects of E systems that are agnostic.
Adam Michael Jonas: Optic between Bev and hybrid I'll ask Hugh.
Speaker Change: I won't hold you to specific but what would be your best guess or range of how much of your 2024.
Adam Michael Jonas: Systems and foundational business are going into hybrid.
Adam Michael Jonas: Include plug in hybrid if you were to isolate <unk> hybrid specifically for some of your foundational step increasingly is going into hybrids as well.
Adam Michael Jonas: As we all know so I didn't know if you could isolate.
Adam Michael Jonas: Guess on how much hybrid hybrid would account for.
Adam Michael Jonas: For the revenue in 2004.
Adam Michael Jonas: Okay.
Adam Michael Jonas: A range it would be great.
Speaker Change: Yes, I guess, maybe just a couple of days I think that can come back to you on the details, but what I would say is when you look at the two five to $2 $8 billion guide. The first thing I'd say is off the top that $7 million to $800 million associated with battery packs is all EV.
Adam Michael Jonas: It's easy in the commercial space in the CV space. So what Youre really looking at is the other $1 billion $2 billion of product revenue and we will have and come back to you with the specific breakdown I don't want to quote a number and have it a little bit off.
Speaker Change: Appreciate it thanks.
Adam Michael Jonas: Okay.
Adam Michael Jonas: Our next question will come from James Picariello with BNP Paribas.
James Albert Picariello: Hi, everyone.
James Albert Picariello: Congrats congrats Kevin.
James Albert Picariello: Just a clarification question first so based on the margin guidance excluding eldar.
James Picariello: The implied loss rate for all doors. This year is roughly $50 million that right and then in addition to that impact youre stepping up organic products R&D by $40 million to $50 million. So all in it.
James Picariello: <unk> $90 million to $100 million and spend.
James Picariello: Right.
James Picariello: Roughly yes, Eldar is a portion of the <unk> loss that engineering related it's somewhere around $40 million.
James Picariello: So youre right its $40 million to $50 million of organic step up will be R&D, and then eldar adds about another $40 million. The overall loss in El Dora is around at the midpoint is around what you said.
Speaker Change: Yeah, Okay, and then can you confirm what the I appreciate that color and then can you just confirm what the product margin was in 2023 and then based on what we just covered is it possible.
James Picariello: Product losses are close to flat year over year, just how should we be thinking about that or asked another way.
James Picariello: Part of the impetus behind separating out of the propulsion was to provide that clarity and transparency on.
James Picariello: Product progression is there a segment specific guidance.
Speaker Change: Sure maybe on the propulsion.
Speaker Change: No. We're not we're not going to give any segment specific guidance this year, but what I would say when you look at the E. Propulsion segment. Obviously, we were focused on driving towards breakeven in the fourth quarter of last year that was the guidance as we started out the year last year and that was really premised on our ability to successfully convert on the incremental revenue and we were disappointed that we have.
James Picariello: Had to pull back on that when we saw some of that.
James Picariello: Volatility in the markets and how that was impacting our revenue. So as we ended the year you can see when you look at the E. Propulsion segment, we ended up coming in at about $540 million of revenue in the fourth quarter, which is about $2 million to $300 million short of our original guidance. When we were expecting to get to breakeven so that business ended up.
James Picariello: Losing about I think $16 million or so in the fourth quarter.
James Picariello: It gives us some comfort in the way we are managing the profitability of that business is the fact that we were down $200 million to $300 million in revenue versus our original guidance.
James Picariello: It's simply less contribution margin flow through on those lower with that lower revenue, we probably would have had a bigger loss in $16 million in the quarter. So I think we feel good about the fact that we're managing the profitability of that business in light of some of the near term volatility, but ultimately the path to breakeven into long term profitability.
Adam Michael Jonas: And that business comes from successfully converting on the incremental revenue and while we take a lot of comfort in is that we see that contribution margin really flowing through the business. I mean, you can see it in the 2024 guidance, we're converting on an all in basis at mid teens and all of the growth in 2024 is coming from the E. <unk>.
Adam Michael Jonas: So we see the underlying fundamentals of the profitability coming through it so as we scale that business, we see the path towards the profitability objectives of the company impact for that portfolio.
Adam Michael Jonas: Thanks.
Speaker Change: Our next question will come from Emmanuel Rosner with Deutsche Bank.
Emmanuel Rosner: Thank you so much I was hoping to follow up on the on the incremental margins and just wanted to understand a little bit.
Emmanuel Rosner: The math would work for the foundational side.
Emmanuel Rosner: Of your business and we basically reached a point now where within your 2020 guidance foundational revenues already down I guess.
Emmanuel Rosner: Even with the growth of the market and so I guess.
Speaker Change: How should we think about the contribution margin with them.
Speaker Change: Within foundation.
Speaker Change: Does it become sort of like the decremental margin do you need to turn back restructuring to sort of offset that.
Speaker Change: And if I think about.
Speaker Change: Some of our.
Speaker Change: Basically personnel decisions.
Speaker Change: Like how quickly can we go from here.
Speaker Change: Having some incrementals into volume plays out better.
Kevin: Versus having to sort of like restructure.
Kevin: Offset any potential downtime.
Kevin: Yes.
Kevin: With respect to the foundational business is implicitly youre right. The revenue is down a little bit year over year somewhere in our guidance implicitly around $60 to $260 million, if you, which means we're down about a half a point or two points.
Speaker Change: In that portfolio year over year, if you look at the underlying markets that those product support being the combustion and hybrid markets those are down anywhere from 3% to 6% on a year over year basis. So we are outperforming those markets as those are coming down a little bit year over year, but we are seeing a revenue decline and as you know at our Investor Day, we talked.
Speaker Change: About our expectation that over time, we're going to see revenue in the foundational portfolio is coming under some pressure and what we needed to do is make sure. We're managing that P&L holistically pricing cost restructuring to make sure that we would sustain that margin profile over time, and we fully expect to do that and we expect to execute that in <unk>.
Speaker Change: 24, as well as all the way through the end of the charging for plant.
Speaker Change: I would add one thing.
Speaker Change: Amendment I would add one thing is that on the commercial side.
Speaker Change: We don't really see no new and we don't really see new engines, new transmission is being developed.
Speaker Change: It is more a longer life for slightly higher volume on the con product. So even if combustion as you mentioned may go back up or a longer tail that doesn't prevent us too.
Speaker Change: Adjusted <unk>.
Speaker Change: The engineering.
Speaker Change: Elements of the foundational P&L.
Speaker Change: Yeah, that's super helpful. Just to make sure I understand so because 2020.
Speaker Change: Help us really understand most of the mid and longer term picture because you have a guidance obviously about it but.
Speaker Change: You mentioned is mid teens incremental margins OLED for this year.
Speaker Change: And Uhm Directionally think about it on what does that look like on the foundational versus product.
Speaker Change: Obviously as mentioned foundational is actually down the revenues and then the product is up a law. So what does that look like anything you could help us a little bit better understand how you manage this going forward.
Speaker Change: I mean fundamentally we are not going to break out the details in terms of our guide, but fundamentally in order for us to execute on our foundational margin profile over the coming years in line with charging forward. It means we need to decrement at an all in basis in that mid teens and for our <unk> product portfolio to deliver on its margin expectations, we need to convert in the mid tier.
Speaker Change: And I think youll see the blended that actually coming through the financials in the P&L and our 24 guidance.
Speaker Change: Okay.
Speaker Change: Great. Thank you.
Speaker Change: And we have time for one final question and that question will come from Noah Kaye with Oppenheimer.
Noah Kaye: Please go ahead.
Noah Kaye: Hey, Kevin I wish you well in retirement.
Noah Kaye: Appreciate all the dialogue over the years.
Noah Kaye: And with that I'm going to get to ask a couple more questions.
Speaker Change: First just a clarification.
Speaker Change: But earlier you talked about this.
Speaker Change: This year and perhaps next being kind of a peak for Capex is that meant to be capex.
Speaker Change: <unk>.
Speaker Change: Should we think about sort of reversion to more like 5% of sales.
Speaker Change: On a go forward basis, but that being that 'twenty six 'twenty seven I'm just trying to understand.
Speaker Change: I think your comments are.
Speaker Change: First question I think typically we've run in the past at 5% we've had years, where we've dipped below and we have been in the four 5% to 5% range. But then you see the last couple of years, we've been elevated running closer to 6% and 5% my expectation over time is that as we get to more of a normalized run rate environment were probably coming back down toward that 5% range.
Speaker Change: Great.
Fred: And then Fred.
Fred: There was good color earlier on.
Speaker Change: The battery pack.
Speaker Change: Expectations for this year, but I'd actually love to delve a little bit more into where you are at in terms of tooling and automation staffing up sell supply.
Speaker Change: Help us understand your true visibility into the production ramp.
Speaker Change: You go throughout the year.
Speaker Change: Yes, we are ramping up.
Speaker Change: A second production line in Seneca in North Carolina, we have our first production line in the Michigan area.
Speaker Change: This is ramping up in Q2.
Speaker Change: And the same line is being commissioned for Europe, and this will ramp up later in the year.
Speaker Change: And that is the 65% year over year growth at the midpoint for those battery packs.
Speaker Change: The demand is.
Speaker Change: <unk>.
