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spk12: Good morning. My name is Jerome, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2022 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 like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.
spk13: 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, BorgWarner.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 Invent section of our IR homepage for a full list. Before we begin, I need you to inform me 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 during this call. During today's presentation, we'll 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 growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we've posted an article presentation to the IR page of our website. We encourage you to follow along with these slides during the discussion. With that, I'm happy to turn the call over to Fred.
spk00: Thank you, Pat, and good day, everyone. We're very pleased to share our results for the first quarter 2022 and provide an overall company update starting on slide five. I am pleased with the resilience of our revenue relative to the industry decline. With approximately 3.9 billion in sales, we were up about 1% organically, and we outperformed in both Europe and North America. Our margin performance was negatively impacted by higher commodities and other inflationary costs. However, our M&A synergies and restructuring savings helped partially mitigate these headwinds. Free cash flow was a usage during the quarter due to inventory increases. However, we still expect to generate significant free cash flow in 2022. While navigating the near-term industry headwinds, we took steps to drive our long-term positioning during the quarter. We completed the acquisition of Central's light vehicle e-motor business. In addition to deploying capital to our M&A investment, we opportunistically repurchased $40 million of stock. And lastly, we secured multiple new electrification program awards. let's look at two electrification awards on slide six. First, I'm excited to announce our first OEM business win for our flexible battery management system. We have been selected by a leading global vehicle manufacturer to equip all its B segment, C segment, and light commercial vehicles with production expected to begin in 2023. We've been working with this global manufacturer for over two decades and are delighted to further strengthen our relationship by contributing our advanced battery management solutions for their vehicle platforms of tomorrow. Our battery management system for hybrid and electric is designed to monitor the state of charge, the state of health, and the battery temperature of each individual battery cell while precisely measuring current flow in and out of the battery pack. This self-balancing is performed during both the charge and discharge consumption cycles. It allows a higher state of charge to be achieved, optimizes battery lifespan, and enhances battery safety by preventing over- or undercharging. The system is suitable for battery applications operating at up to 800 volts. This is another great example of our wide range of products available for electrified vehicles. Next, I'm excited to announce our second dual inverter program. We will be providing a leading Chinese OEM with our highly efficient dual inverter for high voltage hybrid vehicle models slated to launch in 2023. By combining different power electronic technologies into one compact package, our dual inverter provides unrivaled functionality. A single unit can control and drive two electric motors while delivering cost and weight reductions. It also comes with a DC-DC converter as an option. These Advanced Inverter Awards showcase not only the product leadership we have in these domains, but also the trust and confidence we've built in our electrified application with multiple OEMs globally. In addition to their midterm revenue opportunities, advanced high-voltage hybrid programs, such as these, allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicle. On slide seven, I'm happy to highlight an additional e-motor award. Pogon has been selected to provide our high voltage hairpin e-motors for leading electric vehicle brand in China. The e-motors will be used in the company's second generation 800 volt propulsion system platform. The first vehicle equipped with this platform is expected to start mass production in 2023. These motors deliver peak efficiency of over 96% and feature our patented high-voltage hairpin stator winding technology. As you can see by the chart on the slide, our booked e-motor volumes, which are a testament to the recognition of our customers, are expected to grow rapidly from 800,000 units in 2022 to 2 million units by 2025, more than a 30% CAGR. With the additional booking opportunities that we see over the next one to two years, we believe our e-motor volume could reach more than 3 million units by 2025. Central's acquisition is a key part of our e-motor strategy, and I would like to provide a brief update on this acquisition on slide eight. Starting with revenue, we expect central acquisition to contribute 60 to $70 million to 2022 revenue over the next three quarters. We expect the impact to EBIT to be a modest negative for the full year. However, we did not acquire central for its near-term impact on results. We continue to expect the central acquisition to drive approximately $300 million of revenue by 2025, inclusive of assumed revenue synergies. Central's added manufacturing capabilities and e-motor design improvement should advance our overall competitiveness in e-motors. 