BorgWarner Inc.

good morning my name is sharon and i will be your conference facilitator at this time i would like to welcome everyone to the borg warner 2021 first quarter results conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer period if you would like to ask a question during this time simply press star 1 on your telephone keypad if you would like to withdraw your question press the pound key if you are using a speakerphone please pick up the handset before asking your question I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Sharon. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, foregoiner.com, on our homepage, and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences now on our next earnings release. please see the events section of our Investor Relations homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performs and for comparison purposes to prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A, and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our market. When you hear us say market, that means the change in light and commercial vehicle production waited for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. Please note that we posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day to everyone. We're very pleased to share our results today for the first quarter of 2021 and provide an overall company update starting on slide five. I'm very proud of our strong start of the year, despite the component supply headwinds. With just over $4 billion in sales, our first quarter revenue increased over 18% organically. This compares to a market being up less than 13%. so our outgrowth was about 570 basis points for the quarter, which was ahead of our expectation and our guidance for the year. We saw strong outgrowth in North America and Europe. Our earnings per share increased year over year due to the impact of our higher revenue. Our incremental margin performance was in line with our expectations. We delivered strong free cash flow of 147 million for the quarter, a good start towards our full year guidance. We also secured additional new business awards for electrified vehicles, which I'll speak about in a moment. And finally, during the quarter, we announced our planned acquisition of ACASOL. The key strategic elements of the ACASOL acquisitions are detailed on slide six. Based on the last couple of years of experience we have in this space, We're believers in the prospect of EV battery systems and are very familiar with the industry players. As a leader in this space, Acasol had been on our radar for a long time as a potential partner. We're confident that Acasol is an excellent strategic fit for BorgWarner, and we are really excited about adding their capabilities to our portfolio. In particular, we're attracted to Acasol's following strengths. flexible battery technology across multiple cell architectures, proven technology and products with established manufacturing facilities already in serial production today, strong older backlog of about $2.4 billion, primarily from leading OEMs, and a focus on bus, CV, and off-highway applications. We're extremely excited and expect to complete the transaction during the second quarter. Next, I would like to highlight a significant new program win for electric vehicles on slide seven. BorgWarner's integrated drive module, or as we call it, our IDM, was selected by a major non-Chinese Asian OEM for its upcoming global S-segment electric vehicle production, planned to start in mid-2023. This is a significant program for the company as it is our first IDM award combining BorgWarner's and legacy Delphi Technologies portfolio. It is a validation of the potential we saw in bringing our two companies together. I want to thank the team's intense efforts to get to such a significant booking only seven months after the close of the Delphi transaction. And there is more to come. This IDM features our electric motor, our gearbox, and our integrated power electronics. It operates at 400 volts and has exceptional peak power of 135 kilowatts. The IDM weight and space are reduced by integrating our gearbox, our 400-volt silicon inverter, and our motor. This results in a maximized power density and functionality. The IDM also offers a scalable and modular inverter design, making it easily adaptable to customer requirements. This is an important step for the company with a great partner. Next, on slide eight, let me summarize our new strategy called Project Charging Forward that we unveiled at our investor day in late March. With successful execution of this strategy, We expect to deliver over 25% of our revenue from electric vehicles by 2025 and approximately 45% by 2030. That compares to under 3% of revenue today. Project Charging Forward has three pillars. One, we plan to profitably scale ELVs through our continued integration of Delphi and our ability to capture synergies. The new IDM win is a great example. We will also pursue other organic and inorganic actions. Two, we intend to expand more aggressively into eCVs. We will do that by leveraging our strong intimacy with CV customers as well as our position in ELVs. We're building out a go-to-market product portfolio and operation capabilities organically and inorganically. Our ACASOL acquisition is a key part of this expansion. And three, we plan to optimize our combustion portfolio, reducing our exposure by disposing parts of the portfolio that we believe are lower growth, that don't have a path to product leadership, or that are not expected to deliver strong margins. We believe we can fund the EV growth underlying project charging forward primarily from the capital generated by our existing operations. This is not a sudden change in the company's direction. It is a logical extension to what we've been building since 2015. We're excited about the acceleration of the market towards electrification, and about the momentum that we are building with our customers. I want to take a moment to thank all the BorgWarner employees who are working very hard to both manage the present and accelerate the future of the company towards BEVs. Next, on slide nine, I'm proud to announce that BorgWarner achieved the Great Place to Work certified status for the second consecutive year. Great Place to Work is the global authority on workplace culture. This certification validates BorgWarner's positive work environment. I've said before that the BorgWarner secret sauce starts with our people. To lead, develop, and attract the best talents. We strive to be an employer of choice where we operate around the world. We cultivate a workplace environment that is collaborative, transparent, inclusive, and that promotes continuous learning and excellence. So let me summarize our first quarter results and our outlook. The first quarter was a good start to the year. particularly considering the supply challenges currently impacting the industry. We delivered strong top-line growth, and we believe we're tracking well towards our full-year margin and free cash flow objectives. Our first quarter performance has led us to increase our full-year revenue and adjusted earnings per share guidance, despite a lower industry production outlook, as Kevin will detail. As we look beyond 2021, I'm extremely excited about our long-term positioning. We are continuing to take significant steps that we believe will help us to secure our profitable growth well into the future. We are winning in line with our expectations in the electric world, both from a component standpoint, like inverters and e-heaters, for example, and also from a latest generation system standpoint with our IDMs. We're focusing on a disciplined, inorganic investment approach, like the plan acquisition of Acasol, which adds great technology to our portfolio while supplementing our growth profile. With that, I'll turn the call over to you, Kevin.