Speaker Change: Much higher than what we can produce.
Speaker Change: And.
Speaker Change: We don't see in the commercial vehicle.
Speaker Change: The noise of any slowdown whatsoever to the contrary.
Speaker Change: So that's part of it.
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Speaker Change: Uh huh.
Fred: [music].
Fred: Okay.
Fred: [music].
Fred: Hum.
Fred: [music].
Speaker Change: Uh huh.
Fred: Uh huh.
Fred: Mhm.
Fred: [music].
Fred: Please standby your program is about to begin should you need any sessions. During your conference today. Please press star zero.
Fred: Okay.
Savannah: Good morning, My name is Savannah, and I will be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2023 fourth quarter and full year financial results call.
Fred: All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you are using a speakerphone. Please pick up the handset before asking your question.
Greg: I'd now like to turn the conference over to Patrick Nolan Vice President Investor Relations. Mr. Nolan you may begin your conference.
Patrick Nolan: Thank you Savannah, and good morning, everyone and thank you for joining us today <unk> earnings release earlier this morning.
Speaker Change: And on our website Borgwarner com on our homepage and our Investor Relations homepage.
Fred: When you refer to our Investor Relations calendar, we will be attending multiple houses between now on our next earnings release. Please see the events section of our IR page for a full list.
Fred: Before we get any formula during this call. We may make forward looking statements, which involve risks and uncertainties are detailed in our 10-K, our actual results may differ significantly from the matters discussed today.
Speaker Change: During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clear a clearer picture of how the core business performed and for comparison purposes with prior periods.
Fred: When you hear say on a comparable basis that means excluding the impact of FX.
Fred: M&A and other non comparable items.
Fred: When you're saying adjusted that means excluding non comparable items.
Fred: And finally, when you hear us say organic that means excluding the impact of FX and that's a bit high.
Fred: We will also refer to our growth compared to our market when.
Fred: When you hear us say market that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure.
Fred: 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 Daria discussion.
Fred: With that I'm happy to turn the call over to Fred Thank.
Fred Thank: Thank you Pat.
Fred Thank: Good day everyone.
Speaker Change: I used to share our results for 2023 and provide an overall company update starting on slide five.
Fred: With approximately $14 billion in sales, we delivered more than 12% organic growth in 2023.
Fred: Our margin performance was strong.
Speaker Change: At the high end, although Gabe.
Speaker Change: During the course of 'twenty three with just two though he products top line guide to reflect what we saw in the marketplace.
Speaker Change: It resulted in a slightly lower top line for the company, but higher margins.
Fred: This is a good example of the product portfolio resilience that exists at Borgwarner.
Fred: We delivered 565 million of free cash flow in 'twenty three this free cash flow supported the $177 million of share repurchases that we executed during the fourth quarter as well as the closing of the door acquisition.
Fred: Our challenging forward progress continues on multiple fronts.
Fred: We secured multiple new product awards during the fourth quarter, adding to those already announced over the course of the year.
Fred: These awards were a cross sell portfolio for both Beth and hybrid architectures.
Fred: We continue to see a strong sourcing pool for our product base.
Fred: Based on the strength of our portfolio.
Fred: Good.
Fred: Lastly, we.
Fred: We took steps to enable new business awards.
Fred: Executive several strategy actions.
Fred: To further strengthen our product portfolio.
Fred: The acquisition of Eldora electronics business.
Fred: That's where the strategic agreement with BYD syndrome, and batteries for NSP packs outside of China.
Fred: Now, let's look at some new product awards on slide six.
Fred: First borgwarner has been selected by shell thing.
Fred: Its E military rotor and stator for the X Knight NPV as well as for the next electric B class sedan.
Fred: <unk> began in January 2024, 49.
Fred: We're planning to start producing for the B class sedan in Q3 24.
Fred: Our high voltage app into 'twenty E Motor offers high power and torque density and higher efficiency at a competitive cost.
Fred: We're excited to supply HL Bang without proven stator and wrote them.
Fred: We believe it continues to position us for long term success in China.
Fred: And EV penetration is already more than 35% of the market.
Fred: Second Borgwarner secured an award with a major global OEM to extend its existing business.
Fred: Planning, a 400 volt high voltage coolant eases.
Fred: Some of the automakers light vehicle bedspread forms.
Fred: Specifically for its passenger truck and SUV programs.
Kevin: This business win is one of the three awards with North American Oems, incorporating borgwarner is high voltage coolant heater.
Kevin: Into their vehicles.
Kevin: Third Borgwarner are secured in a world with a major Chinese OEM to supply its 1990 kilowatt Julien.
Adam Michael Jonas: The series of the automakers plug in hybrid and range extended electric vehicles.
Adam Michael Jonas: Production is expected to begin.
Adam Michael Jonas: In September this year.
Adam Michael Jonas: Julien there is development for hybrid vehicles as an integrated solution.
Adam Michael Jonas: The product Q2 days is for one of those type of biological platform and Leverages, our inflows of product leadership and scale.
Adam Michael Jonas: Next on slide seven.
Adam Michael Jonas: In addition to securing new business, we took multiple steps to build additional capabilities.
Adam Michael Jonas: Within our <unk> product portfolio driving product leadership and differentiation.
Adam Michael Jonas: I would like to highlight three of them today.
Adam Michael Jonas: First borgwarner completed its acquisition of the electric hybrid systems segment of vendor.
Adam Michael Jonas: This provides us with additional capabilities and onboard Chargers.
Adam Michael Jonas: D C converters and integrated high voltage Buck loot boxes, all of which are expected to complement <unk> existing product portfolio.
Adam Michael Jonas: Rich.
Adam Michael Jonas: Yes.
Adam Michael Jonas: Next.
Adam Michael Jonas: Borgwarner is continuing to expand its product portfolio for battery electric and hybrid commercial vehicles.
Adam Michael Jonas: Our agreement to form a joint venture with Shaanxi fast to drive group a wage a subsidiary.
Adam Michael Jonas: We're working together to accelerate the product efficiency and growth in the Chinese CV market.
Adam Michael Jonas: The largest CV powertrain supplier in China.
Adam Michael Jonas: Borgwarner will then be able to use these products and technologies for the rest of the world.
Adam Michael Jonas: Finally.
Adam Michael Jonas: Borgwarner Science and international strategic relationship agreement with BYD subsidiary.
Ken: Dreams battery for NSP sales.
Speaker Change: Thanks.
Speaker Change: Under this agreement.
Adam Michael Jonas: Warner will be the only non OEM broker like manufacturer and affiliated with Finn Finn doing batteries with rights to localize NSP battery packs for commercial vehicles stipulate in feed dreams batteries late sales.
Adam Michael Jonas: These facts are expected to be sold in the C V markets in Europe.
Adam Michael Jonas: <unk> and select Asia Pacific regions.
Adam Michael Jonas: The F. B battery chemistry is an exciting technology that is cost competitive in comparison with some of the sale of Chemistries.
Adam Michael Jonas: We're seeing increased demand from our customers full tanks with S b cells.
Adam Michael Jonas: Syndrome, Sperry is right for Borgwarner in this area with over 20 years of experience in batteries with numerous successful product analysis.
Adam Michael Jonas: Next on slide eight I would like to summarize the growth. We expect you know E product sales in 2024.
Adam Michael Jonas: We expect 2024 E product sales of $2 5 billion to $2 8 billion, representing a year over year growth of 25% to 40%.
James Albert Picariello: One important driver of our 2020 for growth.
James Albert Picariello: It is expected to be all battery system product line.
James Albert Picariello: Battery systems demand from our commercial vehicle customers trucks and buses.
James Picariello: Continues to outpace our ability to produce.
James Picariello: However, we are continuing to increase our capacity to meet the strong customer demand.
James Picariello: Both incentive kind of North Carolina and in Europe.
James Picariello: We expect these capacity expansion to help drive a $250 million to $350 million increase.
James Picariello: In battery system sales in 2024, which equates to 55% to 75% year over year growth.
Speaker Change: With more to come.
Speaker Change: They are looking at looking at the other parts of our product portfolio, our guidance is 14% to 27% year over year growth.
James Picariello: With the mid point roughly in line with our expected Bev hybrid market growth.
James Picariello: Overall, we expect 2024 to be a heavy year related to the number of ounces.
James Picariello: Cross sell light vehicle portfolio from IBM to motors and power electronics to thermal management globally.
Speaker Change: For both <unk> and.
Speaker Change: And hybrids.
James Picariello: While we expect another yield but it does it does.
James Picariello: Beds in hybrids for you and for the industry.
James Picariello: We believe our capacity expansions and intense lounge activities will support our outlook.
James Picariello: Finally on slide 10.
James Picariello: I wanted to take the opportunity to remind you of the.
James Picariello: The intent of challenging fall of 2027.
James Picariello: Challenging for all of 2027 has three pillars, one E products growth.
James Picariello: To your product profitability.
James Picariello: And three maximize that foundational value.
James Picariello: The first two pillars center around supporting Borgwarner as long term profitable growth.
James Picariello: We continue to believe that despite near term volatility.
James Picariello: Mid to long term trends.
James Picariello: Electrification and.
Adam Michael Jonas: <unk> remains strong.
Adam Michael Jonas: We believe that full wise clearly positioning itself to.