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 commercial vehicles. that we will bring on a global scale. On the right side of the slide, we've provided a sampling of the revenue synergies that we're now in position to pursue. And we're excited that we've already secured two programs on this synergy list, and we expect to see additional success in the coming quarters. So let me summarize our first quarter results and our outlook. Overall, our first quarter performance was respectable. Our revenue, once again, proved more resilient than the industry volume. And while our margins are being negatively impacted by inflation, the proactive steps we have been taking to implement restructuring and cost synergies over the past several months and years are helping to partially mitigate these headwinds. As Kevin will detail shortly, our reduced full-year 2022 outlook is a reflection of the FX update, the moderated industry volume outlook at the top end of our range, and increased commodity costs. However, I'm encouraged that our relative revenue performance outlook has nonetheless improved. We are not accepting our current environment and its impact on our profitability and cash flow. As a management team, we are absolutely taking the measures that we believe are necessary to continue to optimize the short-term margins and cash flow. My eyes are focused on the longer term, and I'm extremely excited about our charging forward. We're taking significant steps that we believe will help us to secure our profitable growth well into the future. We're continuing to secure business in the electric world, and we have now booked significant scale across multiple product lines for electrified vehicles. By 2025, we have booked programs that will support approximately 2 million e-motors, 3 million inverters, and close to 4 million e-heaters, together with IDMs, EDMs, battery management systems, and battery packs. This represents more than $3.3 billion of booked business already in 2025, ready to carry on booking more and acquiring great assets to become even stronger. We're focused on disciplined, inorganic investment, like the acquisitions of Acasol, and Central's eMotor, which already are adding great technology to our portfolio while supplementing our growth profile. With that, I'm turning the call over to Kevin.
spk10: Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our first quarter results. First, our revenue came in at the high end of our expectations despite significantly weaker industry volume in Europe, which is our largest light vehicle market. Second, our margin performance in the quarter was respectable given inflationary pressures that our business is currently facing. Performance was supported by our synergy and cost restructuring actions that we've been executing on for the last couple years. Let's turn to slide nine for a look at our year-over-year revenue walk for Q1. We start with last year's revenue, which was just under $4 billion, after adjusting for the disposition of our Water Valley facility this past December. You can see that foreign currencies decreased revenue by about 3% from a year ago. The U.S. dollar strengthened year over year and has continued to strengthen beyond the quarter end. Then you can see the increase in our organic revenue, about 1% year over year. That compares to a 7% decrease in weighted average market production. That means we delivered another quarter of strong outperformance in the face of a challenging end market environment. This outperformance was driven by Europe, North America, and Korea. The sum of all this was just under $3.9 billion of revenue in Q1. Now let's look at our earnings and cash flow performance on slide 10. Our first quarter adjusted operating income was $389 million, or 10.0%, which compares to adjusted operating income of $464 million, or 11.6%, from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of the Water Valley disposition, adjusted operating income decreased $62 million on $30 million of higher sales. This performance includes nearly $50 million of net commodity and other material cost headwinds that we experienced in the quarter. The balance of the operating income decline year over year is explained by the impact of higher e-products related R&D and the acquisition of Acasol. Moving on to free cash flow, our free cash flow was a $61 million usage during the first quarter due to increased inventory as a result of ongoing production volatility. Let's now turn to slide 11 where you can see our perspective on global light vehicle industry production for 2022. When you look at this slide, you can see that our market assumptions incorporate a range of potential outcomes. That's primarily a result of the semiconductor supply challenges, the additional supply chain impacts as a result of the conflict in Ukraine, and the impact of COVID related shutdowns in China. With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of 2.5% to 5% this year, which is down from our previous assumption of a 6% to 9% increase. Looking at this by region, Europe is where we see the largest reduction relative to our prior guidance. We expect a blended market increase of 2% to 4%, which is down significantly from our prior outlook of plus 12% to 15%. This is driven by weaker production in both light and commercial vehicle markets. In North America, we're planning for our weighted markets to be up 11% to 13%. And in China, we expect the overall market to be down 4% to 7%, which is worse than our previous outlook. This has an underlying assumption that the COVID-related shutdowns are resolved by early June and that most of the lost volumes can be recovered in the second half of the year. Now let's talk about our full year outlook on slide 12. First, our guidance assumes an expected $650 million headwind from weaker foreign currencies, which is based on FX rates as of the end of April. While the U.S. dollar had already appreciated somewhat against foreign currencies through the end of March, we've seen additional meaningful appreciation of the dollar through the month of April as well. So we factored that into our outlook for the balance of the year. But remember, Our strategy is to produce and purchase components in the same region as our customers. As a result, the impact of currencies on our guidance is predominantly translational in nature. Next, as I previously mentioned, we expect our end markets to be up 2.5% to 5% for the year. But we expect our overall organic revenue growth to continue to exceed industry growth. In fact, our current outlook for outperformance is stronger than our prior outlook based on both our year-to-date performance and an increase in our expected pricing recoveries for commodity and other inflationary costs. Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 13% relative to 2021 pro forma revenue. That means we expect to outgrow the market by approximately 7% to 8%. which is higher than our prior outlook of 4% to 5%. To look at it another way, our stronger relative performance is almost entirely offsetting the impact of lower industry production. Finally, as it relates to our revenue outlook, the Santral acquisition is expected to add $60 to $70 million to 2022 revenue, as Fred previously noted. Adding these items together, we're projecting total 2022 revenue to be in the range of $15.5 to $16.0 billion. From a margin perspective, we expect our full-year adjusted operating margin to be in the range of 9.8 to 10.2 percent compared to a pro forma 2021 margin of 10.9 percent. This represents a 40 to 50 basis point reduction versus our prior outlook. Of this, Approximately 40 basis points, or just over $60 million, is the result of higher commodity and other inflationary costs, net of additional pricing recoveries. And about 10 basis points relates to the Santral acquisition, which is expected to be modestly dilutive this year. As it relates to R&D investment, our guidance still anticipates a $130 to $160 million increase in e-products R&D investment in 2022. Despite this challenging environment, we are not constraining the key investments that support the long-term growth of this company. Excluding inflation and this e-products R&D investment, our 2022 margin outlook contemplates the business delivering full-year incrementals in the high teens. Based on this revenue and margin outlook, we're now expecting full-year adjusted EPS of $3.90 to $4.25 per diluted share. It's important to note that the translation impact alone of the strengthening U.S. dollar is impacting our year-over-year EPS outlook by about 20 cents per share. And finally, we expect that we'll deliver free cash flow in the range of $650 to $750 million for the full year. The reduction from our prior guidance is being driven by our lower adjusted operating income, partially offset by lower capital spending expectations. That's our 2022 outlook. So let me summarize my financial remarks. Overall, we had a respectable start to the year. Our revenue proved more resilient than the decline in industry volume with our outgrowth tracking ahead of our expectations coming into the year. And we still delivered double-digit margins despite significant material cost inflation and higher R&D investment. As we look out to the balance of 2022, near-term industry pressures are likely to continue with ongoing production disruptions in multiple markets, as well as continuing material cost inflation pressure. As a management team, we continue to work to strike a balance between managing the present by sustaining our strong margin and cash flow profile, while at the same time maintaining the momentum in delivering our long-term plans under charging forward. But we know how to meet this challenge. Managing near-term results and long-term profitable growth has been and will continue to be the hallmark of BorgWarner's success. With that, I'd like to turn the call back over to Pat.
spk13: Thank you, Kevin. Jerome Ray to open up for questions.
spk12: All right. At this time, I would like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. If you were 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 Colin Langan with Wells Fargo. Your line's open.
spk05: Oh, great. Thanks for taking my questions. Just to start, I think you mentioned there's about a $60 million increase in the assumption on commodities. Where does that sort of bring your sort of full year headwind for commodity and input costs? And quite frankly, surprisingly, not nearly as bad as a lot of other suppliers are talking about. Seems like a pretty relatively small number. And you're doing a really good job offsetting that because the incrementals on the sales cut aren't really that bad. What are the sort of the key offsets that are kind of keeping those, you know, decrementals in a pretty low range?
spk10: Yeah, so a couple things. On the $60 million, if you remember last quarter, we talked about having $50 to $60 million of net commodity headwind, and then we talked about double-digit million of additional inflationary pressures. With the $60 million addition, where we're actually at on a full-year basis for both elements, the commodity piece and the other inflationary pressures, it's about $130 to $140 million net. That's net of the recoveries. And so that's an increase of $60 million net. In terms of managing the incrementals on the sales cut, aside from the $60 million flowing through, keep in mind the bulk of the sales cut is really driven by foreign exchange. If you look at the production cuts, the math of the production cuts that we're talking about in our guide translate to somewhere around $500 to $600 million of lower revenue. But the increased outgrowth that we're delivering is kind of in that $450 million range. So it's substantially offsetting the production impact. So the lower revenue is really predominantly driven by the foreign exchange. That's why you're not seeing a huge decremental on lower revenues because it's mainly translation. Got it.
