BorgWarner Inc.

Good morning. My name is Jerome, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2021 Fourth Quarter and Full Year 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 like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Jerome. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, boardwarner.com, on both our homepage and our investor relations homepage. With regard to our investor relations calendar, we will be attending multiple conferences between now and 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-Ks. 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 with prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, Net M&A, and other non-comparable items. 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 growth. When we say market, this means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we posted an earnings goal presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. We're very pleased to share our results for 2021 and provide an overall company update starting on slide five. I am very proud of our strong top-line performance relative to the industry declines. With approximately $14.8 billion in sales, we were up about 12% organically and we outperformed in all major regions. I'm also pleased with our margin performance, despite the significant production volatility we faced during 2021. This was achieved while continuing to significantly increase our R&D investment to support our e-product growth. This investment will continue and accelerate. We also delivered solid cash flow performance despite the impact of a one-time warranty payment for combustion-based products during the fourth quarter. We also have seen progress on all three pillars underlying our charging forward plan. We secured multiple new EV program awards during the fourth quarter, which I will discuss in a moment. And we are already beating our booking target. We completed the acquisition of ACASOL earlier this month, and today we announced the acquisition of Central's light vehicle e-motor business. We also completed the first step in the combustion disposition goals with the sale of the Water Valley, Mississippi facility to Attar Capital. Now let's discuss some of our recent new business awards starting on slide six. I'm happy to highlight two new product awards for the commercial vehicle market. First, I'm excited to announce our first win for our hydrogen injection system. This is a product that we've been discussing with our customers for quite some time. Hydrogen internal combustion is a quick-to-market powertrain solution that requires only slight adjustments to the traditional ICEs. This is our first award, and the program is with a top global manufacturer of construction equipment that is expected to launch in 2024. BorgWarner will be providing the full system, including injectors, rails, ECUs, system integration and calibration. Next, we announced that BorgWarner has secured its first high-voltage e-fan system with a global commercial vehicle OEM. Fully electric-powered AV-duty trucks will require dedicated high-voltage thermal management solutions, like the e-fan systems, for cooling components such as the e-motor, batteries, and electronics. BorgWarner has specifically optimized its fan design for performance and efficiency. The high-voltage e-fan is driven by a robust e-motor, which is powered from the vehicle's electrical system via an inverter. This is another application of the three-in-one concept with mechanical, motor, and inverter. The system will be utilized in battery electric heavy-duty long-haul trucks expected to launch in 2024. Both the hydrogen injection system and the e-fan are great examples of us continuing to organically develop new products to drive profitable growth in innovative powertrain systems. On slide seven, I'm happy to highlight two more wins in North America. First, BorgWarner has been awarded the generator inverter for an innovative electrified architecture. The North American program is anticipated to launch in 2024. Our product will be used in a range extension system to charge the main battery. This win highlights our technical capabilities in managing continuous high currents. Next, I would like to highlight a new battery system award for the North American electric commercial vehicle market, that we expect to launch in 2023. Port Warner will supply Gillick, a leading manufacturer of heavy duty transit buses in North America, with a third generation of our ultra high energy battery system. The battery system was developed for long distance application and can be scaled for the customer needs. It can offer close to 700 kilowatt hour of available energy This is the largest capacity in a North American transit bus. The system will be produced in our Hazel Park manufacturing facility here in Michigan. On slide eight, we highlight two additional 800 volts awards in China. First, I'm glad to announce that we have secured an 800 volt silicon carbide inverter with a leading Chinese OEM for electric vehicle. anticipated to launch in 2023. The award includes inverters for front and rear drive modules. Our 800-volt silicon carbide technology offers enhanced power density, proven performance, and long-term reliability. And our leadership in this area continues to be recognized by our customers globally. We're also partnering with a leading luxury new energy vehicle maker in China to supply an 800-volt IDM, expected to launch in 2023. Designed, developed, and manufactured by BorgWarner, the 800-volt IDM includes our electric motor, inverter, and gearbox. It features our exclusive and compact Viper power module, which is the core of the silicon carbide inverter. This is BorgWarner's first 800-volt IDM project worldwide, opening a new chapter in the company's global electric drive business. We're pleased to continue our longstanding partnership with this leading domestic manufacturer of luxury electric vehicles. As you can clearly recognize, we're seeing a strong pull for our new e-products. We are increasing our e-R&D investment by $130 to $160 million this year to support this growth. Now on slide nine, I would like to expand on our announced acquisition of Central's light vehicle e-motor business. E-motor is a key element of BorgWarner's electric vehicle growth strategy. The acquisition of Central's business is expected to have multiple benefits for us. First, we expect this acquisition to improve both our e-motor product leadership and our manufacturing capabilities, adding state-of-the-art equipment design and proven automation expertise. This acquisition will also expand our e-motor portfolio breadth and scale. Post this transaction, BorgWarner expects to produce more than 3.5 million units in 2026 for a wide range of customers and regions. With Central, BorgWarner now has a full suite of e-motor products at scale with application in small and larger passenger vehicles as well as for commercial vehicles. And we obviously see potential for significant revenue synergies over time globally. The acquisition will be funded with existing cash balances and is expected to close late in the first quarter 2022. As you can see on slide 10, we've made significant progress towards our charging forward plan, starting first with the organic electric vehicle revenue growth. With the award secured as of this course, we now have electric vehicle programs that we expect will generate about $2.7 billion of book revenue in 2025. This is an amazing achievement by the BorgWarner teams. Turning to M&A, which includes the completed acquisition of Acasol and the planned acquisition of Central's e-motor business, We've secured additional businesses that we expect to generate more than $600 million to $700 million of additional EEV-related revenue for 2025. And we expect to take additional M&A steps and are actively engaged with a number of potential targets which will impact multiple parts of our EEV portfolio. Related to dispositions, we completed the sale of our Water Valley Mississippi facility to Attar Capital during the fourth quarter. With just under $200 million of revenue in 2021, this transaction represents 20% of the dispositions that we plan to complete by late 2022. With less than a year since the announcement of charging forward, I am pleased that we've made significant progress across all pillars of this plan. The takeaway from today is this. BorgWarner successfully managed a volatile production environment during 2021. Our revenue growth outperformed the industry, and we delivered strong margins and free cash flow. We're seeing strong demand for our product. as evidenced by the numerous awards that we have secured throughout the course of the year. We're making the necessary organic and inorganic investment to support this significant growth in E. In short, we are successfully executing on our long-term strategy, challenging forward, which will deliver value to our shareholders long into the future. With that, I turn the call over to Kevin.