Adam Michael Jonas: To be amongst the leaders in terms of E product business Awards.
Adam Michael Jonas: And to do so profitably.
Adam Michael Jonas: The third pillar of charging forward is an enabler of these long term growth.
Adam Michael Jonas: Our foundational business brings customer relationship.
Adam Michael Jonas: Technological capabilities and the ability to internally fund our investments.
Adam Michael Jonas: As importantly, what is leading market positions and strong margin profile.
Adam Michael Jonas: We believe our foundational business provides near term earnings resiliency.
Adam Michael Jonas: During times of Bev and hybrid market volatility.
Emmanuel Rosner: Just as we highlighted at our Investor day back in June.
Emmanuel Rosner: As Kevin will review that.
Emmanuel Rosner: That is evident both in our 2023 results and our 2020 for outlook.
Emmanuel Rosner: The key takeaway is that both our product and our foundational business names.
Emmanuel Rosner: Play important role in charging forward 2027.
Speaker Change: This was true when we unveiled our plan in June and it remains true today.
Speaker Change: As I look back on 2023 might take into this.
Speaker Change: Borgwarner successfully manage another challenging environment during 2023.
Kevin: We delivered solid margins and strong free cash flow, which is a sign of the product resiliency that we built.
Speaker Change: We successfully completed the spinoff of Affinia.
Speaker Change: We secured new business awards that are supportive of our long term revenue objectives in all types of electrification.
Speaker Change: Train architectures.
Speaker Change: We also secured some critical alliances, especially on the CV side.
Speaker Change: With subsidiaries of wage a floating voters and BYD for battery packs.
Speaker Change: We also continued to return capital to shareholders.
Speaker Change: Warner has repurchased about 600 million of stock since completing.
Speaker Change: The Delphi acquisition in 2020.
Speaker Change: And over the last four years, we have also returned about 600 million to shareholders in dividends.
Speaker Change: Borgwarner has returned about $1 2 billion to shareholders since 2020, and that's before considering the tax free spin.
Speaker Change: A finish.
Speaker Change: Okay.
Speaker Change: Moving into 2024 and beyond.
Speaker Change: We are balancing near term margins relative to our long term objectives.
Speaker Change: We expect to manage our incremental margin holistically, while continuing to invest in our future growth.
Speaker Change: As we've always said.
Speaker Change: The industry growth invest in hybrids will not be a straight line.
Speaker Change: The near term volatility is a long term opportunity for the companies with the final show strengths.
Speaker Change: Earnings resiliency and the great products for this your focus their core processes.
Speaker Change: Our product portfolio is built for resiliency.
Speaker Change: Such that a longer combustion tail will help margin and cash generation.
Speaker Change: As a company we are executing our challenging forward 2027.
Speaker Change: Which we expect will deliver value to our shareholders here and now and long into the future.
Speaker Change: This is kevin's last earnings call with the company and I wanted to take a moment to personally thank him for his tremendous contribution to our company.
Speaker Change: Over the past few years.
Speaker Change: Kevin has played an instrumental role in all of Borgwarner as recent major strategic initiatives ranging from the acquisition of Delphi through the creation and execution of charging forward.
Noah Kaye: What is the split of Affinia.
Noah Kaye: On behalf of the entire board of directors and the management team.
Speaker Change: Thank him for his contribution to our company for his friendship and wish him a fantastic retirement.
Noah Kaye: I look forward to Craig Allen stepping into the CFO role next month.
Speaker Change: I am confident Craig is the right skills.
Speaker Change: Deep knowledge of Borgwarner in our industry to execute our next chapter of profitable growth with that let me turn the call over to Kevin.
Kevin: Thank you Frank and good morning, everyone.
Frank: Before I dive into the financials I'd like to provide a quick overview of our fourth quarter results.
Speaker Change: I'll be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2023 fourth quarter and full year financial results call.
Speaker Change: All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you were using a speakerphone. Please pick up the handset before asking your question.
Speaker Change: I would now like to turn the conference over to Patrick Nolan Vice President Investor Relations. Mr. Nolan you may begin your conference.
But just about al good morning, everyone and thank you for joining us today.
Fred: Our earnings release earlier. This morning, I was it on our website Borgwarner com both on our homepage at our Investor Relations homepage.
Fred: With regard to our Investor Relations calendar, we will be attending multiple houses between now and our next earnings release. Please see the events section of our IR page for a full list.
Fred: Before getting to inform you that during this call. We may make forward looking statements, which involve risks and uncertainties are detailed in our 10-K.
Fred: Our actual results may differ significantly from the matters discussed today.
Fred: During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clear a clearer picture of how the core business performed and for comparison purposes with prior periods.
When you hear say on a comparable basis that means excluding the impact of FX M&A and other non comparable items.
Fred: When you hear say adjusted that means excluding non comparable items.
Savannah: And finally, when you hear us say organic that means excluding the impact of FX and that that Manhattan.
Dan Levy: We will also refer to our growth compared to our market.
Fred: Can you hear us say market that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure.
Dan Levy: 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 are under discussion.
Patrick Nolan: With that I'm happy to turn the call over to Fred Thank.
Patrick Nolan: Thank you Beth.
Speaker Change: Good day everyone.
Speaker Change: Pleased to share our results for 2023 and provide an overall company update starting on slide five.
Fred: With approximately $14 billion in sales, we delivered more than 12% organic growth in 2020 three.
Fred: Our margin performance was strong.
Fred: I mean at the high end, although Gabe.
Fred: During the course of 'twenty three we're just too though he products topline yeah. It to reflect what we saw in the marketplace.
Speaker Change: It resulted in a slightly lower top line for the company, but higher margins.
Speaker Change: This is a good example of the product portfolio resilience that exist.
Fred: At Borgwarner.
Fred: We did with 565 million of free cash flow in 'twenty three.
Fred: This free cash flow supported the $177 million of share repurchases that we executed during the fourth quarter.
Fred: As the closing of the Al Dor acquisition.
Fred: Our challenging forward progress continues on multiple fronts.
Fred: We secured multiple new product awards during the fourth quarter, adding to those already announced over the course of the year.
Fred: These are rules, where a cross sell both for Ya for both Beth and hybrid architectures.
Fred: We continue to see a strong sourcing pool for our product base.
Fred: Based on the strength of our portfolio globally.
Fred Thank: Lastly, we.
Fred Thank: We took steps to enable new business awards.
Fred: Executive several strategic actions to further strengthen our product portfolio like the acquisition of electronics business.
Fred: What is the strategic agreement with BYD syndrome, and batteries for NSP packs.
Speaker Change: Outside of China.
Speaker Change: Now.
Speaker Change: Let's look at some new product awards on slide six.
Speaker Change: First borgwarner has been selected by shell thing.
Speaker Change: Its E mode to a rotor and stator for the X Knight NPV as well as for the next electric B class sedan.
Fred: <unk> began in January 2024, 49.
Fred: We're planning to start producing for the B class sedan in Q3 'twenty four.
Fred: Our high voltage app into 'twenty E motor offers.
Speaker Change: Power and torque density and higher efficiency at a competitive cost.
Fred: We're excited to supply HL Bang without proven stay tuned wrote them.
Fred: We believe it continues to position us for long term success in China.
And EV penetration is already more than 35% of the market.
Fred: Second Borgwarner secured an award with a major global OEM to extend its existing business supplying a 400 volt high voltage coolant eases.
Fred: Some of the automakers light vehicle bedspread forms.
Fred: Specifically for its passenger truck and SUV programs.
Fred: This business win is one of the three awards with North American Oems incorporating both one is high voltage coolant heater.
Fred: Into their vehicles.
Fred: Third Borgwarner are secured in a world with a major Chinese OEM to supply its 1990 kilowatt dual inhibitor of a series of the automakers plug in hybrids.
Fred: And range extended electric vehicles.
Fred: Production is expected to begin.
Fred: In September this year.
Fred: The jewelry inverter is developed for hybrid vehicles as an integrated solution.
Fred: Q2 days is for one of those type of power module platform and.
Fred: Averages are and those are products as it should and scale.
Fred: Next on slide seven.
Fred: In addition to securing new business, we took multiple steps to build additional capabilities within our product portfolio driving product or the shipper differentiations.
Fred: I would like to highlight three of them today.
Fred: First <unk>.
Fred: <unk> completed its acquisition of the electric hybrid systems segment of vendor.
Fred: This provides us with additional capabilities in the Unbilled charges, DC DC converters and integrate into the high voltage Buck loot boxes, all of which are expected to complement <unk> existing product portfolio.
Fred: Right.
Fred: Yes.
Fred: Next bill.
Kevin: Borgwarner is continuing to expand its product portfolio for battery electric and hybrid commercial vehicles.
Kevin: Our agreement to form a joint venture with Shaanxi fast to drive group a wage a subsidiary.
Kevin: We're working together to accelerate the product efficiency and growth in the Chinese TV market.
Adam Michael Jonas: The largest C V powertrain supplier in China.
Adam Michael Jonas: Borgwarner will then be able to use these products and technologies for the rest of the world.
Adam Michael Jonas: Finally, Borgwarner science and international strategic relationship agreement with BYD subsidiary Fin Dreams battery for NSP sales.
Adam Michael Jonas: Next.