spk05: That makes a lot of sense. Any update on the divestitures that you were planning for internal combustion engines? It seems like the recent volatility is probably not helping the market currently. I think the target was to do $1 billion by the end of this year.
spk10: Yeah, I mean, we're still actively involved in our processes, but I'd say it's highly likely that the current market environment is going to have some impact on the timing of that disposition process. I think until there's more clarity around things like the resolution of inflationary cost pressures, the impact of Russia-Ukraine, the impact of COVID lockdowns in China, I think it has the potential to impact certain buyers, making them a little bit more hesitant in different processes that we're undertaking. So I think that's okay. We're not a desperate seller. We're looking at disciplined approaches to selling positive cash flow generating businesses that have a certain value to us. So I would tell you those processes we're involved in right now are continuing to progress, but I think it's fair to assume that this has the potential to impact the market environment for executing these dispositions in the near term until there's more clarity about the situation. That situation being the market situation.
spk12: Okay, thanks for taking my question. Your next question comes from the line of John Murphy with Bank of America. Your line's open.
spk06: Good morning, everyone. This is Aileen Smith. I'm for John. Of course, I wanted to start asking the flip side to Colin's question from a longer-term perspective and the charging forward plan. You mentioned that there may be some impact of timing around the divestiture target for this year, but does the volatility in the capital markets and what may be going on with valuations from a public and a private side of things change anything from your perspective in terms of the acquisition opportunities that are available?
spk00: Amy, I think you need to think about it depending on the attributes or the characteristics of the target. So if you have an acquisition that we're going after that has a substantial current business in production, the current market conditions will have more impact on us looking at it versus a target that would be more of a startup in nature. And that's the way we look at it. A startup in nature, if there is a low level of production and if the bulk of the business comes in the years to come, the impact is way more marginal. In any case, We've always applied a very disciplined approach as far as M&A is concerned, actually MD&A is concerned. This will carry on. And over the past two quarters, we've turned down some acquisitions that we looked at for X number of reasons. So very disciplined in those approaches.
spk06: Okay, got it. That's helpful. And then we've asked this question a few different ways to suppliers on the cost inflation side, but your automaker customers have been pretty successful in passing on cost inflation more recently to their customers in the form of price. And I think we can understand the dynamic of commodities and pass-throughs between you and your customers, but cost inflation is really everywhere. So in the past few months, have automakers been in any way receptive or kind of opened the door for to discussions of taking on some incremental cost burden from you beyond commodity as they may be able to pass it down to their customers?
spk00: Yes, I think I'm getting encouraged by the discussions that we have with our customers. Those are not easy discussions, but we're making progress. And I think we will have substantially more clarity in the next earnings call to give you more detail, but the discussion is ongoing and encouraged by the tones.
spk06: Okay, great. And one quick housekeeping or clarification question, if I may. The battery management system WIM that you highlighted on slide six, is that technology that came from the Akasol acquisition?
spk00: No. It's a technology that came with the Delphi acquisition that has been enhanced since we're together.
spk06: Okay. Fantastic. Thank you.
spk12: Your next question comes from the line of Noah K. with Oppenheimer. Your line's open.
spk09: Thanks so much. I just wanted to ask about the pace of quoting and award activity. It feels like, from what we can see, it's continuing to accelerate. You've maintained your outlook for R&D spend this year. Any considerations that we should have about maintaining that with activity picking up? I'm just wondering how to reconcile the two.
spk00: We're very happy with the intensity of discussion with the customers, intensity of quotes and book business. And also very happy with the increase of 130, 260 million year-over-year on R&D on E. And we want to maintain that. And again, this increase is linked to application engineering and launch and quoting activities for businesses where we have high... high confidence. It's not R&D scratching our heads on what products we're going to develop. It's really concrete link to launch activities. And we feel good about those numbers.