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our fourth quarter results. First, our revenue came in higher than we were expecting going into the quarter due to better than expected industry volume. Second, our margin performance in the quarter was strong, driven by better than expected revenue and cost synergy performance. Additionally, our net R&D investment was lower than our guidance due entirely to higher customer reimbursements of engineering expense than we had anticipated. And finally, our cash flow performance in the quarter was strong, despite the impact of a one-time cash warranty settlement payment. Let's turn to slide 11 for a look at our year-over-year revenue walk for Q4. We start that walk with last year's revenue, which was just over $3.9 billion. Currencies had a very small impact when comparing Q4 of last year to Q4 of this year. Then you can see the decrease in our organic revenue, about 7% year over year. That compares to a 15% decrease in weighted average market production. So we delivered another quarter of strong outperformance in the face of challenging end market environment. And we're pleased with the fact that this outperformance occurred in all three major markets. On top of that, what's particularly exciting to see in our outgrowth is that we're seeing a portion of it coming from our electronics and electrification products, especially in China and North America. And finally, you add to that the $34 million of Q4 battery pack revenue coming from ACASOL. The sum of all this was just under $3.7 billion of revenue in Q4. Now let's look at our earnings and cash flow performance on slide 12. Our fourth quarter adjusted operating income was $375 million, or 10.3%, which compares to adjusted operating income of $448 million, or 11.4%, from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of ACASOL, adjusted operating income decreased $60 million on $256 million of lower sales. That translates to a decremental margin of approximately 23%. That's not a bad decremental for such a volatile environment, especially considering the roughly $16 million of net commodity cost headwinds that we experienced in the quarter. Excluding these higher commodity costs, our year-over-year decremental margin was approximately 17%, which we view as a sign that we're effectively managing our operating cost performance. Moving on to free cash flow, we generated $370 million during the fourth quarter. Our free cash flow included a $130 million payment to a customer, which was related to a warranty claim that we settled in the quarter for an engine-related component. Based on the agreement with our customer, this one-time payment fully resolved the claim. Let's now turn to slide 13, where you can see our perspective on global industry production for 2022. When you look at this slide, you can see that our market assumptions incorporate a wide range of potential outcomes. That's primarily a result of the semiconductor supply challenges that we think will continue to impact the industry during 2022. With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of 6 to 9 percent this year. Looking at this by region, we're planning for our weighted North American markets to be up 13 to 15 percent. In Europe, we expect a blended market increase of 12 to 15 percent, And in China, we expect the overall market to be down 2% to 5%, mainly due to a mid-teens decline in commercial vehicle volumes. Before moving to our financial outlook, I wanted to highlight a change we're implementing in 2022 with respect to how we report our adjusted operating income and margin. You can see this summarized on slide 14. As you know, M&A is expected to play a significant role in project charging forward. And given the nature of the likely acquisitions, we anticipate the potential for significant goodwill and intangibles associated with these transactions. Importantly, intangible asset amortization expense flows through our adjusted operating income line. Now, sitting here today, we don't know the magnitude of the intangible amortization expense that may come from future potential acquisitions. But what we do know is that it's likely to make true underlying operating performance, as measured in our operating margin, less comparable to previous periods. Therefore, we believe that excluding intangible asset amortization expense from adjusted operating income will improve year-over-year earnings comparability and provide a clearer picture of the real performance of our ongoing operations. But it's important to also note that the impact of intangible amortization expense will continue to be included in our adjusted earnings per share. Now let's talk about our four-year financial outlook on slide 15. As I mentioned earlier, we expect our end markets to be up 6 to 9 percent for the year. Next, we expect our revenue growth to continue to exceed industry growth driven by new business launches. Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 14% relative to 2021 pro forma revenue, which means that we expect to outgrow the market by 4% to 5%. Then, subtracting an expected $220 million headwind from weaker foreign currencies, we're projecting total 2022 revenue to be in the range of $15.9 to $16.5 billion. From a margin perspective, we expect our full-year adjusted operating margin to be in the range of 10.2% to 10.7% compared to a pro forma 2021 margin of 10.9% when adjusted for intangible asset amortization expense. This 2022 margin outlook contemplates the business delivering full-year incrementals in the low to mid-teens on an all-in basis before the impact of a planned increase in R&D investment. Underlying those incrementals We expect tailwinds from continued cost synergies and restructuring savings, and headwinds from the continuing impact of higher commodity costs and the mounting pressure of other supply chain cost increases. As it relates to R&D investment, we're continuing to win new business. You saw it in the six new wins Fred profiled earlier, and you can see it in our 2025 EV business, which now stands at more than $3 billion. With this continued success, we are leaning forward and continuing to invest more in R&D for our e-products portfolio. In fact, our guidance anticipates a $130 to $160 million increase in R&D investment in 2022. And that increase is 100% related to our e-products portfolio. This is higher than the $100 million increase we signaled on last quarter's call for two reasons. First, as I mentioned earlier, our 2021 net R&D expense came in lower than our expectations due to higher than anticipated engineering reimbursements from our customers. Second, and more importantly, the larger increase is a reflection of our bullishness on the prospects for securing additional EV wins in the coming quarters. Based on this revenue and margin outlook, we're now expecting full-year adjusted EPS of $4.15 to $4.60 per diluted share. This EPS guidance contemplates our effective tax rate coming down to 28%, which is declining from the peak of more than 30% that we experienced over the last couple years. And finally, we expect that we'll deliver free cash flow in the range of $700 to $800 million for the full year, despite a significant increase in capital spending year over year that supports the aggressive growth we're seeing, particularly in our EV portfolio. That's our 2022 outlook. So let me summarize my financial remarks. Overall, we had a solid year, despite a really challenging end market environment, one where we saw significant volatility during the last two quarters. And remember, it was a year with only 76 million light vehicles produced globally. In the face of this environment, we outgrew the market. We drove 10% operating margins by executing on our cost synergies and restructuring savings, while also investing more in R&D to support the future of our e-business. And we delivered another year of strong cash flow. And as we continue to successfully manage the present, we were delivering on the future by making significant progress on our charging forward plan. Now as we look ahead to 2022, we're keenly focused on continuing to manage the present by sustaining our strong margin and cash flow profile, maintaining the momentum in delivering new business wins on electric vehicle programs, and continuing to make disciplined investments, both organic and inorganic, that will help secure our growth and financial strength long into the future. With that, I'd like to turn the call back over to Pat.