Thank you, Fred, and good morning, everyone. Before I review the financials in detail, I'd like to provide a quick overview of the two key takeaways from our first quarter results. First, our revenue came in stronger than we were expecting going into the year. This was driven by the fact that we delivered solid outgrowth with both the legacy BorgWarner and former Delphi Technologies businesses performing better than expected. Second, our margin and cash flow performance in the quarter were strong, driven by the top line results, as well as our cost-saving measures. So let's turn to slide 10. As we look at our year-over-year revenue walk for Q1, we begin with pro forma 2020 revenue of $3.2 billion, which includes $945 million of revenue from Delphi Technologies. You can see that foreign currencies increased revenue by about 6% from a year ago. Then our organic growth year-over-year was over 18% compared to a less than 13% increase in weighted average market production. That translates to 570 basis points of outgrowth in the quarter, which breaks down as follows. In Europe, we outperformed by mid to high single digits, driven by growth in small gasoline turbochargers and strong performance in multiple former Delphi Technologies businesses, most notably fuel injection. In North America, we outperformed the market by high single digits, as we saw a nice benefit from the ramp-up of the new Ford F-150 and other new business launches. In China, we underperformed the market by mid-single digits against very strong outperformance in the first quarter of 2020. Also keep in mind, Q1 was a very unusual quarter last year in the face of COVID-19, primarily in China. The sum of all this was just over $4 billion of revenue in Q1, which was a new quarterly record for the company. Now, we do believe that some of the strong outgrowth we delivered in Q1 was a result of the production of build and hold vehicles by our customers in multiple regions of the world. That means it's likely that some level of our reported outgrowth in Q1 is inflated due to a pull forward of production into the quarter. This will have an offsetting impact on our expected outgrowth later in the year. However, our outgrowth for the full year is still expected to be above our prior guidance, as I'll discuss further in a moment. With all that background in mind, we're pleased with the strong start to 2021. Now let's look at our earnings and cash flow performance on slide 11. Our first quarter adjusted operating income was $444 million compared to the pro forma $274 million in the first quarter of 2020. This yielded an adjusted operating margin of 11.1%, which was up compared to the 10.3% margin for BorgWarner only in the first quarter of 2020. On a comparable basis excluding the impact of foreign exchange, adjusted operating income increased $145 million on $591 million of higher sales. That translates to an incremental margin of roughly 25%. This solid performance was driven by conversion on higher volumes, restructuring savings, and Delphi technology synergies in excess of purchase price amortization. We were particularly pleased with this performance given elevated supplier costs that we experienced during the quarter. Moving on to free cash flow, we're proud of the fact that we generated $147 million of positive free cash flow during the first quarter, which was roughly flat year over year despite increased investment in working capital. Let's now turn to slide 12, where you can see our perspectives of global industry production for 2021. As a reminder, our market assumptions incorporate our view of both the light vehicle and on-highway commercial vehicle markets. As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 9% to 12%. which is down from our previous assumption of an 11 to 14 percent increase. This reduction to our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production. Looking at this by region, we're planning for North America to be up 17 to 20 percent. We see the largest incremental impact of the semiconductor shortage in North America, with our market expectations down approximately 500 basis points from our initial assumptions. In Europe, we expect a blended market increase of 9% to 12%, with that range being down approximately 200 basis points from our earlier planning assumption. And in China, we expect the overall market to be roughly flat year over year, similar to our previous estimate. Now let's talk about our full-year financial outlook on slide 13. Starting with our pro forma 2020 sales, which includes $2.6 billion of revenue from the first three quarters of Delphi Technologies in 2020. As you know, those