spk09: Okay, very helpful. Thanks, Fred. And then just to clarify, how much of the anticipated weakness in the European markets have you really started to see here quarter to date versus what you're thinking for the back half?
spk00: So I would tell you that I think that the people that have been impacted by the Ukraine war directly, and it's not really our case, have done a pretty good job over the past weeks getting around some of the original supply chain that we saw when this conflict arrived. And so we've reduced We've reduced the midpoint of our European forecast by about 1.3 million units. But remember, 40% of that reduction is Russia, where we have very, very low exposure. So I think even if Q2 is going to be under pressure still, I think our customers are really doing an effective job managing through those supply issues in Europe.
spk09: Very helpful. Thank you.
spk12: And your next question comes from the line of Rod Lash with Wolf Research. Your line's open.
spk08: Good morning, everybody. Just, first of all, a couple housekeeping things. You originally, at the beginning of the year, pointed to 4% to 5% growth of the market. Now it's 7.5% to 8% relative to your weighted production assumption. Within that organic... growth, what is the commodity reimbursement? And Kevin, you mentioned two numbers for net inflation. One was $60 million and one was $130 to $140 million. Which one is the net for the year?
spk10: Yeah, so the increase in the outgrowth effectively going up 300 basis points is really a combination of the flow through of what we saw in Q1, the good news, as well as the incremental pricing recoveries that we're anticipating. Now, ultimately, the pricing, the additional pricing, which is both related to commodities, the contractual commodities, as well as some of the non-contractual things that we're working on, it's really going to be subject to the negotiations that ultimately transpire, both with the suppliers, how much of that flows through to us, and how much of that passes through to customers. I think you should assume that that, of the three points of additional outgrowth, that's somewhere in the zip code of plus or minus two points of that three points, and the Q1 outgrowth coming through being the rest of it. So still even without that, delivering five or six points of outgrowth on a full-year basis. In terms of that 130, 140, what I was trying to get at, I apologize if I confused the situation, but 130 to 140 represents the total net impact of material cost inflation, inclusive of commodities, on a year-over-year basis. That's a $60 million increase from what was embedded in our prior guide.
spk08: Okay. Thanks. And you're... R&D increase for the year, the definition changed a little bit. Originally it was R&D, now it's e-products R&D. I just wanted to see if there's anything there. It seems like you have a different cadence of margin expectations than we've heard from others. You did a roughly 10% margin in Q1, and you've got the midpoint of your margin target around 10% for the year. Can you maybe give us a little bit of color on how you expect the year to evolve? Does production look a little bit better or mix or commodity absorption later in the year?
spk10: Yeah, so the R&D and the ER&D, you're right. We changed the wording a little bit. And the main reason we did that is because actually as part of managing our cost structure along with other things that we manage within our P&L, we actually did manage our R&D on the combustion side lower in the quarter than what was implicitly in our guidance. So it was part of our cost management action. So if you look at total R&D for the company, it was up $8 million year over year. But our e-products R&D in the first quarter was actually up over $20 million, which just means combustion-based R&D was down on a year-over-year basis. So we wanted to make sure it was clear that we haven't come off the expectation that we're continuing to invest the same amount of e-R&D on a year-over-year basis. With respect to the cadence of margins, we're obviously not giving quarterly guidance, but what I would suggest to you is Q2 is likely going to come under the most pressure because that's where we're likely to see a lot of the volume headwinds. As Fred talked about with Europe, some of the challenges that we're likely going to see in Europe from a production perspective are going to be most pronounced probably in the second quarter, and we're obviously living right now through the impacts of the China shutdowns, and that's going to have an impact on second quarter revenue as well. So we'll obviously see impacts of that from a conversion perspective. As we then get back to the back half of the year, we would expect those types of pressures to abate as some of the OEs are working on solutions to navigate the European situation, and we would expect the China situation to recover in the back half of the year, most of the volume that gets lost in the second quarter. And then on top of that, we expect that we'll see significant progress even over the next 90 days or so as we work with our customers on these recovery mechanisms, which should help to further mitigate some of the headwinds that we're expecting to see there, part of that $130 to $140 million net. Okay.
spk08: And just really quick, Fred, this EMS contract seems like it's very short lead time. Is that going to be typical? And any thoughts on the size of that contract?