Thank you, Kevin. Jerome, 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 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'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Murphy. With Bank of America, your line's open.

Good morning, everybody. Thanks for all the info today. I just wanted to focus on slide 10. And if we look at this, Fred, it seems like your awards are coming faster than we had traditionally seen, so it's from booking to actual launch. I'm just curious how much room you have or how much progress you think you're going to make on this first bar and how much you're bidding on there. And then also, as we think about this, is there more of an opportunity on the commercial vehicle business in EVs because there's maybe some less competition and implementation is coming faster? I'm just trying to understand, are we speeding things up here? And is there maybe even more of an opportunity on the commercial vehicle side near term?

John, morning. Yeah, I think you're right. There are more opportunities on the organic side. We still have nine to 12 months to go in order to book business that will see daylight in 2025. Our organic target was at 2.5. We're at 2.7 and continuing to book business. Yes, you see opportunities in past care and commercial vehicles. Some of the products I alluded to are on commercial vehicles. And on the M&A, I would say that we are engaged with a few targets. We have a healthy pipeline of of M&A targets, and I'm pretty happy where we are on charging forward. You know, I'm laser-focused on charging forward. We're winning. Target is $4.5 billion of BEV revenue in 2025, and we are absolutely on target.

Okay, and just to follow up, as we look at the middle bar there, Axel and Central, I thought Axel was going to be about $500 million By 2024 so it seems like a console plus central should be closer to sort of an 800 million ish number there's something changed in the console. Business and then also just to follow up on the reimbursements in the r&d for 2021 and why are those larger in 2021 is that something that's changing in. The relationship with automakers where they're there's greater r&d reimbursement or is that just timing.

Yeah, I'll take that. John, on the ACTA, so I think previously what we had disclosed was a half a billion dollars of revenue in 2024. We've rolled this forward to 2025, which suggests we're probably more in that $600 million zip code. When you look at Santral, which is in that number as well, Santral is actually predominantly, at least the revenue that we see through 2025, more e-motor business in high-voltage hybrids. So the bulk of their revenue is not likely going to count toward our explicit battery electric vehicle goal. So it actually doesn't add a lot to that particular bar, but it adds a lot to our capabilities, and that's what we're really excited about with Santral. With respect to the R&D reimbursements, it's really just a function of what we were able to accomplish at the end of the year. Recovery sometimes come in higher or lumpier in certain quarters. And that's exactly what we saw in Q4. I mean, our recoveries were up $20 million or so from what we were previously expecting. I wouldn't view that as a trend. I think that's just sometimes you get some lumpiness when you go quarter to quarter or year to year.

Okay, great. Thank you very much, guys.

Your next question comes from the line of Rod Lash with Wolf Research. Your line is open.