revenues were not part of our P&L last year, but to provide year-over-year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful. You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $0.9 to $1.3 billion. Next, We expect to drive market outgrowth for the full year of approximately 300 to 500 basis points, which is a meaningful step up from our previous guidance of 100 to 300 basis points. Our higher outgrowth guidance is based on the stronger than expected outgrowth in the first quarter and outgrowth for the balance of the year being higher than our previous guidance based on better than previously expected revenue trends in a number of former Delphi Technologies product lines. Based on these assumptions, we expect our 2021 organic revenue to increase about 12% to 17% relative to 2020 pro forma revenue. Then, adding a $400 million benefit from stronger foreign currencies, we're projecting total 2021 revenue to be in the range of $14.8 to $15.4 billion. That's up from our prior guidance by about $100 million at both ends of the revenue range. So even with weaker end market outlook, our stronger revenue outgrowth is driving an overall increase in our revenue guidance from the guidance we gave last quarter. Also, you should note that we're maintaining a wider than typical revenue range at this point of the year due to the wide range of potential production scenarios that I discussed on the previous slide, which stems from the volatility and uncertainty in end markets arising from the industry-wide semiconductor issues. From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.1% to 10.5% compared to a pro forma 2020 adjusted operating margin of 8.3%. This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi related cost synergies and purchase price accounting. From a cost synergy perspective, our margin guidance includes $70 to $80 million of incremental benefit in 2021. That puts us right on track to achieve 50% of our total expected cost synergies in 2021. And based on our year-to-date performance, we believe that we're tracking at the high end of this range. Based on this revenue and margin outlook, we're expecting full-year adjusted EPS of $4 to $4.35 per diluted share. which is an increase from our prior guidance of $3.85 to $4.25 per diluted share. I would point out that this guidance now assumes a 31% tax rate versus our prior guidance of 32% as a result of the successful execution of certain international tax planning initiatives. And finally, we continue to expect that we'll deliver free cash flow in the $800 to $900 million range for the full year. This is flat with our prior guidance, as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income. This would still represent a record annual free cash flow generation for the company. That's our 2021 outlook. Let's turn to slide 14 for an update on the near-term actions related to project charging forward. On the acquisition front, we believe we remain on track to complete the acquisition in the second quarter. We've now received regulatory approvals in all required jurisdictions. The tender offer is in progress with the final acceptance period expected to be completed later this month and then with a closing shortly thereafter. ACASOL represents an important part of Project Charging Forward as it represents approximately 20 to 25 percent of the estimated 2025 revenue from acquisitions underlying our plan and it significantly increases our exposure to the ECV space. As it relates to portfolio optimization, we continue to target combustion-related dispositions with annual revenue of approximately $1 billion to be executed over the next 12 to 18 months. The process for these dispositions is underway. We would expect to update you on our progress there as we get closer to executing those transactions. So let me summarize my financial remarks. Overall, we had a really solid start to the year, despite the industry supply headwinds. We delivered 570 basis points of market outgrowth, an 11.1% adjusted operating margin, and $147 million of free cash flow. And we increased our four-year revenue and earnings guidance, despite moderating our industry production assumptions. Looking beyond our near-term results, we're taking the necessary steps to accelerate the company's progression towards electrification. The ACASOL acquisition and today's IDM announcement are great examples of our progression. And importantly, we're executing our strategy from a position of financial strength. Ultimately, we expect that the successful execution of our strategy will drive value creation for our shareholders. With that, I'd like to turn the call back over to Pat.