spk00: Yeah, this is a little untypical. We've been working with this customer for quite some time, and we've announced it since they have really – spread the volumes to all those platforms. I would still say that for such a product, 18 months would be a good proxy, 18 to 24 months. Obviously, we did not start from scratch. We have modular battery management systems available. And this is why we can launch fairly rapidly. You've seen some of the other launches also in eMotors. Motors also linked to the modular design, we can be up and running pretty rapidly. So 18 months would be a good proxy. Thank you.
spk12: Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
spk07: Thank you very much. I was hoping to come back to the topic of commodities. And in particular, can you give us a little bit more color around how some of these recovery mechanisms work for you, how you expect them to play out for the rest of the year? Because obviously, you know, it seems to be very successful setting a lot of these costs, but 130 to 140 million is still left net, you know, for the year. Is there any perspective to these mechanisms to get some of it back in 2023? Yeah, I mean, it's, it is, it is,
spk00: It is ongoing. As I mentioned before, Emmanuel, progress are being made. I'm encouraged by the mindset of the interaction and the discussion with the customers. And so, yeah, I am absolutely confident that we're going to get to the target that we set to ourselves, both managing the current And we're not, as you know, we're not in the business of, you know, making deals. We're in the business of a long-term relationship, and I expect fairness in the relationship in the short term linked to sunlight, to volume, to inflation, and also improving and nurturing the relationship on the longer term with great e-products at the lowest total cost of ownership for our customers. We're doing both. And, you know, as a side note, I've been in sales-related functions for about 20 years of my life, so this is something that I've got a little bit of experience on.
spk10: And just to be clear, Emmanuel, the 130 to 140 is net. I mean, it's net of our assumption about pricing recoveries, which is both the normal contractual commodity recoveries, which are still working the way they're designed at 50%, but also an assumption that we're going to be continuing to work with our customers to try to recover some of the extra inflationary impacts that we're seeing. And so the 130 to 140 is net of the assumption about those recoveries.
spk07: Yeah, no, I understand. But I guess my question is, so at the end of the day, you're left by the end of the year with sort of like this headwind to your margin profile of, you know, 130 to $140 million net of recoveries. Um, do you have either a contractual mechanical or just commercial discussion process to then, you know, continue these discussions next year, assuming, you know, spot prices say where they are and go back to the automakers and say, Hey, look, you know, the margins are not, you know, where they should be. We were still left holding this amount, you know, can we, you know, do something towards that? Or at this point, this is sort of the result of the, the result of your negotiations will be seen this year. And, uh, no necessary additional upside next in 2023.
spk00: It's already difficult enough to get to a resolution for this year. We don't want to speculate for what's happening next year. Next year will be dealt next year. Right now, the focus is to get to our targets in some fairness this year.
spk07: Okay, that's fair. So then second question will be on the... e-products R&D and then the overall R&D for the company. So as you mentioned in the remarks, as part of guidance, the margins are under year-over-year pressure, both because of some of this inflation, but also because of extra investment in R&D. How should we think about it going forward? I obviously assume e-products R&D will keep growing, but what about the R&D at the company level? Does that remain a headwind to margins, or does that stabilize around a same level as a percentage of revenue.
spk10: Well, we're not giving updated guidance on R&D in total for the company. It's obviously one of the levers that we have to be able to manage our cost structure when we look at the non-E-related R&D. But I think you should continue to expect that we're going to drive the investment and growth in the E-R&D it's necessary to support the launch of our programs and the profitable growth of the future. So we continue to expect that to be growing at $130 to $160 million this year. I think it's still also overall a good way to think about it as being in that 5% to 5.5% range from a total R&D perspective on a four-year basis, and that's where we are based on what's underlying our current guidance. Okay, thank you.
spk12: Our next question comes from the line of Brian Johnson with Barclays. Your line's open. Thank you.
spk02: I just want to, you know, talk a little bit about ICE and particularly plug-in hybrids. You know, a couple things. You know, when you look at your growth over market, how much is still driven by uptake of your product line on ICE vehicles? Is there perhaps a mix effect there? G-Luxury might have held up better. But secondly, given all the discussion around both cost and shortages of battery materials, it seems like the same amount of minerals that could power one EV could power 10 plug-in hybrids, which for most of the week could be operating in all-electric mode. So are you seeing any renewed interest in plug-in hybrids? Are you seeing any uptick? The sales have gone well so far in-year sales. And is that helping drive the near-term performance And is there maybe more upside in the midterm than most investors would think?