Adam Michael Jonas: Under this agreement Borgwarner will be the only non OEM broker like manufacturer unaffiliated with Finn Finn doing batteries with rights to look at it as the battery packs for commercial vehicles today.
Adam Michael Jonas: Delays in feed dreams batteries late sales.
Adam Michael Jonas: These facts are expected to be sold in the C V markets in Europe, the Americas, and select Asia Pacific regions.
Adam Michael Jonas: The F. B battery chemistry is an exciting technology that is cost competitive in comparison with some of the sale of Chemistries.
Adam Michael Jonas: We're seeing increased demand from our customers full tanks with NSP sales.
Adam Michael Jonas: Syndrome, Sperry is right for Borgwarner in this area with over 20 years of experience in batteries with numerous successful product in ounces.
Adam Michael Jonas: Yeah.
Adam Michael Jonas: Next on slide eight I would like to summarize the growth. We expect you know E product sales in 2024.
Adam Michael Jonas: We expect 2024 E product sales of $2 5 billion to $2 8 billion, representing a year over year growth of 25% to 40%.
Adam Michael Jonas: One important driver of our 2020 full growth is expected to be all battery system product line.
Adam Michael Jonas: Battery systems demand from our commercial vehicle customers trucks and buses.
Speaker Change: Continues to outpace our ability to produce.
Adam Michael Jonas: However, we are continuing to increase our capacity to meet the strong customer demand.
Hugh: Both incentive kind of North Carolina and in Europe.
Adam Michael Jonas: We expect these capacity expansion to help drive a $250 million to $350 million increase.
Adam Michael Jonas: In battery system sales in 2024, which equates to 55% to 75% year over year growth.
Adam Michael Jonas: With more to come.
Adam Michael Jonas: We're looking at looking at the other parts of our product portfolio, our guidance is 14% to 27% year over year growth.
Adam Michael Jonas: With the mid point roughly in line with our expected Bev hybrid market growth.
Adam Michael Jonas: Overall, we expect 2024 to be a heavy year related to the number of ounces.
Adam Michael Jonas: Cross sell light vehicle portfolio from IBM to motors and power electronics to thermal management globally.
Adam Michael Jonas: For both <unk> and.
Adam Michael Jonas: And hybrids.
Speaker Change: While we expect another yield 10 beds in hybrids volume for the industry.
Adam Michael Jonas: We believe our capacity expansions and intense lounge activities will support our outlook.
James Albert Picariello: Finally on slide 10.
James Albert Picariello: I wanted to take the opportunity to remind you of the intent of challenging fall of 2027.
James Picariello: Challenging for all of 2027 has three pillars, one E products growth.
James Picariello: To your product profitability.
James Picariello: And three maximize the foundational value.
The first two pillars center around supporting Borgwarner as long term profitable growth.
James Picariello: We continue to believe that despite near term volatility.
James Picariello: Mid to long term trends.
James Picariello: Electrification Bev hybrid remains strong.
Speaker Change: We believe that Borgwarner is clearly positioning itself.
James Picariello: To be amongst the leaders in terms of E product business Awards.
James Picariello: And to do so profitably.
James Picariello: The third pillar of charging forward is an enabler of these long term growth.
James Picariello: Our foundational business brings customer relationship.
James Picariello: Technological capabilities and the ability to internally fund our investments.
Speaker Change: As importantly, what is leading market positions and strong margin profile.
James Picariello: We believe our foundational business provides near term earnings resiliency.
James Picariello: During times of Bev and hybrid market volatility.
James Picariello: As we highlighted at our Investor day back in June.
James Picariello: As Kevin will review that.
James Picariello: That is evident both in our 2023 results.
James Picariello: Our 2020 for outlook.
James Picariello: The key takeaway is that both our product and our foundational business names.
James Picariello: The important role in charging fall of 2027.
This was true when we unveiled our plan in June and it remains true today.
James Picariello: As I look back on 2023 might take as this.
James Picariello: Borgwarner successfully manage another challenging environment during 2023.
Adam Michael Jonas: We delivered solid margins and strong free cash flow, which is a sign of the product resiliency that we've built.
Adam Michael Jonas: We successfully completed the spinoff of Affinia.
Adam Michael Jonas: We secured new business awards that are supportive of our long term revenue objectives.
Adam Michael Jonas: In all types of electrification.
Adam Michael Jonas: Powertrain architectures.
Adam Michael Jonas: We also secured some critical alliances, especially on the CV side with subsidiaries of leachate for Inverters and BYD for battery packs.
Adam Michael Jonas: We also continued to return capital to shareholders.
Adam Michael Jonas: Borgwarner has repurchased about 600 million of stock since completing.
The Delphi acquisition in 2020.
Emmanuel Rosner: And over the last four years, we have also returned about 600 million to shareholders in dividends.
Emmanuel Rosner: Borgwarner as return.
Emmanuel Rosner: One $2 billion to shareholders since 2020, and Thats before considering the tax free spin.
Emmanuel Rosner: Finish.
Speaker Change: Moving into 2024 and beyond.
Speaker Change: We are balancing neuro term margins relative to our long term objectives.
Speaker Change: We expect to manage our incremental margin holistically, while continuing to invest in our future growth.
Speaker Change: As we've always said.
Kevin: The industry growth invest in hybrids will not be a straight line.
Kevin: The near term volatility is a long term opportunity for the companies with the final show strengths.
Speaker Change: Earnings resiliency and the great products for this you focus that call one of processes.
Speaker Change: Our product portfolio is built for resiliency such.
Speaker Change: Such that the longer a combustion tail will help margin and cash generation.
Speaker Change: As a company we are executing our challenging forward 2027.
Speaker Change: Which we expect will deliver value to our shareholders here and now and long into the future.
Speaker Change: This is kevin's last earnings call with the company and I wanted to take a moment to personally thank him for his tremendous contribution to our company.
Speaker Change: Over the past few years.
Speaker Change: Kevin has played an instrumental role in all of Borgwarner as recent majors trying to take initiatives ranging from the acquisition of Delphi through the creation and execution of challenging forward.
Speaker Change: What is the split of Affinia.
On behalf of the entire board of directors and the management team.
Speaker Change: Thank him for his contribution to our company for his friendship and wish him a fantastic retirement.
Speaker Change: I look forward to Craig Irwin stepping into the CFO role next month.
Speaker Change: I am confident Craig is the right skills.
Speaker Change: Deep knowledge of Borgwarner in our industry to execute our next chapter of profitable growth with that let me turn the call over to Kevin.
Speaker Change: Thank you Brad and good morning, everyone.
Speaker Change: Before I dive into the financials I'd like to provide a quick overview of our fourth quarter results.
Speaker Change: First revenue was at the midpoint of our guidance supported by stronger than expected industry production in the quarter.
Speaker Change: Second our margin performance was at the high end of our guidance driven by strong conversion on higher revenue.
Speaker Change: And finally, we delivered strong free cash flow performance to finish out the year.
Speaker Change: Okay.
Speaker Change: Let's turn to slide 10 for a look at our year over year revenue walk for Q4.
Speaker Change: Last year's Q4 revenue from continuing operations was just over $3 $3 billion.
Speaker Change: You can see that the weakening U S dollar drove a year over year increase in revenue of almost 2% or $55 million.
Speaker Change: And you can see the increase in our organic revenue, which was roughly four 5% year over year.
Noah Kaye: The reason why our growth was stronger than we were negatively impacted in the quarter by customer launch and ramp up the place of a key product programs in China.
Lower customer volumes on our North American EV program.
Noah Kaye: And lost sales due to the UAW strike in North America.
Speaker Change: Finally, the acquisition of Eldar, and SFC added $5 million to revenue year over year.
Kevin: The sum of all of this was just over $3 $5 billion of revenue in Q4.
Kevin: Turning to slide 11, you can see our earnings and cash flow performance for the quarter.
Kevin: Our fourth quarter adjusted operating income was $332 million equating to a nine 4% margin.
Speaker Change: That compares to adjusted operating income from continuing operations of $321 million or nine 7% from a year ago.
Speaker Change: On a comparable basis, excluding the impact of foreign exchange and the impact of M&A.
Speaker Change: Adjusted operating income increased $16 million on $145 million of higher sales.
Speaker Change: This performance includes a planned E product related R&D increase of $15 million.
Speaker Change: Excluding this higher E R&D investment we converted at approximately 21% on the organic sales increase.
Speaker Change: Our adjusted EPS from continuing operations was down four cents compared to a year ago at higher adjusted operating income was offset by a higher effective tax rate.
Speaker Change: Recall that our adjusted effective tax rate in Q4 of 2022 with only 18% lower than our typical tax rate.
Speaker Change: And finally free cash flow from continuing operations was $679 million during the fourth quarter, which allowed us to deliver full year free cash flow of $565 million.
Speaker Change: On slide 12, I'd like to take a moment to look at our 2023 results compared to the post <unk> spin off guidance that we provided in June.
Speaker Change: Because I think it provides a helpful look at the resilience, we believe underlies our current product portfolio.
Speaker Change: You'll see that overall sales came in modestly below that midpoint of that guidance.
Speaker Change: While E product sales fell short by about $400 million relative to the midpoint of our two three to $2 $6 billion guide.
Speaker Change: Our national sales largely offset this coming in about $300 million higher than the June guidance.