Good morning, everybody. A couple things I wanted to ask you about. the company today is something like 70% North American Europe and, um, looks like you have 13 to 15% upside in North America, 12 to 15 in, in Europe production, but you're only talking about seven to 9% on a weighted basis. So I was hoping you can maybe address what you're anticipating in terms of mix headwinds, presumably. And, um, wanted to also just check, um, On the year-over-year bridge, if I added back the amortization, the $88 million to 2021, am I correct that your incrementals on the $1.7, $1.8 billion of organic growth at the midpoint is in the 12% range? And if that's right, what are some of the puts and takes that I should be thinking about to bring that up to the normal high teens market? to 20% that you normally get.

Hey, Rod, it's Kevin. A couple things. First, on the growth in the market outlook, remember when we're quoting our 6% to 9%, we're also including commercial vehicles. So this is a weighted average of our markets, which is the light vehicle, which is displayed on that slide, but the commercial vehicle as well. And you can see the blend in the backup slides that we've provided. So we know China actually, from a commercial vehicle standpoint, is going to be a headwind in that market in the high teens. Or when you look at Europe, Europe light vehicle might be growing in the mid-teens, but the commercial vehicle side of that's single-digit growth. So when you factor all those growth elements in across light and commercial vehicle the way we're weighted, it comes out to 6% to 9%. So I'd say take a look at that backup slide we have in the appendix materials, and hopefully that'll help answer that question. On the conversion question you had, I'm sorry, were you asking a 21 versus 20 or a 22 versus 21 question?

It's 21 to 22, just looking at – I made the adjustment that $88 million on amortization that you pointed out on 2021, and then I'm trying to bridge the various components that you've given that looks like – The organic growth looks like it's about 1.46 to 2.06, excluding the, well, I think all-in. Maybe you can just address that.

Sure. When you look at the conversion, the way to think about it, if you look at it on an all-in basis, we're converting year over year in that, call it 2% to 10%-ish kind of a range, zip code. But that includes the $130 million to $160 million of R&D. And so if you back out the increase, that $130 to $160 million of R&D, we're actually converting year over year in the low to mid-teens, call it more in that 13% to 15% range. And so what are the puts and takes on that? Well, on the negative side, we have commodity cost headwinds, because remember, last year, that $65 million net impact that we experienced over the course of the year was predominantly in Q3 and Q4. And so as we come into the new year, we're going to continue to get that impact in the first couple quarters. That's going to be about $50 to $60 million in those first couple quarters. On top of that, we are seeing some additional inflationary pressures coming from the supply base that are part of our guide as well. Not as big as what we're seeing on the commodity side, but there is definitely inflationary cost pressure coming through that's factored in. And then those things are being offset by restructuring savings that we're continuing to drive, as well as incremental cost synergies on a year-over-year basis. And so those puts and takes, commodity costs, supplier inflation, restructuring synergies, those are basically offsetting to get us to that, call it low-to-mid-teens conversion year-over-year.

Okay. And maybe just to follow up, can you give us a sense of what the mechanisms are for recovering some of these inflationary pressures, whether it's commodities or... what you're seeing from tier two suppliers, it seems like it's a pervasive issue in the industry. Are you able to make adjustments to pricing or things along those lines with your OEM customers for that?

Yeah, it's true that the situation is a bit unusual with commodity and other increases. And so discussions are happening with our customers and we expect everyone to pay their fair share, to be honest, in this situation. Logistic issues have been also impacted by never-ending customer schedule changes, and so we're talking to our customers and hopefully getting to some resolutions. Okay, thank you.

And your next question comes from the line of Noah K. with Oppenheimer. Your line is open.

Good morning, everyone. Thanks for taking the questions. You know, I just wanted to go back and check past transcripts to confirm this, but I don't seem to even remember you talking about, you know, hydrogen combustion as a potential R&D opportunity development. And this quarter, you come out and actually announce a program award. We've heard a lot of folks in the powertrain space talking about you know, prototyping development of hydrogen. It just seems like to go from, you know, kind of stealth mode to announcing this is pretty remarkable. So I was wondering if you could take us through how the design cycle and development worked for this award. And then I think, you know, what do you say about the company's approach to R&D going forward to kind of get this time to market?

Yeah. Thanks, Noah. So You know, hydrogen can be used in two ways, right? First, you inject it into combustion, and second, you use it as a fuel cell, which is a range extender of a battery electric vehicle. Here, this wind, small in nature, is hydrogen as a mean of combustion. So you inject hydrogen rather than injecting gasoline. We've been working with a lot of customers, actually, on this. This is a pretty appealing... technology. And we've actually had in our tech centers engine fired up with hydrogen as a combustion mean over the past few months. And yeah, it's something that can be of interest. And we are focusing especially on commercial vehicle construction and agricultural opportunities at this point in time. And so one thing I would add, Noah, this is not a big part of the R&D increase at all. It is the biggest part of the, I mean, 100% of the part of the R&D increase is linked to BEV, right? And if you compute the numbers, This year, we will have 45%, 45% of our total R&D focused in BEV, which is, for me, absolutely exciting because I think it really validates the essence of charging forward. And I'm very proud of that where we are.