spk00: Yeah, Brian, I think we're focusing, charging forward on pure BEV, and it's the right thing to do. Hybrid is simply a combination of good combustion product and great BEV product. the dual inverter program in China is a good example of that. And we're seeing high-voltage plug-in hybrids, 400 volts and above, still taking some share of the market. And for us, what's really important to understand is that this is giving us scale. This is giving us launch experience. in motors, in those inverters that apply in high voltage plug-in hybrids for now, but would get us really a scale in BEV, too. So high voltage plug-in hybrids is a clear trend, as well as BEVs. And with Borg, we are able to serve our customers without being tainted to whether they want BEV or high-voltage plug-in hybrids. And all that converges into getting a scale. I was mentioning $3.3 billion of pure BEV revenue in 2025. If you add the high-voltage plug-in hybrids on top of that, and I don't have the number today, but it's pretty significant.
spk10: And then in terms of the specific outgrowth-related numbers, Brian, I guess You know, if you look at what's embedded in our guidance, that 7% to 8% outgrowth, that translates to more than a billion dollars of outgrowth this year. And separately, we've disclosed that we expect our EV revenue this year to be over $800 million, which is more than double what it was last year. So you can see, hey, there's $400 million plus coming from EVs, and the rest of it's coming from everything else. So to answer your question, yes, we're still seeing outgrowth in parts of our business other than EV. Okay, thanks.
spk00: Thank you.
spk12: And your next question comes from the line of Dan Levy with Credit Suisse. Your line's open.
spk11: Hi. Good morning. Maybe we could just start with the margins in the first quarter. And if you could give us a sense of the extent to which the China COVID shutdowns and the Ukraine war impact your margins, meaning excluding those items, what would we have otherwise seen?
spk10: Yeah, I mean, I think China really started to have an impact very late in the quarter. It's really more of an impact here as we get into Q2. But then in terms of Europe, you can just see the lost production. Obviously, we normally, as we've talked about in the past, we normally convert in the high teens on incremental revenue. And so as we start to lose revenue, it has an impact on our conversion accordingly. If you just cut through the math of what happened to us in the first quarter from a margin perspective, on a comparable basis, when you exclude FX and you exclude the Water Valley disposition, there were really just three things that moved the needle for us. It was the net material cost impacts that we talked about year over year, almost $50 million. It was the incremental e-products related R&D of $20 million, and then a little bit of impact from ACASOL. Other than that, it was pretty normal conversion. So again, if we had more production coming out of different geographies, we would expect to convert on that normally at our typical incremental margins.
spk11: And the go-forward guidance, is that assuming any additional supply impacts from Europe or any lumpiness around the China COVID shutdowns?
spk10: It assumes a couple of things. I mean, we're... Expecting that Q2 will be the most challenged quarter from a production perspective, because I think some of the lingering impacts of the Russia-Ukraine situation will likely manifest in Q2 and then probably see some recovery in production beyond that. In China, the lockdowns are going on right now. And our expectation underlying our guide is that the situation in China gets resolved in the early part of June and that we see the bulk of those volumes get recovered later in the year. So embedded in the guide is that Q2 will be the most challenged from a production perspective.
spk11: Great. And then as a follow-up, I want to understand, you know, in this inflationary environment, how costs are trending between EV versus combustion products, and most notably on the EV side inverters. You know, is there any difference in the input costs on each side for you? And Given the likely added margin pressure for EV product needs, margin pressure for everything, are the levers to mitigate those headwinds any different than what you'd have for ICE?
spk10: In terms of the input costs, I mean, a lot of it goes back to the overall inflationary environment is really having an impact on, I'd say, just about everything. I mean, you see it on semiconductors. You see it on a lot of underlying commodities. I mean, take a commodity like nickel. Nickel gets used in batteries. Nickel gets used in stainless steel. So that's having an impact across both types of propulsion architectures, whether you're talking about EVs or ice. So the way we go about managing our cost structure is pretty much the same, whether it's an ice-based component or an EV component, except that on the EV side, we're very cognizant of making sure that we're continuing to make the incremental ER&D investments to support our long-term growth and the launch of the programs that are coming into the P&L over the coming years.