Speaker Change: However, the real evidence of our earnings resilience is in our adjusted operating margin performance.
Speaker Change: Despite the shortfall in sales relative to the midpoint of our June guidance, adjusted operating margin and adjusted operating income dollars.
Speaker Change: It came in above the midpoint of that June guidance.
This demonstrates precisely the resiliency, we've been speaking about since our Investor day.
Speaker Change: If he products are weaker than our revenue I think going to grow as quickly.
Speaker Change: Our margin is likely going to be stronger and that's what happened in the second half of 2023.
Speaker Change: Okay.
Speaker Change: Let's now turn to slide 13, where you can see our perspective on global industry production for 2024.
Speaker Change: We expect our global weighted light and commercial vehicle markets to be flat to down two 5% this year.
Speaker Change: Looking at this by region, we're planning for our weighted North American markets to be down 1% to up 1%.
Speaker Change: In Europe, we expect our blended market to be down 2% to 4% year over year.
Speaker Change: And in China, we expect the overall market to be down 1% to up 1%.
Speaker Change: Now, let's take a look at our full year outlook on slide 14.
Speaker Change: First it's important to note that our guidance assumes minimal impact from foreign currencies on full year sales.
Speaker Change: Second as I previously mentioned, we expect our markets to be flat to down two 5% for the year.
Speaker Change: Despite that we expect to continue to deliver year over year organic sales growth driven by growth in our <unk> product sales.
Speaker Change: Specifically in 2024, we're expecting to deliver between two five and $2 8 billion and <unk> product sales, which is up significantly from the approximately $2 billion, we generated in 2023.
Speaker Change: Finally, the LDR acquisition is expected to add approximately $40 million to 2020 for revenue.
Speaker Change: Based on these expectations, we're projecting total 2020 for revenue in the range of 14, 4% to $14 9 billion.
Speaker Change: Which equates to organic growth of approximately 1% to 5%.
Speaker Change: Right.
Speaker Change: Let's switch to margin.
Speaker Change: We expect our full year adjusted operating margin to be in the range of nine 2% to nine 6%.
Speaker Change: It is important to note that this guidance includes a negative operating income impact due to the LDR acquisition.
Speaker Change: But as al Dor, we purchased strong engineering capabilities that we believe more clearly puts us on a path to achieving product leadership and an addressable market that we expect will approach $30 billion by 2030.
Speaker Change: However that business has very little revenue today, which means we'll be generating operating losses for the next few years.
Speaker Change: Excluding the impact of those Eldar related losses in 2024, we expect adjusted operating margin to be in the range of nine 6% to nine 9%, which compares to our 2023 margin of nine 6%.
Speaker Change: That implies the rest of the business delivering full year incrementals in the mid to high teens, including our planned growth in the E. R E.
Speaker Change: We believe this margin performance is a reflection of the underlying earnings power of the company with the ability to manage costs and drive conversion even in the face of volatile Bev and hybrid markets.
Speaker Change: Based on this revenue and margin outlook, we're expecting full year adjusted EPS from continuing operations in the range of $3 65 to $4 per diluted share.
Speaker Change: Turning to free cash flow, we expect will deliver free cash flow of $475 million to $575 million for the full year.
Speaker Change: The midpoint of this outlook is slightly lower than the 565 million we generated in 2023 due to a modest build in working capital that supports our revenue growth.
Speaker Change: That's our 2020 for outlook.
Speaker Change: So let me summarize my financial remarks.
Speaker Change: Overall, we delivered a solid 2023 result, despite volatility in EV markets and our associated the product revenue.
Speaker Change: Our adjusted operating income and free cash flow performance shows the resilience of our portfolio specifically.
Pat: Specifically when he product growth is under pressure, it's likely to be offset by stronger performance in the rest of the portfolio.
Pat: Now as we look ahead to 2024, the company will be keenly focused on delivering organic growth. Despite near term volatility in the global Bev and hybrid markets and the expected softening of industry production.
Pat: Delivering strong incremental margin performance on an all in basis, including our spending to support growth.
Speaker Change: And continuing to make the prudent investments both organic and inorganic and we believe will help secure our growth and financial strength long into the future.
John Murphy: Okay.
Speaker Change: This will be my last earnings call. After five years, working with Fred and the team to drive the transformation of Borgwarner.
John Murphy: I'm proud that I can leave the company in a moment I truly believe it's positioned to be a winner in the world of electrification across a variety of <unk> products, which is probably not the case when I joined in 2019.
John Murphy: With a resilient portfolio I believe the company is poised for long term success no matter, how the progression toward electrification plays out in the coming years.
John Murphy: And as a result, I expect that will translate into value creation for our shareholders.
Speaker Change: I'd like to thank Fred and the team for the opportunity to be part of this journey and I know I'm, leaving the finance function in good hands with Craig.
Speaker Change: Finally, thanks to all of you in the investment community for our engagement over my last 11 years as a public company CFO.
Speaker Change: It's been a fun ride and I've enjoyed the relationships I've had the chance to build with many of you over the years.
Speaker Change: With that I'd like to turn the call back over to Pat. Thank.
Pat: Thank you, Kevin Nevada, we're ready to open up for questions.
John Murphy: Yeah.
Pat: Thank you and 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 the interest of time. Please limit yourself to one question and one follow up question, we will pause for a moment to compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: And our first question will come from John Murphy with Bank of America.
John Murphy: Please go ahead.
John Murphy: Good morning, everybody and congrats Kevin look forward to crossing paths sometime in the near future.
Speaker Change: Hey, Jeff.
Jeff: Just a first question here you know I understand you have to run a business.
Jeff: And sometimes it makes sense in the volatile world that we live in today is slightly conservative attack. If I were to tell you you know instead of your volumes being flat to down two 9% year, they might be flat to up two 5% at the midpoint of the range I would add about $355 million.
John Murphy: In revenue.
John Murphy: What's your outlook would it be reasonable to keep.
You can sort of assume that those could convert sort of a 15% to 20% incremental margin and that would kind of really translates to about 5% upside to earnings are essentially cash flow is that a reasonable way to think about it if that would happen.
Speaker Change: It's a reasonable way to think about it yes, we are.
Our guidance is premised on our expectation that our markets are flat to down two 5%, but if markets come in stronger we'd fully expect that we would execute on that deliver the revenue and convert on it and you can see the conversion on an all in basis implied in our guide is a mid teens conversion and so if we see upside in revenue you should expect to see us convert.
Manny: On that incremental revenue.
Manny: Okay and then just.
Speaker Change: A quick follow up.
Speaker Change: Is it shifting all over the place, although it's not moving as quickly as it was kind of some of the commentary would lead you to believe if we saw a greater hybrid penetration not just in 2024, but maybe in 2025 and beyond Fred is there potentially a shift in cap allocation in slightly in strategy that you can.
Speaker Change: You could execute and not leave capital screened at I mean, you know how sensitive are you to shifts between evs.
Speaker Change: In hybrid and how much would you have to shift strategy and capital allocation.
Speaker Change: The products for the east side of libraries, all similar than the product from Dev.
Speaker Change: All the same motors.
Speaker Change: Same power electronics, the same transmission cases.
Speaker Change: They are the same high voltage coolant heater is so it's from an R&D perspective, it's extraordinary fungible the same engineers.
Speaker Change: And from a capital standpoint, it's pretty fungible too. So we've developed the product portfolio that is.
I would say very fungible across hybrids in Bev.
al: Very much so.
Speaker Change: That's helpful. Thank you guys.
al: Yeah.
Speaker Change #100: Thank you John.
Speaker Change #100: Yeah.
Speaker Change #100: [noise] Battle ready to come out next question.
Speaker Change #100: Yeah.
Speaker Change #100: Okay.
Speaker Change #100: So Matt are you there.
Matt: Yes, I hear you man.
Matt: Yes. Please the next question please.
Manny: Yeah.
Speaker Change #102: Question will come from.
Speaker Change #102: Okay.
Speaker Change #103: Oh, great. Thanks for taking my question and congrats Kevin as well.
Kevin A. Nowlan: Thanks, Alex just looking just.
Manny: Knocking on contribution margin it does come out with something like a 16, if you exclude al Dor.
Manny: Any other puts and takes you mentioned your R&D how much of a headwind is there any commodity or labor issues that we should be thinking about.
Speaker Change: And then when we think about outdoor when does this drags starts to go away or is that sort of is gonna be here for several years.
Speaker Change: With respect to the year over year conversion in 'twenty four there is nothing unusual to really think about I mean, you're right. We're looking at the mid teens and that is on an all in basis. If you look at it we are investing a little bit more on the product R&D again in 2024, it'll be up organically about $40 million to $50 million, but that's embedded with.
Speaker Change: In that conversion. So we're looking at our conversion now given the scale of the business from a new product perspective on an all in basis.
Speaker Change: And we expect to contribute in the mid teens.
Speaker Change: With that in mind.
Speaker Change: Okay.
al: And al Dor any thoughts on that.
al: Great.
al: So let me take a step back here.
al: I think board is very good at taking great technologies, and commercializing them and globalizing them look at what we've done with <unk>.
Speaker Change: Then if I look at what we've done with <unk>, which was which literally had no revenue issue we had.
Speaker Change: $750 million at the midpoint.