Great. Thanks, Fred. Let me just follow up on the M&A question asked earlier here. You know, are you seeing any kind of a reset on valuations for EV targets? And clearly, some of the public means in the space have gone through a pretty hard reset to start the year. Execution has not been easy. There's been supply chain challenges. So just curious to know what that does to your pipeline and, you know, potential for closing something relatively near term.

Really, I think that ultimately impacts the seller willingness to be able to execute a transaction. When we go into a transaction, we're looking at a discounted cash flow analysis based on the long-term prospects for the business. And obviously, if you have a relatively frothy public market, it influences the way that sellers can think about valuation. So that makes it sometimes more difficult to bridge a difference in perspectives on valuation. So as those types of valuations come down in the public markets, that undoubtedly helps in some of the discussions that we have on the buy side. But again, that's a data point, but for us, we're really focused on the long-term value of the business through the intrinsic value, which is built based on our discounted cash flow analysis.

Okay. And then, Kevin, sorry to sneak one more in, but just to clarify, the $50 to $60 million of cough headwinds from commodities you talked about in the first half, is that a net number? Year over year? Okay.

That's net of price increases. That's net of the recovery mechanisms with our customers. That's correct.

Okay. Thank you very much.

And your next question comes from the line of Chris McNally with Evercore. Your line is open.

Thanks so much, team. So just two questions on the margin. I think you mentioned answered my first question during Rod. It seems like the core incrementals, if we go pro forma for the accounting change, is about 13 to 15% year-over-year. Is that what you want? I just want to make sure that was the number that was given. Excluding R&D, that's exactly right. Excluding R&D. Perfect. So then the R&D leverage question. So when we think about the step-up of that $145 million midpoint year-over-year, Should I think about that as sort of RD&E, meaning the engineering expense associated with launching these platforms, or is it more about R&D to work on new platforms? Because then clearly the follow-on question would be, you know, should we expect similar increases in the future, or is this sort of a new elevated level that will grow with sales, but not to the extent of $145 million, you know, going forward?

Crystal, first of all, R&D, it's more development and application engineering than R&D, right? We're not scratching our heads to figure out what product we're going to develop, right? We have that portfolio. So it is both for launches and high-confidence pursuits.

Perfect. Yeah, that's exactly my question. Okay, so it then becomes more of a one-time step up, and then obviously if the business continues to grow, the opportunities are more than the $2.7 billion, then it could grow. But for now, this is largely a relatively sizable one-time step up.

That's correct. And remember, when we talked about this as part of charging forward even, we talked about our expectation that R&D would step up to the low to mid 5% range on a go-forward basis. And that's stepped up here as part of our 2022 guide. As we, again, have high confidence pursuits as well as the wins that we've generated and that we're working on launching, it's driving that. But it's right in line with our prior expectations of being in that 5% to 5.5% zip code on R&D.

Perfect. And then the only small one on margin, Acosol. It's obviously about 30 to 40 basis points diluted to margin now. You've given some revenue outlook, but could you also just help us to when we can think about break-even on an EBIT basis?

Yeah, if you exclude purchase price amortization, we expect it's going to be a little bit negative this year just based on where we're jumping into it. Again, we haven't had control of that operation yet until effectively last Thursday. Last Thursday we completed the merger squeeze-out process, which allows us to now fully control that operation. And so we're excited to get in there and really run the day-to-day operations of that business going forward and manage it the way we would at BorgWarner, which is continuing to drive the types of revenue growth that they're seeing, which probably has more upside than downside from what we've seen, as well as driving the types of profitability and cash generation we would expect. but a little bit of a margin headwind this year because it'll be a little bit less than break even before PPA. Okay. Thanks so much, Tim.

And your next question comes from the line of Colin Langan with Wells Fargo. Your line is open.

Oh, great, guys. Thanks for taking my questions. Just to follow up on the walk from 21-22, you mentioned Last quarter, there were cost synergies of 40 to 45 and restructuring of 40 to 50. Are those still the right numbers? And that would kind of imply there's another additional 30 to 35 million of other inflationary pressures that are offsetting those synergies with commodity costs?

Yeah, good question. Synergies actually ended up coming in stronger toward the end of the year than we anticipated. Some of the things that we were executing on last benefited us in Q4. So actually part of the tailwind we saw in Q4 relative to our guide was synergies coming in stronger. So cumulatively through the end of 2021, we're at about $140 million, which included year over year last year, $125 million, which means to now get to our ultimate $175 million of objective, there's only 35 million of synergies left to go. So a little bit lighter remaining in 2022 relative to what we signaled last quarter, only because of the acceleration into 2021. And then I'm restructuring. You're right. We guided at 30 to 35 is what we signaled last quarter. I'd say we should be at least at that level, if not slightly higher, as we come out of 2022. Okay.

And then going back to earlier questions about growth over market. So it's kind of hard this year since there's such a product mix tailwind last year. I mean, how are you thinking about it? It looks like your weighted average market outlook sort of implies about 300 basis points of geographic mixed tailwinds, but then that seems to also imply that there's another 400, 500. How much is backlog of just pure new business? How much is platform mix being positive, or is that viewed as negative as some of these platforms may be normalized? Where does that put some taste into the organic growth outlook?