Thank you, Kevin. Sharon, we're ready to open it up for questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star 1 on your telephone keypad. If you're 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'll pause for just a moment to compile the Q&A roster. First question comes from Chris McNally with Evercore ISI.

Thanks so much, Tim. I wanted to ask two high-level questions around EV demand, and the first is around lead times. The business that you're winning in 2021, for the most part, is it fair to say that the start of productions are for 2025 and beyond? I was kind of surprised by the comments that you made about the IDM when being as early as 2023, just trying to get a sense of you know, the mega awards out there, what type of lead times we're looking at.

Yeah, we're talking about start of production in the second half of 2023. This is something that, depending on the production ramp-up, can be very well achieved. I don't see any issues with that at all.

But is it sort of surprising that they're meeting that business out to be awarded so soon, or is it maybe you just were only able to actually disclose that you had that specific customer just now?

No, we're disclosing that win pretty much at the same time we won it. We're not disclosing the name as you've – you've noticed, and we'll do that when we can.

Chris, I think it's fair to think that it's normally, it's a three-year type of a lead time, so most of the production awards we would be looking to win in 2021 are probably more likely going to be in that 24, 25 timeframe, but there's some fluctuation around that, and this one happens to launch later in the latter part of 2023.

no it's super super helpful i mean the reason i asked is basically there was another european supplier that was mentioning some of the mega programs like bw you know uh basically we're only going to award business for 25 26 27 later in the year so i just wanted to check with you guys it's super helpful um the second question is maybe by by region and i know it's hard to to be this sort of um overarching you know question but Where do you think specifically for the BorgWarner suite of products are you seeing right now the most amount of interest when we think about it on a region basis?

No, I think on an e-sale, we see growth in all regions. Some regions will... will be more on components, some regions will be more on systems, even if that is not a clean cut, we see growth in all major regions. It is also true that the regions don't move at the same pace on electrification, so you'll see potential growth in North America a little bit later than in other parts of the world. Great.

And then if I could sneak in one last one just to be greedy. I mean, the IDM one looks super interesting. Since it's an A-segment car, should we expect lower content per vehicle, or can you still get that $1,500-plus that you sort of laid out in some of the detail at the analyst day?

I'm not totally able to answer the price point at this point in time. I don't think you can – Adjust the price point depending on the size. There is a little bit of that, but I'm not in the position to answer that in detail, Chris.

Fair. Thanks so much, Fred.

Next question comes from James Piccarello with KeyBank Capital Markets.

Hey, good morning, guys. Morning. On the guidance, Can you just provide some context on the second quarter in terms of what you're seeing thus far in OEM build schedules related to the chip shortage and just how you perceive that situation playing out in the back half relative to the market assumptions you laid out?

As you know, we're not providing quarterly guidance, but what I can tell you is that we do expect the bigger impact from the semiconductor shortage issue to occur really in the second quarter and a little less so in the third quarter. If you look at the way I would help you dimension it is if you look at what's implied at the midpoint of our guide, for instance, about the last nine months, it implies that the average quarterly revenue is somewhere in that $3.7 billion zip code. And you should assume that probably, you know, again, the semiconductor issue is more likely going to have a bigger impact in the near term as opposed to the back end of the year.

Okay. Does that make sense? And then, you know, on BoardWarner's outgrowth, I mean, clearly the first quarter came in stronger. To provide color from maybe a product perspective, segment perspective, I mean, what drove the quarter strength? Because, I mean, I thought the first half here had a difficult diesel comp from an outgrowth standpoint. So I'm just curious on the upside and how we should be thinking about growth over market the rest of the year, and I guess also within the context of the chip shortage and lower volumes maybe near term.

Yeah, I mean, I think a few of the things that we saw from a pure product perspective, the Ford F-150 launch was actually helpful in terms of driving some of the outgrowth that we saw in North America. We saw a gas turbo business in Europe, which was helpful. And we saw good performance across the legacy Delphi Technologies businesses, stronger than what we were anticipating as we started the year, particularly in the fuel injection business. So, I mean, I think we saw it across a wide variety of our businesses. And so as we look at the back half of the year, you saw that we took up the full-year outgrowth guidance. I think before we were at 100 to 300 basis points for the full year. Now we're saying the full year is 300 to 500 basis points based on both what we saw in Q1 as well as what we're expecting in the back nine months of the year. So in the last nine months of the year, I think it stacks up to be about 200 to 450 basis points or so of implied outgrowth in that full-year guide.

Very helpful. Thanks.

Next question comes from Noah Kay with Oppenheimer.

Hi, good morning. Thanks for taking the questions. So the organic growth in the quarter year-over-year being paced by e-propulsion drivetrain at 36%, what were the major drivers of that growth? Just trying to get a sense if the segment is more geographically weighted to last year's more affected markets, whether there was some significant e-business growth. If you can just give us some color on the segment.