Speaker Change: The plan with a long D. C. D. C converters onboard Chargers is is exactly that and so I'm very.
Speaker Change #104: I'm optimistic about that.
Speaker Change: The drive that we can generate.
Speaker Change: The profitable growth, we can generate from the engineering base that we've acquired with indoor.
Speaker Change #105: And maybe I'd just add to that Collyn.
Speaker Change #106: This is something we anticipated when we gave guidance back at our Investor day, as well and because Eldar was well in flight and we knew that would have an impact on our margin in the short term a position us for long term success in a $30 billion addressable market in 2030. So it is impacting the near term, but over time as we start to have some success in that business look into the next few.
Speaker Change: Years out it'll start to be a.
Speaker Change: Positive for us, but that's still several years away, we expect to have operating losses in that business for the next couple of years as we support the R&D necessary to support our capitalizing on that business.
Speaker Change #107: Okay that makes sense.
Speaker Change #107: Just you touched today on.
Speaker Change #107: This year's guidance being sort of flexible between E V and ice profitability and at your Investor Day, you talked about 27 same dynamic. So that's E. D mix is higher to sort of offset higher or lower you'd add a dollar basis similar in 'twenty seven.
Speaker Change #107: But you're still forecasting them like a fivefold increase in your E powertrain sales.
Speaker Change #107: Through 'twenty seven.
Speaker Change #107: That would imply probably a lot of E R&D as you're trying to prepare for those launches. So is that a flexibility you're going to be consistent over the mid term or is there going to be.
Speaker Change #107: Because you have some pretty chunky R&D needs to get ready for that you.
Speaker Change #107: You talked about 27.
Speaker Change #107: Yeah. When you look at the product related R&D as we've mentioned in the past we thought the real peak and that was going to be in 2022 in terms of the growth in the product R&D you might remember it stepped up a $150 million that that year, but then we said we expect the pace of the growth in the E R&D to step down year over year, and you can see that happening.
Last year, it stepped up about $60 million, so not as big an increase as what we saw in 2022 and as we look ahead to 2004, it's going to step up about $40 million to $50 million organically. So the pace of the growth in that E. R&D is definitely slowing but still growing because it's supporting our ability to successfully launch and ramp up programs as well as to capitalize.
Speaker Change #107: On continued profitable opportunities out into the future. So we think the pace of what we're seeing right now is supportive of our long term outlook for electrification.
Speaker Change #108: Okay, great. Thanks for taking my question.
Speaker Change #108: Our next question will come from Joe Spak with UBS.
Joseph Spak: Uh huh.
Joseph Spak: Yes.
Joseph Spak: Thanks, Good morning, and congrats to both Kevin and Craig.
Joseph Spak: I guess I just wanted to sort of touch on a couple of the mid term factors here in light of.
Joseph Spak: What's going on in your strategy.
Joseph Spak: First.
Joseph Spak: If I look at slide 13, and I look at it.
Joseph Spak: <unk> plus hybrid at the industry.
Joseph Spak: Showing about a 4% decline roughly at the industry level. Your implied foundational revenue growth is like minus one and a half so that like two to three per cent outgrowth is that like a reasonable level of outperformance on the foundational stuff is ice continues to decline over the coming years and and can you still hit.
About 13% foundational margin target that you laid out.
Joseph Spak: Ice continues to decline.
Joseph Spak: Yeah.
Joseph Spak: So.
Speaker Change #110: I would say.
Speaker Change #110: Joe that we're growing outgrowing the outgrowing the foundational.
Speaker Change #111: Bye bye.
Speaker Change #111: By about 300 basis points.
Speaker Change #111: I would tell you that on the SA ER I see more upside than downside at this point in time.
Speaker Change #111:
And we are constantly.
Speaker Change #111: As we presented a few months ago and as we reviewed with the team regularly with constantly.
Speaker Change #111: Restructuring and a position of strength are and that I believe will allow us to maintain.
Speaker Change #111: The foundational margins.
Speaker Change #111: It is called by our third pillar of challenging forward.
Okay.
Speaker Change #112: Thank you for that and then I guess, the second question maybe to build off of.
Speaker Change #112: Collins question, a little bit like you know, what let's call it two and a half billion dollars products.
Speaker Change #112: Guidance for this year you know your prior twenty-five was four and a half to 5 billion. So it's like a big jump. So maybe maybe a couple of things there like it seems like maybe some of that product launches through the year. So.
Speaker Change #112: Maybe the 24 exit rate is a better sense and I don't know if if if you would agree with that and I guess just secondly.
Speaker Change #112: You know is that sort of 25 level for your products still.
Speaker Change #112: Attainable I mean, it doesn't seem like the market really believes it is but I'd be curious to understand year over year.
Speaker Change #112: So if.
Speaker Change #112: If you take the the CV packs, a growing 69% CAGR year over year.
And we are ramping up in the U S significantly in Q2 and in Europe.
Speaker Change #112: End of the year and more to come so I would say that the 2020 end of 2024 jump off point on the C. V is much higher than the coffee.
Speaker Change #112: On light vehicle roughly 60% of the programs that we've disclosed so far.
Speaker Change #112:
Speaker Change #112: Are we announcing these here or we've announced at the tail end of last year.
Speaker Change #112: So even if there is some variability possible I think youre right. The jump off point at the end of this year is going to do from a much bigger base on the light vehicle standpoint, as it is and you just alluded to on the C. V site, So I would say that.
Speaker Change #112: The customer volumes.
Speaker Change #112: Holding as as Oh.
Speaker Change #112: The the are currently forecasting we would expect to be within that range in 2025.
Speaker Change #113: Okay. So.
Speaker Change #113: Obviously, a volatile market, we need to monitor but based on what you see now and sort of the growth through.
Speaker Change #113: The year on what you're just sort of talked about it still seems.
Speaker Change #113: Achievable.
Speaker Change #113: For now we're focusing on 24 rebalancing. So many products we are focusing on 'twenty four and we'll let you know what we think finally on 25.
And in due course.
Speaker Change #113: 24 is our focus but I just wanted to give you the color of.
Speaker Change #113: The different building blocks between C V in light vehicles.
Speaker Change #114: I appreciate that thank you.
Speaker Change #115: Thank you.
Speaker Change #115: Okay.
Speaker Change #115: Our next question will come from Rod Lache with Wolfe Research. Please go ahead.
Rod Lache: Good morning, everybody.
Rod Lache: Hey, Brad Congrats Kevin.
Rod Lache: Okay.
Rod Lache: First of all confirm.
Rod Lache: On the question that.
Rod Lache: Joe just as is.
Rod Lache: Based on the growth in <unk> products and in a flat market. It would appear that there is some moderation in the foundational business.
Rod Lache: But you are maintaining that 13% margin so youre not delevering.
Rod Lache: And secondly, can you remind us what's embedded for M&A within the E products revenue target for 2025, and I'm, referring to the four and a half to $5 billion.
Speaker Change #117: So I'll take the second part of the question.
Speaker Change #117: Yeah.
Speaker Change #118: There is no M&A in the four five to five it is booked business. There is a significant portion of about $2 billion of M&A in 2027.
Speaker Change #118: Okay.
Speaker Change #118: And then on the foundational margin hit one of our key strategies is that we know over time as electrification continues to grow at the expense of.
Speaker Change #118: Underlying combustion based technology that all put pressure over time on our revenue outlook and our challenge is to make sure. We're managing the cost structure of that business actually you can see the overall P&L of that business, whether that's on the price side or the cost side to make sure we are delivering and sustaining our margin profile, we fully expect that to be the case as we go through 2024.
Speaker Change #118: And well beyond that.
Speaker Change #119: Okay. Thanks for that and maybe just bigger picture when we take a step back and you you kind of analyze the regulatory requirements for your light vehicle customers I'm curious if you have any thoughts on how much flexibility the Oems really have to defer our electric vehicles.
Speaker Change #119: Do you think that they would be able to shift to plug ins or hybrids to a much greater extent and are you seeing any benefit from the fact that you have a lot of kind of off the shelf hybrid technology, which.
Speaker Change #119: It's these are sort of late decisions I would imagine they might accelerate.
Speaker Change #119: Yeah, so for customers.
Speaker Change #119: Most of them do you need to ask them I think there is some flexibility we are hearing commentary that he would do that in the U S. There was some intention to Russell hybrids outside of the U S. Hybrid is a big portion of the new energy vehicles.
Speaker Change #119: China 30 to 40 percentage Europe, its a big percentage to what's important to me is that we build our product portfolio.
Speaker Change #119: <unk> is totally fungible across hybrid and Dev.
Speaker Change #119: Al N D. It's the same engineers power electronics motors transmission thermal that it's the same thing for us it doesn't matter, we can support our customer to wherever they want to grow.
Speaker Change #119: So Fred just to clarify.
Fred Thank: Are you actually seeing that we're reading about it we're hearing about this increased interest in the U S are you or your customers now sort of accelerating activity with you and in that area.
Fred Thank: Brian I think it's I think it's a little too early to see the communication and the <unk> materializing on the hybrid side.
Fred Thank:
Fred Thank: But I would say that with the scale that we have with all of your products that got figure out hybrids different types of I believe it was as we can be one of the one of our neighbors of our rapid launch of hybrid powertrain for those customers.
Brian: That makes sense. Thank you.