Well, the geographic mix for us isn't a tailwind because what we do is we report on a weighted average market basis. So we're not looking at just global markets. We're looking at our weighted average mix. So the fact that you're seeing higher growth in jurisdictions where we might be more weighted, that's already factored into our assessment of market and embedded in that 6% to 9% guide for blended market. So when you look at us in 2022, what we're effectively guiding toward is our growth above that market, our weighted average market, is in that 4% to 5% range this year. And that's jumping off of last year's about 1,000 basis points of outgrowth on a year-over-year basis. So continuing to deliver that mid-single-digit outgrowth as we look ahead. Now, for us, our focus is less on outgrowth each year and more about how we execute relative to charging forward in 2025. 25% EV mix in 2025. which corresponds to roughly $4.5 billion of EV-related revenue. And that's really how we're measuring success. But underlying that is the expectation that we'll continue that mid-single-digit outgrowth on a go-forward basis.

Yeah, just to follow up, I kind of get the four to five. The four to five, how do you think about it, though? Is that all just brand-new business wins, or are you factoring any tailwinds or headwinds from PlatformX, I think? Other suppliers have indicated that you had such a rich luxury SUV mix last year that some of that unwinds. Is that incorporated in here, or is it fairly neutral in color there?

It's not really driven by any sort of a mixed benefit as we look ahead into 2022. It's really some of the product launches, some of the strength that we have on particular programs that are ramping up still. And so there's nothing unusual from a pure mixed perspective about that outgrowth.

Okay.

All right. Thanks for the questions.

And your next question comes from the line of Brian Johnson with Barclays. Your line's open. Thanks.

I have a couple questions just around the evolution of the portfolio. With regard to the acquisition in China, you'd already won that Hyundai A-Class China IDM business. So what does the acquisition bring you that you hadn't had before and kind of when did you think about the Chinese marketplace, what range of vehicles, in terms of price points range, would this get you into that perhaps you weren't in before?

Good morning, Ryan. HMC was for the, as you mentioned, for A-class IDM. With the central, we are really bringing a portfolio of motors for a whole suite of power level. And so this acquisition is not linked to that IDM with Hyundai since this was a motor that we were already doing in-house. So the whole logic is around, you know, I sometimes alluded to vertical integration as part of our M&A focus. This is clearly a vertical integration with great manufacturing capabilities. And it really expands the e-molotov portfolio at scale from the A-class that you can think about with Hyundai to long-haul trucks at scale in different power levels. So that's pretty much the highlights and the logic of that acquisition from a portfolio standpoint.

Okay, and kind of second question, I know I've asked this before, but you still have a lot of acquisition budget left. In the commercial vehicle market, several of the competitors would highlight the advantages of e-axles, that is integrating the motor into the axle. You know, your historical application was more of a DM1 motor. Would be similar, Dana, where you have an electric motor and traditional drivetrain. Are you thinking about tuck-in acquisitions around the e-axle space?

I mean, I'll start in general. You know, our components can be utilized, our e-components can be utilized, whether it's light vehicle or commercial vehicle. And as we think about e-axle, e-axle is definitely an important piece of the market on a go-forward basis in CD, but it's not the entirety of the market either. And so our ability to supply components into that market, whether it's e-motors like we've had success on, whether it's inverters or other things, that opportunity is absolutely there, and we've been generating those wins. And then you can even see what we talked about today with the eFan win, as well as the Gillig announcement on battery packs. So there's definitely opportunity for us in CV, and e-axles aren't an end-all, be-all that drives whether we can be successful in the CV market.

Okay, and final question on the disposition of IceSide. You did complete one deal. However, it's relatively small relative to your goals. What does the pipeline of dispositions look like? And second, the extent that things happen faster, is it buyer uncertainty over production environment and not wanting to buy and lever up if it's private equity with choppy production? Or is it a general hesitation about taking on even profitable ice assets in terms of what their terminal value is?

Yeah, I think, you know, we're pleased that we were able to accomplish step one here, the sale of about $200 million of revenue relative toward that billion-dollar goal. So we are pretty pleased with that. I will say that the current end market environment conditions, you know, with the volatility we've seen with a 76 million global light vehicle market and with the supply chain uncertainties has absolutely had an impact on buyers, broadly buyers' willingness to engage in some of these discussions over the last couple quarters. But we do have a pipeline that we're pursuing to drive toward that billion dollars of dispositions later this year. I think it's just going to be helpful for us to see a more stable market environment because I think appetite is there when the market is more stable and more certain. Okay, thank you.

And your next question comes from the line of Emmanuel Rassner with Deutsche Bank. Your line is open.

Thank you very much. First question is on the margin outlook and trajectory for margins, I guess, beyond this year. So as part of your 2022 outlook, you're essentially guiding on a comparable basis for margins taking a small step down despite some meaningful revenue growth in the double digits. And so I'm just... Wondering from here, you know, how should we think about it in terms of trajectory? What are sort of like more normalized margin? And is there a tradeoff between investment in growth and sort of like ability to maintain margins? Or do you feel like once you've had this step up in R&D, now the percentage of revenue sort of like will be fairly stable from here, then you can, you know, show better operating leverage going forward?