Yeah, I mean, we're not We haven't really disclosed outgrowth by segment, but clearly when you look at that segment, we do have a lot of business in that segment coming out of China, and the global markets were simply up a lot more in China. If you look at our global weighted production, it increased about 80% in China versus you look at Europe and North America, much smaller increases are even down in North America on a blended basis. That's part of the reason you see stronger revenue numbers year over year in that business. It has a little bit more disproportionate skewing to the Chinese market than some of our other businesses.

Sure. Makes sense. Thanks. And then maybe just if you can comment on the drivers for the increased CapEx outlook. Just curious to know if there's new programs getting pulled forward, any other factors to consider in increasing the CapEx outlook for the year?

Not specifically. I think as we've just rolled up our programs and rolled up our forecasts, we've realized that we probably needed to take that up a little bit. Along with that, there are some of the investments we're making associated with the Delphi Technologies integration, particularly on the IT side, that are actually being bucketed in capital that we didn't anticipate. We thought it would be in a different line item. So we're bucketing that now in CapEx as well. So that has a little bit of an impact, although that's just a left pocket, right pocket when it comes to free cash flow outlook.

Makes sense.

All right.

Thanks very much for the call.

Next question comes from Dan Levy with Credit Suisse.

Hi. Good morning. Thank you. Just wanted to start on the growth side. One of your key customers is highlighting a particularly challenged volume outlook. So maybe you could just give us a sense for, and I know you've given us some ranges there, but to what extent is this end market guidance reflecting maybe some of the more draconian outlooks that have been cited? And also, if you could just comment in the quarter, how much revenue growth did you get from maybe partially built vehicles, vehicles that may not be reflected in the production builds, but that you shipped goods to?

As we look at, I mean, you can see our end market production assumptions we've taken down about 200 basis points globally, which factors in the intelligence we have based on production schedules, based on conversations with our customers, and based on other things that we see going on in the marketplace. So based on the things we've seen announced or discussed with customers as late as last week, that's contemplated in our four-year guidance, and that's part of the reason we took our guidance down from a production perspective, particularly in the North American market. I'm sorry, Dan, what was the second part of your question?

Was there any growth benefit or revenue benefit in 1Q from partially built vehicles?

Yes. We think the answer to that is yes, although it's hard to tell for certain. When you look at that outgrowth coming in at about 570 basis points, as we're trying to sort through the numbers, it's not 100% clear, but our expectation is the amount of outperformance we're generating relative to call it that 300 to 500 basis points full year is probably the amount that's arguably linked to the build and hold vehicles that we're seeing. But it's really hard to dimension that for sure. But that's our assumption at the moment.

Great. Great. And then my follow up is really just more of a follow up from the investor day. And it's around silicon carbide and high voltage inverters. So, you know, I think this is an area that you mentioned. You have some market leadership. You've obviously got some pretty chunky wins here. You know, the content could be a pretty material step up over some of the base IGBT inverters. Could you just maybe walk us through your view of how you see mix for yourself or for the industry of silicon carbide or high voltage versus IGBT over time? Maybe the margin and content differences and, you know, how do the competitive environments differ? I'm wondering, you know, is there, you know, as we get more silicon carbide, does that incrementally favor you more? versus some of your competition?

Yeah, you see, one of the advantages that we have is that we can do lower voltage silicon, higher voltage silicon carbide, very high voltage, 800 volts silicon carbide. And we are positioning ourselves more in the high voltage, higher or, let's say, lower losses type of product, more efficient product with silicon carbide. The tendency is to increase efficiency, so the tendency is to go to those direction of higher efficiency technologies. At the end of the day, it's the customer's choice who's going to decide what they want. And silicon carbide is primarily on high-end vehicles today. They might find their way down to other ranges in the future.

And the competitive environment, your competitive positioning versus others on silicon carbide or high voltage?

I really like where we are. Okay, great. Thank you.

Next question comes from Rod Lash with Wolf Research. Please go ahead.

Hi, everybody. So it does look like the adjustments that you're making the global production and North American production go beyond what we heard from Ford last week. And I'm just wondering if, whether you think your customers are providing transparency into the constraints that are kind of bubbling up through the supply chain from tier threes to tier twos at this level. Obviously some questions about that in light of what we saw from Ford and Do you see other OEMs moderating their forecasts anywhere near what we're seeing for that one customer?

What I would say is that, for sure, we are very aware about what we are delivering, meaning that we are on top of making sure that we can continue the flow of products. We have a lot of three-party meetings with our customers, ourselves, and the semiconductor suppliers, and we manage that very, very, very intensively and as accurately as we can. We see some customers that have announced shutdown. Obviously, we are sometimes aware through schedule changes, but we're more aware through the discussions that we have with our customers more than looking at the schedules. and that is informing also our market intelligence on what is likely to happen.