Speaker Change #121: Thank you Rob.
Speaker Change #121: Your next question will come from Dan Levy with Barclays.
Dan Levy: Hi, good morning, Thanks for taking the question.
Dan Levy: Congratulations.
Dan Levy: Kevin.
Oh no.
Dan Levy: And then he goes.
Speaker Change #122: And maybe we can just start with El.
Speaker Change #122: Although in the broader M&A strategy specifically.
Speaker Change #122: How are you managing I guess, we can say.
Speaker Change #122: Integration deals you have done.
Speaker Change #122: A lot in the way of Emma.
Speaker Change #122: M&A what is the process for <unk>.
Speaker Change #122: Integration, how do you manage any integration risk and then maybe you could just remind us on al Dor.
Speaker Change #122: Are these losses in line with what you originally anticipated or is this a function of maybe a weaker environment than when you originally did the deal.
Speaker Change #123: So first of all.
Speaker Change #123: The financial profile available was fully comprehended when do we when do we.
Speaker Change #123: Did the due diligence.
Speaker Change #123: And it was fully comprehend is into the views of our financials.
Speaker Change #123: Integration integrating companies, becoming I think a real.
Speaker Change #123: A real trend.
Speaker Change #124: Oh boy.
Speaker Change #124: And we.
Speaker Change #124: We do that in a very disciplined way.
And we're doing it with a very disciplined way with a little too Hum.
Speaker Change #124: We are locating but one of the people on location.
Speaker Change #124: And we are we are managing the business starting day, one, but we will do it for a couple of months now but.
Speaker Change #124: We are going to just manage the indoor business as we manage the bolt on the business with that.
Speaker Change #124: Initial discipline.
Speaker Change #124: They are attractive businesses.
Speaker Change #124: In Unbilled childhood D C D C, Colorado and one box.
Speaker Change #124: Which again.
Speaker Change #124: Is totally.
Speaker Change #124: Totally the same products, either it's a hybrid or Beth and we see.
Speaker Change #124: A lot of pools.
Speaker Change #124: Other than from our customers.
Speaker Change #124: In those in those Polyclinics technologists.
Speaker Change #124: Technology is too.
Speaker Change #125: And maybe I'll just piggyback on.
Speaker Change #125: Dan back to the losses being in line.
Speaker Change #125: If you look at what's implied in our guidance. This year, we're at $9 six of nine 9% without al Dor, and you know as we look out to 2027, and we thought we were on track to be a 10% margin business. So we'd already be on the cusp of that without doing outdoor but al Dor was contemplated.
Speaker Change #125: Impacting us to the tune of 30 to 40 basis points in the short term because we knew we were investing in.
Speaker Change #125: Our strong engineering shop that doesn't have a lot of revenue today and so that was contemplated in our original guidance.
Speaker Change #126: Okay, and then maybe just.
Speaker Change #127: As a follow up on that.
Speaker Change #127:
Speaker Change #127: Given you've seen some shifts in.
In product plan, maybe you could just.
Speaker Change #127: Give us a sense of what the go forward capital allocation I mean, Fred you mentioned.
Speaker Change #127: A moment ago that there's $2 billion of M&A assumed in the 2027 targets I know, we're not going to get an update on that today, but maybe you can give us a sense of how this environment shifts what your appetite is for.
Speaker Change #127: How does the capital allocation changed and what else is remaining that still isn't in your portfolio from a case.
Speaker Change #127: Capability or product.
Speaker Change #127: Or a customer exposure standpoint, that's still you know.
Speaker Change #127: It would require some M&A.
Speaker Change #127: I went to the capital.
The capital allocation strategy is pretty much unchanged, we are looking at M&A.
Speaker Change #127: M&A is as.
Speaker Change #128: Let's see.
Speaker Change #128: Important part of strengthening electrification capabilities.
Speaker Change #128: We were very disciplined in the way we look at M&A.
Speaker Change #128: We are looking at the way more companies than we actually pulling the trigger on.
Speaker Change #128: And.
Speaker Change #128: We think that the constant environment could provide could provide some attractive buying opportunities.
Speaker Change #128: And be rest assured that we will include in Kosovo the near term impact.
Speaker Change #128: In the evaluation assessments.
Speaker Change #128: We are looking at M&A as with discounted cash flows and we're taking those near term impact.
Speaker Change #128:
Speaker Change #128: A really importantly.
The.
Speaker Change #128: This is a policy on capital allocation also includes the dividends.
Speaker Change #128: We've left unchanged even during COVID-19.
Speaker Change #128: We've repurchased stocks and buyback is the start of the strategy.
Speaker Change #128: You did too in my prepared remark on how much we've given back to our shareholders.
Speaker Change #128: And and the spinoff of <unk>, which I think was a great success.
Speaker Change #128: He is also part of the capital allocation strategy, Kevin do you want add anything no I think.
Kevin A. Nowlan: Got it.
Kevin A. Nowlan: Okay.
[noise] rainfall.
Kevin A. Nowlan: Our next question will come from Adam Jonas with Morgan Stanley.
Kevin A. Nowlan: Yes.
Adam Michael Jonas: Hi, everybody and perhaps Kevin.
Adam Michael Jonas: Just two simple questions first one what portion of your 2020 for budget.
Adam Michael Jonas: Capex and R&D.
Adam Michael Jonas: Is.
Adam Michael Jonas: Allocated.
Adam Michael Jonas: With them.
Yeah, we don't we don't really break that out but it publicly in terms of what we've been disclosing in terms of an overall R&D or capex allocated that way, but what I would tell you is if you look at R&D first and foremost we end up.
Adam Michael Jonas: I said about $475 million of any product related R&D in 2023 versus the 700 million or so 715 or so of R&D in total as we look ahead to 'twenty four organically, we'll add another $40 million to $50 million of there from a product R&D perspective, and you can expect that the foundational based R&D will probably come.
Adam Michael Jonas: Down a little bit on a year over year basis as it's been doing the last few years. So the R&D will continue to be increasing fleet weighted towards E products and it is the majority of the investment from a capital perspective, and you can see we stepped up our capital investment last year pretty meaningfully a couple of hundred million dollars relative to two.
Adam Michael Jonas: <unk> 22, and that was really focused on investing in some of the.
Adam Michael Jonas: The product portfolio ramp ups that we needed, particularly within our E propulsion segment as well as our battery pack business.
Adam Michael Jonas: See a comparable level of investment in capital in 2024 going toward that and it'll be a couple of the peak years of investment from a capex perspective, particularly on that battery pack business and then you'll probably see it come back down a little bit to more normalized levels as we hit 25 and beyond.
Adam Michael Jonas: And then what's really important is to understand that the R&D and capex all for EV and hybrids and again I'd say, it's full time.
Adam Michael Jonas: <unk> saw the same for us in light vehicle, whether it goes into a hybrid or a bev.
Adam Michael Jonas: Same people the same R&D the same capex.
Speaker Change #129: Thank you and then just going to jump at.
Speaker Change #130: That point Brad.
Speaker Change #130: That there are there are many aspects of E systems that are agnostic of Magna.
Speaker Change #130: Optic between Bev and hybrid allows you a I won't hold you to specific but what would be your best guess or range of how much of your 2024.
Speaker Change #130: E systems, and foundational business are going into hybrid.
Speaker Change #130: [noise] include plug in hybrid if you were to isolate just hybrid specifically, but for some of your foundational stuff.
Speaker Change #130: Recently going into hybrids as well as we all know so I didn't know if you could isolate.
Speaker Change #130: Guess on how much hybrid hybrid would account.
Speaker Change #130: Or the revenue in 'twenty four.
Speaker Change #130: [noise].
Speaker Change #130: Range would be great.
Speaker Change #131: Yes, I guess, maybe just a couple of things I think that can come back to you on the details, but what I would tell you is when you look at the two five to $2 $8 billion guide. The first thing I'd say is off the top of the $7 million to $800 million associated with battery packs is all EV.
Speaker Change #131: It's easy in the commercial space in the CV space, So what you're really looking at it. The other 1 billion a $2 billion of product revenue and will have to come back to you with the specific breakdown I don't want to quote a number and have it a little bit off.
Speaker Change #132: Pretty good thanks.
Speaker Change #132: Yeah.
Speaker Change #132: Our next question will come from James Picariello with BNP Paribas.
James Albert Picariello: Hi, everyone. Congrats congrats Kevin.
James Albert Picariello: Just a clarification question first so based on the margin guidance excluding eldar.
James Albert Picariello: The implied loss rate for all doors. This year is roughly $50 million that right and then in addition to that impact you're stepping up organic products R&D by like $40 million to $50 million. So all in it.
James Albert Picariello: $90 million to $100 million and spend.
James Albert Picariello: Right.
Roughly yes, Eldar is a portion of the <unk> loss that engineering related it's somewhere around $40 million.
James Albert Picariello: So you're right, it's $40 million to $50 million of organic step up to the R&D and then al Dor adds about another $40 million. The overall loss in El doors around at the midpoint is around what you said.
Speaker Change #133: Yeah, Okay, and then can you confirm what the I appreciate that color and then can you just confirm what the product margin was in 2023 and then based on what we just covered is it possible.
Speaker Change #133: Part of classes or close to flat year over year, just how should we be thinking about that or asked another way.