Yeah, as we look ahead after 2022, our expectation is that We're going to continue to deliver the types of cost performance we've been generating over the last few years, driving restructuring savings that have been coming into the P&L and will continue to come into the P&L. Maybe still a little bit of a tail left on some of the cost synergies from a Delphi perspective. But at the end of the day, what's really going to drive the margin performance jumping off of 2022 into the next few years is going to be where end markets are. Because obviously, we're talking about a guide that's based on, at the midpoint, about 80 million light vehicles. And so, you know, our ability to deliver continued improvement in our margin profile is going to be markets returning to more normalized level. Call it the high 80s of millions of units or even where IHS is now talking about being into 90 million next year. You know, ultimately our ability to convert on incremental revenue and on growing markets is there the same way it's always been, but markets are going to be a big driver of our ability to improve the margin from where we are today. In terms of that question about tradeoff and growth versus margin, We're willing to make that trade-off to the extent that the new business wins are there to support investment in R&D. And you can see that in what we're doing in 2022, stepping up our R&D $130 to $160 million is obviously a pretty meaningful step up, but greater than 20% increase in our R&D. And so we're willing to do that if we see the growth opportunities there because we think it's the right thing to do for the company. So the more growth opportunities to see, the more we're willing to invest in those growth opportunities through R&D. And if that comes at the expense of near-term margin, so be it. But we still see the trajectory of margin growing over the coming years.

Understood. And just sort of following up on this last point. So, I mean, presumably, the pipeline of available EV opportunity is only going to grow, right? This EV is at the beginning of penetration and eventually it's going to make its way towards 100% of the industry or something thereabout. So there's going to be a lot to invest in towards EV. So I guess when would you want to start seeing it as a driver of margin expansion? Or in other words, how long would you be willing to take margin compression as an investment into EV growth?

Well, I think we saw obviously the big step up this year We had guided before that we thought we'd be in the 5% to 5.5% range on a go-forward basis, and we were running below 5% the last couple years. So this is a major step up that we thought aligned with our longer-term objectives. So we would expect to continue to invest in increasing R&D, but probably in that zip code of where we're operating today in that 5% to 5.5%. But what's important to also note is that we're now starting to see the EV revenue coming into the P&L. And we expect to have healthy contribution margins on that. I mean, you can see we indicated in our press release today that our EV revenue is north of $800 million in 2022 embedded in our guidance, which is more than double what it was last year. So we're getting contribution on that incremental revenue, which is now starting to help fund that increase in R&D investment. So I'd say less of a headwind as we go forward because we start to operate at a more normalized R&D that's more of our steady state run rate R&D expense on a go-forward basis as a percent of sales, and then getting contribution margin on that revenue as it comes into the P&L.

Okay. And then just one quick final one still on this topic. So you very helpfully broke out sort of the EV revenues for 2022 versus 2021, and we get to see how much of the growth comes from here and then also back into how much of the revenue growth still comes from the combustion engine side of the business. When over the next year would you expect sort of like this ratio to sort of flip where essentially more of the revenue growth would come from EV than from combustion engine? I remain impressed and positively surprised that you still have so much revenue growth from combustion engine when sort of like the industry production seems to be heading in the other direction.

You know, we're targeting $4.5 billion in 2025, and part of charging forward, we're pretty much half and half in 2030. And that's absolutely part of the plan. Kevin, you want to add anything?

No, I was going to comment on that. I mean, really, it's the drive toward about $4.5 billion under our charging forward plan, which is the 25% EV mix. So as we jump off of 2022, $800 million, growing to $4.5 billion or so in 2025. I mean, that's the type of growth you should expect. Part of that coming from acquisitions, but the bulk of that really coming from what's already in our business today.

And it's true that 2025 might be, you know, 2024, 2025 might be a key inflection point. And for us, jumping off that inflection point, already having in-house Right now, as of this call, $3.3 billion of booked business, I'm not talking about other things than booked, with the target of being at $4.5 or above is a great jump-off point.

Yeah, thank you very much.

And our next question comes from the line of Ryan Brinkman with JP Morgan. Your line is open.

Hi, thanks for taking my question. Congrats on now having fully booked your targeted 2025 electrification revenue. I thought to ask, given the very strong expected top line growth at Santral, it looks like from de minimis revenue in 21 to $300 million in 25, are you able to say how much of that growth has also been booked versus maybe requires more bookings?

We're not going to comment on that right now. We'll give you more clarity around the outlook on that when we close on the transaction.

Okay, thanks. And then you got one question already on the multiples you might pay for acquired companies and how that could be impacted by the decline in public company multiples. Maybe the flip side of that question, there has been at least a relative rotation right from growth to value in the public markets this year. So with slower growth companies that are generating a healthy margin and cash flows now, similar to those you're looking to dispose, benefiting relative to the currently unprofitable high-growth companies whose cash inflows are in the future, similar to those you're looking to buy. So might you benefit from both ends because of this rotation? Or what has been the appetite for some of the businesses that you're shopping? How are you thinking about the value of some of these businesses now versus, I don't know, maybe like a year from now after the industry has continued to claw back some of the volume from the chip shortage, etc.? ?