Okay. I was hoping maybe you just can elaborate on just two points. One is the strong turbo and GDI mix. Are there any changes that are happening here? Obviously, we've seen very strong performance in hybrids in Europe recently, but are you detecting any kind of changes durable strength that's happening there, and any color on what you've experienced in terms of commodity costs and your outlook for that?

So, obviously, Rod, there is a strong demand for efficient downsized gasoline engines, and all efficient downsized gasoline engines are usually turbocharged and include GDI injection, right? So, that is one key element for combustion-based engines as well as for hybrid-based engines. The second part of your question is around raw material. We are seeing some increases. We have incorporated what we have seen so far in our guide. And the color I wanted to give you is that on the biggest raw material purchases, we have about 60 percent pass through with our customers. And when we go into discussing those items with them, we usually do a little bit better than that. So that's the situation on raw material. And, yes, we're seeing some inflation.

What's the magnitude of that?

We're not disclosing it. It's just embedded in our guidance. And so the good news is we're able to offset that with the performance we're seeing in the business and able to actually even take up the bottom end of our margin range for the full year.

understood thank you thank you next question comes from joseph smark with rbc capital markets uh thanks everyone maybe just to to follow up on on that last point a little bit kevin so um you know you are pointing to some weaker margins over over the balance of the year now as you pointed out like the the average sort of revenue is lower than the first quarter so is it really just um you know a a volume sort of uh flow-through dynamic or is there sort of less or a bigger net raw material headwind or maybe some other things like freight has obviously been something that's been called out as a big constraint in the system?

Yeah, I mean, it's really fundamentally linked to volume more than anything else. If you look at what's implied by our guide about the back half of the year, it still suggests that we're going to convert in the low 20%, call it 23% to 25% over the last nine months of the year, pretty much in line with what we saw in Q1 on a year-over-year basis. So nothing beyond volume. Certainly, there's puts and takes in our P&L. You have certain things going one way, certain things going another. But overall, what it comes down to in our guide is really the conversion on incremental revenue. Okay.

Second question would just be on the IDM award, you know, the first using combined Borg, Warner, and Delphi technology. You know, I know you said it's for an A-segment vehicle. Can you just spend a little time talking about, like, how scalable is that, what you're showing there for larger vehicles? And is it actually, like, an easier or harder for larger small vehicles? I imagine each comes with its own engineering complexities.

It is scalable. It is modular from an inverter standpoint. The building blocks are modular. Same for a motor standpoint. We have family of motor and the transmission that is hosting the whole thing will size up depending on the torque that we need to give So, it's fairly modular. I would not think that smaller IDMs or A-class vehicle IDMs are more or less complicated than C-class vehicle IDMs. There are different types of complexities. For sure, with the customers that we have, weight, perfect NVH, and And good power density, very good power density was key element for us to win this program, as well as competitiveness, hopefully. And I think this is the recipe for success for the other IDMs that will hopefully come in the future. So you will see continuous booking, both from a component standpoint, power electronics, combined power electronics boxes, combining inverters and DC-DC converter or any other type of combination, you will see also hopefully continuous booking on the system like this IDM.

If I could just sneak one in, any update on the billion dollars of dispositions or the market for that that you expect by the next year? And can we expect some of that to occur in 2021?

Yeah, I think the process is underway. Nothing to report. Obviously, we're 45 days removed from announcing our project charging forward strategy, and I think we still feel good about the ability to deliver on that approximately $1 billion of dispositions over the next 12 to 18 months. So we'll update you when we're closer to executing transactions, but nothing additional to report at this point sitting here today. Thank you. Thank you.

Next question comes from John Murphy with Bank of America.

Good morning, guys. Just a first question to follow up on the production outlook. Without naming names or maybe if you can give us groups, how variable to the upside and the downside are the changes in schedules been? Because it just seems like some automakers, particularly the Japanese, have gone through this with the tsunami in the past, had a better handle on this and had higher buffer stocks. Europeans maybe somewhere in the middle, and it seems like the North American companies are less prepared for this, and that's the reason there's maybe these extreme divergences as opposed to companies not being up to date. I'm just curious what your perspective on sort of the variances between your customers' preparedness to this and why we might be seeing these divergences.