Speaker Change #133: Part of the impetus behind separating out he propulsion was to provide that clarity and transparency on.
Speaker Change #133: Product progression is there a segment specific guidance.
Speaker Change #134: Sure maybe I'll call it the propulsion mix.
Speaker Change #135: No. We're not we're not going to give any segment specific guidance this year, but what I would say when you look at the E. Propulsion segment. Obviously, we were focused on driving towards breakeven in the fourth quarter of last year that was the guidance as we started out the year last year and that was really premised on our ability to successfully convert on the incremental revenue and we were disappointed that we have.
Speaker Change #135: Had to pull back on that when we saw some of that.
Speaker Change #135: Volatility in the market and how that was impacting our revenue. So as we ended the year you can see when you look at the E. Propulsion segment, we ended up coming in at about $540 million of revenue in the fourth quarter, which is about $2 million to $300 million short of our original guidance. When we were expecting to get to breakeven so that business ended up.
Speaker Change #135: Losing about I think $16 million or so in the fourth quarter.
Speaker Change #135: What gives us some comfort in the way we're managing the profitability of that business is the fact that we were down $200 million to $300 million in revenue versus our original guidance.
Speaker Change #135: It's simply less contribution margin flow through on those lower that lower revenue, we probably would have had a bigger loss in $16 million in the quarter. So I think we feel good about the fact that we're managing the profitability of that business in light of some of the near term volatility, but ultimately the path to breakeven into long term profitability.
Speaker Change #135: And that business comes from successfully converting on the incremental revenue and while we take a lot of comfort in is that we see that contribution margin really flowing through the business. I mean, you can see it in the 2024 Guy we're converting on an all in basis at mid teens and all of the growth in 2024 is coming from the E. <unk>.
Speaker Change #135: So we see the underlying fundamentals of the profitability coming through and so as we scale that business, we see the path towards the profitability objectives of the company and half of that portfolio.
Speaker Change #135: Thanks.
Speaker Change #135: Our next question will come from Emmanuel Rosner with Deutsche Bank.
Emmanuel Rosner: Thank you so much I was hoping to follow up on the on the incremental margins and just wanted to understand a little bit how.
Emmanuel Rosner: The math would work for the foundational side.
Emmanuel Rosner: Of your business. So we basically reached a point now where.
Emmanuel Rosner: Within your 2020 full guidance foundational revenues already down I guess, even with the growth of the market and so I guess, how should we think about the contribution margin with them.
Emmanuel Rosner: Within foundation all that is it.
Emmanuel Rosner: Does it become sort of like the decremental margins, you need sort of like restructuring to sort of offset the any.
Emmanuel Rosner: And you kind of think about.
Emmanuel Rosner: Some of volatility around you know basically patching decisions.
Emmanuel Rosner: Like how quickly can it go from.
Emmanuel Rosner: Having sort of like Incrementals into volume plays out better.
Emmanuel Rosner: Versus having to sort of like restructure.
Emmanuel Rosner: Offset any potential downtime.
Emmanuel Rosner: Yes.
Emmanuel Rosner: With respect to the foundational business is implicitly you're right. The revenue is down a little bit year over year somewhere in our guidance implicitly around $60 million to $260 million, if you, which means we're down about a half a point or two points.
In that portfolio year over year, if you look at the underlying markets that those products support being the combustion and hybrid markets those are down anywhere from 3% to 6% on a year over year basis. So we are outperforming those markets as those are coming down a little bit year over year, but we are seeing a revenue decline and as you know at our Investor Day, we talked.
Emmanuel Rosner: About our expectation that over time, we're going to see revenue in the foundational portfolio is coming under some pressure and what we needed to do is make sure. We're managing that P&L holistically pricing cost restructuring to make sure that we would sustain that margin profile over time, and we fully expect to do that spec to execute that in <unk>.
Emmanuel Rosner: 24, as well as all the way through the end of the charging for plant.
Speaker Change #136: I would add one thing.
Speaker Change #136: And I know that I would add one thing is that on the commercial side.
Speaker Change #136: We don't really see no new we don't really see new engines, new transmission that's being developed.
Speaker Change #136: It is more a longer life for slightly higher volume on the con product. So is it even if combustion as you mentioned may go back up or a longer tail that doesn't prevent us to adjust.
Just say no.
Speaker Change #136: The engineering.
Speaker Change #136: Elements of the foundational P&L.
Speaker Change #137: Yeah, that's super helpful. Just to make sure I understand so I guess what are your 20 points.
Speaker Change #137: Help us really understand those would be the mid to longer term picture because you have a guidance. Obviously you bought it but he you you've mentioned, it's mid teens incremental margins all in for this year.
Speaker Change #137: Uhm Directionally think about it on what does that look like on the foundational versus E product because obviously as you mentioned foundational is actually down the revenues and then your product eat up a lot. So what does that look like anything you could help us a little bit better understand how you manage this going forward.
Speaker Change #138: I mean fundamentally what we're not going to break out the details in terms of our guide, but fundamentally in order for us to execute on our foundational margin profile over the coming years in line with charging forward. It means we need to decrement at an all in basis in that mid teens and for our <unk> product portfolio to deliver on its margin expectations, we need to convert it.
Speaker Change #138: The mid teens and I think you see the blended actually coming through the financials in the P&L and in our 24 guidance then huh.
Speaker Change #138: Yeah.
Speaker Change #139: Great. Thank you.
Speaker Change #139: And we have time for one final question and that question will come from Noah Kaye with Oppenheimer. Please go ahead.
Noah Kaye: Hey, Kevin I wish you well in retirement and appreciate all the dialogue over the years and with that I'm going to get back to a couple more questions.
Noah Kaye: Hmm.
Speaker Change #140: Just a clarification.
Earlier, you talked about you know really this year and perhaps next being kind of the peak for Capex is that meant to be capex in absolute dollars should we think about sort of reversion to more like 5% of sales on a go forward basis without doing that.
Speaker Change #141: 627, I'm just trying to understand.
Speaker Change #141: I think your comments.
Speaker Change #142: That's a fair question I mean, typically we've run in the past at 5% we've had years, where we've dipped below than we've been in the four 5% to 5% range. But then you see the last couple of years, we've been elevated running closer to 6% and 5% my expectation over time is that as we get to more of a normalized run rate environment were probably coming back down towards that 5% range.
Speaker Change #142: Great.
Speaker Change #143: And then Fred.
Fred Thank: You know there was some good color earlier on.
Fred Thank: The battery pack.
Fred Thank: Our expectations for this year, but I'd actually love to delve a little bit more into where you're at in terms of tooling and automation staffing up so supply can you just help us understand your true visibility into the production ramp.
Fred Thank: You go throughout the year.
Speaker Change #144: Yes, we are ramping up.
Speaker Change #144: A second production line in Seneca in North Carolina, we have our first production line in our in the Michigan area.
Speaker Change #145: This is ramping up in Q2.
Speaker Change #145: And the same line is being commissioned for Europe, and as we ramp up later in the year.
Speaker Change #145: And and that is the 65% year over year growth at the midpoint of all those battery packs.
Speaker Change #145: The demand is.
Speaker Change #145: Ooh.
Speaker Change #145: Much higher than where we can produce.
Speaker Change #145: And we don't see in the commercial vehicle.
Speaker Change #145: The noise of any slowdown whatsoever to the contrary.
Speaker Change #145: So that's pretty much what we were doing on the on the battery, but we don't see any issues on self supply.
Speaker Change #145: And all of that is is reviewed.
Speaker Change #145: And money to vary.
Speaker Change #145: In a very focused way precisely.
Speaker Change #145: Yeah.
Speaker Change #145: Also on more and more generally to help our understanding of new insights into customer.
Speaker Change #145: Hey, good you know given the shifting dynamics around town.
Speaker Change #145: Powertrain that Tony.
Speaker Change #145: Okay.
Speaker Change #145: The increase in labor costs.
Speaker Change #145: For some of the Oems.
Speaker Change #146: Got it.
Speaker Change #146: But more broadly.
Speaker Change #146: How old is translated.
Speaker Change #146: Customer expectations are around.
Speaker Change #146: Pricing versus value proposition.
Speaker Change #146: And I'm comfortable in being able to hit the <unk>.
Speaker Change #146: Okay.
Speaker Change #146: We've always quoted for this program is there anything you'd call out in terms of.
Speaker Change #146: And customer expectations.
Speaker Change #146: Yeah.
Speaker Change #146: So I think you know, we've always quoting businesses with 15% return on invested capital.
Speaker Change #147: We have we have we are.
Speaker Change #147: Volume base cruises and.
Speaker Change #147: And everything that I see is tending towards meeting those 15% return on invested capital.
Speaker Change #147: And we very experience on how to do that.
Speaker Change #147: For us it doesn't change whether it is a new product in the life product. The rules are the same.
Speaker Change #148: I appreciate that thanks for that.
Speaker Change #149: Thank you Bill.
Speaker Change #150: Thank you all for your great questions. Today, if you have any follow up so for to reach out to me or my team with that savanna. You can go ahead and close today's call.
Speaker Change #151: And that does conclude the Borgwarner 2023, fourths quarter and full year results Conference call you may now disconnect.
Speaker Change #151: [noise] [noise] [noise].
Speaker Change #151: Hum.