Yeah, we'll see. I think, just as you alluded to there at the end of your question, I think it's really going to be dependent on a more stable end market environment. So undoubtedly, the end markets inform buyers and sellers as to how to think about valuation. I tell you, in this market right now, with the choppiness we're seeing in the volatility and only an 80 million unit global end market that we're projecting at the moment, it makes things a little bit more challenged on the disposition side. But we'll see how things progress from here, because I think as market conditions stabilize, and if there's continued rotation toward more value-related investments, maybe that'll be a tailwind, but we'll see. Our focus is on executing our strategic plans, controlling what we can control, and making sure we get good value for the assets that we dispose of. Great. Thank you.

And your next question comes from the line of Luke Young with Barrett. Your line's open.

Good morning. Thanks for taking questions. Fred, hoping we could start with a big picture question this morning, and it's on Project Charging Forward. Flipping back on when you first outlined the company's current strategy about a year ago now, how does where the company stands today compare to your initial expectations on all three of the major fronts, organic bookings, which clearly look to be above expectations, M&A, and the asset dispositions? Where are you ahead of expectations, and is there anywhere that you're not? And if not, what's driving that?

I think we are on track. And personally, I'm fully focused on charging forward. And with a broader team, I think we're absolutely on track. We're ahead of organic bookings, and I'm very proud of that. I would say that our decentralized operating model allows me and a few others at the top of the house to really spend a lot of time charging forward. And I'm really excited to up our game on R&D with 45% of R&D on E next year. I think it really, really validates the essence of using the cash that we generate and reinvesting it in the business with the traction that we have for all the E products that we now have in our portfolio. I am happy. with where we are just a year after, or maybe less than a year after the announcement of charging forward.

And then, thank you for that. My follow-up question, can you just remind us, now that the SCUSA process is completed at Accasol, what the initial steps are as you're able to take a little more control? Thank you.

I think, as Kevin alluded to before, we see some good prospects, and the pipeline of growth is strong. With that investment, go with it, and we're not shy about investing for the future of battery-packed technologies and battery-packed product leadership. We have to Literally, we are in charge since last Thursday, so we're going to put in place, and we're putting in place the different steps to run the company the way we would like it to be run. I am very impressed by the talents in this company, the technology leadership that they have, and the bookings that they've been able to generate in Europe and in the U.S., We'll be one of the only ones in the world having production facilities for high-volume commercial vehicle battery packs in both sides of the pond. So a lot of work to be done, but very, very excited about running with the ACASEL people and talents.

I'll leave it there. Thank you.

All right. We have time for one final question. And that question comes from Don Levy with Credit Space. Your line's open.

Great. Good morning. Thank you for squeezing me in. Wanted to go and just revisit some of the assumptions on the combustion set. So if you're saying you're going to grow EV by $400 million this year, that basically implies that sort of the outgrowth related to the ice piece is you know, maybe, you know, a point or so, as opposed to call it three, three and a half, three points or so from EV. So just wondering, you know, that's obviously a clear deceleration versus what we saw in 2021. And I assume 2021 was more driven by ice outgrowth. So maybe you could just give us the sense of the underlying outgrowth dynamics from your combustion products. And then maybe you could also just talk through the underlying margins. Obviously, you strip out the elevated R&D and the margin track from your EV products, wondering what those margins for combustion would look like.

Yeah, I mean, when you look at that, you're right. A good chunk of outgrowth this year is being driven by the EV, and we're excited about that. But we're continuing to see some level of that organic growth coming from the combustion business as well. So the combustion business has actually been been holding up well and actually outperforming the market. So not sure what to add to that other than I think we feel pretty good that the combustion portfolio is holding up and the e-business is now really starting to gain traction and coming through in the P&L.

And are you seeing increased penetration of, say, turbos and GDI? Is that an increased trend?

We're definitely seeing that as it relates to hybrids. I mean, when you look at the advanced hybrid technologies, those products lend themselves to driving more efficiency and downsizing of the engines. And so we do see adoption rates of products like turbos, VCT, GDI actually increasing in the hybrid world. And so that is a piece of what we expect to be a tailwind for the coming years and why we continue to expect underlying growth in that C portfolio over the next few years.

Okay, thank you. And then the second question is just on your longer-term planning assumptions. And I think when you gave your targets, your 2030 plan was assuming global BEV penetration of 30%. But I think what we've seen is just broadly OEMs, third-party forecasters, these long-term assumptions just keep on skewing higher and higher. This is occurring just a very short period of time. So I think some would argue that 30% is now looking conservative. So To the extent, I know 2030 is a ways out, but to the extent we continue to see EV expectations accelerating, maybe you can unpack what that does to your plans on acquisitions, dispositions, or organic growth initiatives.

Dan, I think you're right. The EV market adoption appears to be accelerating based on public comments and also with conversation with our customers. What's very important for us is our positioning in 2025, and that's really key to our long-term success. Target of $4.5 billion of BEV product in 2025. We're at 3.3, and we have time to book more organic business, and we have a healthy pipeline of M&A. So more to come on that. I think the jump-off point of 2025 is really, really important now. having the right portfolio, the right product leadership, the right customer intimacy, and the right base of a significant multi-billion dollar BEV revenue in 2025 is going to be key to our success. Great. Thank you very much.

Thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, Jerome, you can go ahead and conclude with us.

All right, that does conclude the BorgWarner 2021 Fourth Quarter and Full Year Results Conference call. You may now disconnect.