John, I think it varies a lot across regions, across customers. It depends. upon their sourcing strategies and things like that. And by program, it's very difficult for us to figure out those dynamics. We're not in that detail of what OEMs, what the OEMs issues in details are, right? So what I can tell you is that it varies and I don't have a, a way to ring fence this either by region or by customer types. It's not possible, at least for us.

Okay. And then just a follow-up on the IDM. Congrats on the award. It's the kind of thing that everybody was skeptical that you would ever get, and it seems like you got it pretty early on, so it's a good sign. You know, as you think about this transition towards the electric powertrain, you know, there are sort of skeptics on your company that believe the automakers are going to insource, you know, everything, and then there are, you know, some optimists or realists, as I would call them, that understand at least part of the parts will get outsourced, and maybe over time, you know, full IDMs might be the way, you know, things go. You know, as you look at the shift in technology, you know, how different do you think it is versus other shifts in technology we've seen in the past where the automakers are trying to learn what's going on and sometimes they might insource and sometimes they might outsource. How do you think this is going to shape up differently or similarly to past transitions in technology?

So, John, I think at the end of the day, product leadership and scale will prevail. The force of that will win. There will be some insourcing. The market is very big, and the content per vehicle that we have on E is three times more than we have on C. And I give some examples sometimes that one inverter is equivalent to pretty much what we can sell if we sell it all on combustion. As you mentioned, the IDM is a very, very good example. There is more to come on system outsourcing. And again, you will see some customers that are outsourcing. They want to learn in order to buy better. Some customers will insource some platforms, outsource some others. And that varies across customers and across regions, and that will also vary over time. where I think when suppliers like us will have very good product leadership and scale in an IDM, for example, but you have other products, I think the likelihood for us to be able to sell more systems will become higher over time.

But I'm sorry, just one follow-up to that. I mean, how different do you think that is in the commercial vehicle market? You know, I mean, it just seems like there's huge potential for outsourcing there, consolidation with the Accosol acquisition. It seems like your right to play is pretty strong. I mean, is there even a greater opportunity on the commercial vehicle side, at least for the foreseeable future?

I would say that especially on the battery pack standpoint, there is obviously way more opportunities on the commercial vehicle for us than on Pascal. That is one of the reasons why we went and focused on commercial vehicle battery charging systems and battery systems. So on that front, there is certainly more room for outsourcing than on the Pascal side. And on the IDM? Well, on the IDM, I think generally the likelihood of outsourcing in commercial vehicles by the volumes of those industries and by the diversity of what is required is at the high level leading to maybe more outsourcing than in other segments. You will see in the commercial vehicle, I think, maybe more combination of motor and power electronics as those two go together, one controls the other, than IDMs. from a commercial view propulsion standpoint. Thank you very much.

Next question comes from Emmanuel Wasser with Deutsche Bank.

Hi, good morning, everybody. Good morning. I was hoping to follow up on your comments about the insourcing versus outsourcing of electric powertrain. And wondering how much we can read into this discussion specific, you know, first win. So are you able to comment on whether this customer has other EVs either out or coming up and, you know, what would the sourcing strategy have been on those? So I'm wondering if there's a way to read into a shift towards sort of like more insourcing or whether depending on which platform and which, you know, class of vehicle, there's sort of like different sourcing strategy within that one OEM.

obviously won't give you, can't give you detail on the customer. What I can give you is that I think what it means is that great technology is making a difference. And in line with my prepared remark, I want to again thank the board and the team that have been working since the closing of the Delphi transaction together to get an award of this magnitude and that strategic impact seven months after close, I think it's pretty remarkable.

Yes, definitely. Are you able to comment on the volume expected for this program?

No, I can't.

Okay. So I guess on a different topic, so the volatility around the semi-shortages, I was wondering, how do you manage this on the ground and, I guess, in your operations? Not to keep picking on Ford, but I guess they gave some pretty clear outlook last week. It feels like a lot of their factories may be shut for a prolonged amount of time in Europe, potentially six or eight weeks or so, and with pretty low amount of notice, little notice. How do you manage this in terms of cost, efficiencies, and making sure that things continue to run at the right level of margin?

So there is two facets to that. First is the facet of what we supply to our customers that have semiconductors. And we're working very well with our customers and with our semiconductor suppliers in order to keep it going. Second is, when we're impacted by somebody else's shutdown, and you're taking Ford as an example, well, we are agile enough to be able to manage that. And with the notice we have, this is something that we do for a living. We can flex. And this particular element is, in the grand scheme of BorgWarner, is not going to move the needle to a point where where it is impacting us too much. And the plants and the plant managers know how to flex, what they have to flex in order to cope with the latest schedules.

That's great to hear. And then the final follow-up on this topic is you were mentioning, I think, the prepared or marked some supplier-elevated costs. Any way to quantify this and how much those were in the quarter?

Yeah, there were two things that are really impacting us. One, and the bigger item was really a troubled supplier situation that we have impacting one of our segments in Europe. And you'll see that disclosed in the 10Q as well. And that had about an $18 million impact in the quarter. And then the second, as we talked about earlier, is the impact of commodity costs on us as well. We are seeing some escalation there. As Fred noted, we do have recovery mechanisms for the underlying movements in the raw materials that are just a subset of our material purchases. But that does have an impact on us and will continue to have an impact as we look ahead to the balance of the year. But again, both those things are contemplated in the 11% margin performance in Q1 as well as the full year guide of 10.1 to 10.5. Great. Thank you.

Next question comes from David Kelly with Jefferies.

Hey, good morning and good afternoon. Maybe starting with a follow up on that last semiconductor point, just given your electronics mix, you reference discussions ongoing with your semiconductor partners. I guess, can you talk about if you're currently seeing any price inflation in electronics or if you expect to see increases? And then also was curious to hear if you if so, if you see an opportunity to pass those through.

We're not saying anything important so far. The situation is, as you know, still very volatile, but we've not been faced with those types of demands yet.

Okay, got it. Thank you. And maybe quickly shifting gears, You know, you raised your commercial vehicle underlying outlook. I was curious if you could talk a bit more about contribution to the quarter and how you're thinking about the CV outgrowth through the balance of the year. That'd be great.

Yeah, I mean, the main thing that we saw from a CV perspective was really China coming in a little bit stronger, including one from a production standpoint, than what we were previously guiding to. But that's really all I would comment on at this point. It's mainly coming from that.

Okay, got it. Thanks. Kevin, maybe one quick follow-up on that. Can you remind us of typical incremental margin contribution from commercial vehicles?

We haven't broken it down between commercial vehicle and live vehicle. I think it's appropriate to think of us just in totality as being normally in that high teens from a conversion standpoint. Obviously, our guide This year, both what we delivered in Q1 and what we're guiding to for the full year suggests that we're in the low 20 percentiles from a conversion year-over-year perspective, which would contemplate anything in both the CV and the light vehicle space. And obviously, we're getting a tailwind from things like the cost synergies in excess of purchase price amortization, getting a tailwind from the execution of our restructuring initiatives, both on the legacy Borg Warner side and Project Pioneer at Delphi. And so it's leading to conversion that this year is in the low 20s right now.

Okay, great. That's helpful. Thank you.

We have time for one final question, and that question comes from Brian Johnson with our colleagues.

Yes, good day, everyone. You know, it's a less glamorous part of the eDrive and power electronics business than PureBev's, but can you comment a bit on the pace of your business in plug-in hybrids and just how that could unfold in the next couple of years? you know, before further inflection in that perhaps later in the decade or mid-decade.

We are seeing a pool, a strong pool actually for plug-in hybrids, especially coming from Europe, also a little bit from China. And as you know, Brian, we're more into the high-voltage plug-in hybrids, more than in the lower voltages, and we see a strong pool. We're very, very happy with the programs that we have and the pool that we're seeing, especially in Europe.

Okay. And, you know, I think a few people have hit on commodities, but in the past there have been some special alloys. I think I forget which the alloy that bit you about five or six years ago was. you know, is that going to be a particular problem now, you know, in terms of the input cost of that alloy? And two, are you now fully protected with pass-throughs of that particular alloy?

Yeah, I mean, when it comes to steel costs, we are seeing underlying inflationary pressures in the raw material underlying our material buy. Remember, material spent for us runs around 55% of revenue, and the underlying raw material is a relatively modest percentage of that. But within that spend, the bulk of which from a raw material exposure perspective would be on the steel side, we are seeing some inflationary pressures. But as Fred mentioned, we do have cost recovery mechanisms with our customers associated with the underlying raw material increases. But there is an impact that's hitting us this year, and it's embedded in our guidance. Okay. Thank you.

I'd like to thank you all for your great questions today. Sharon, you can go ahead and close out the call.

That does conclude the BorgWarner 2021 first quarter results conference call. You may now disconnect.