spk11: Okay, so the cost pressures aren't any worse for EV products than they are for ICE, correct?
spk10: We're seeing cost pressures in both. If you look at the indices, even just in the last 90 days, what's happened to stainless steel, to nickel, to aluminum copper, those types of things, you're seeing 20, 30, 40% increases in some of those indices. And so that cuts across. That can be ice-based technology or it can be EV-based technology. And then logistics costs, freight costs, labor costs at some of the suppliers, those are impacting across the propulsion type as well. So I wouldn't say it's limited to one technology or the other.
spk11: Great. Thank you.
spk12: Your next question comes from the line of James Piccarello with BNP Paribas. Your line's open.
spk03: Hey, good morning, guys. Really appreciate the e-motors detail on slide seven. From an industry perspective, you provided the average CPV for motors at around $500. Just curious if this is trending in line with what BorgWarner is seeing, what it has in backlog. And then within the 2 million units slated for 2025, can you share roughly what the IDM mix is? And is there any way to think about the margin differential between you know, an e-motor component sale versus the full IDM system. Thanks.
spk00: I don't have all the detail. Pat, will you please come back to James? What I can tell you at least on one of your questions is that most of the 2 million of e-motor volume in 2025 are standalone motors. And a few go into IDMs, but but by far not the vast majority. For the rest, Pat's going to come back to you.
spk03: Okay, just like at a high level, just the margin differential for the full IDM system versus eMotors? I mean, is the IDM system materially, you know, margin accretive relative to the component?
spk10: Yeah, I mean, we price our business substantially similar, whether it's a system or a component. We look at the return on the invested capital I look at the capital that's required, and it tends to be, since we're in the assembly business, whether it's a system or a standalone motor, that we likely have relatively comparable capital intensity for that individual sale, which means that the margin profile on a percentage basis tends to look similar. Obviously, if you're selling more content through a system, the dollar amounts might be bigger, but the ROEC and the margin profiles tend to look directionally similar.
spk03: Okay, understood. And then is there a tally as to how many BMS-related awards you have in backlog? And then you do have five months in organic contribution from Acasol this year. So curious if you could share, you know, what Acasol's revenue was in the quarter and, you know, how you're thinking about that business for the rest of the year. Thanks.
spk10: Yeah, so with respect to Acasol, I'll take that question. I mean, Acasol, we delivered between $40 and $50 million of revenue this first quarter, and I would say we tend to be trending stronger in terms of what we're seeing is the longer-term prospects for that business from a growth perspective.
spk03: Okay, the tally on the BMS-related awards, is this your first one that you announced?
spk00: So this is the first major one that we announced, cutting across a lot of volume and a lot of platform for for a large global OE. There are other BMS businesses in the company that came with the Delphi acquisition. And of course, we're doing our own BMS as far as commercial vehicle battery packs are concerned. We would not flag that out independently from the battery pack revenue. So that's a little bit of color for you, James.
spk03: Appreciate it. Thanks.
spk00: Thank you.
spk12: Your next question comes from the line of Mark Delaney with Goldman Sachs. Her line is now open.
spk01: Yes, good morning, and thank you very much for taking the question. I was hoping to better understand the 2025 booked EV-related revenue. I think last quarter you talked about $2.7 billion was already booked. This quarter you talked about over $3.3 billion. I'm a little unclear if those are apples to apples or if there's some differences in how M&A is being treated. But the second part of that question is, can you bridge as to what's driving that increase from the 2.7 to the 3.3?
spk00: Yeah, that's easy. The 2.7 is organic. It's the first bar of our charging forward dashboard that you can see on our website. The additional 600 or 700 is coming from acquisitions. So And it's essentially ACASO and a little bit of central and 2.7 plus 0.6, a bit more than 0.6. We said 0.6 to 0.7 is north of 3.3. That's how the math works.
spk01: Got it. That's helpful. And I guess the follow-up is you got the VMS when you were speaking about today that starts late 23. So I was thinking that might have some contribution to the 25. EV targets. So maybe talk a little bit more on what kind of revenue we can be expecting from the BMS program. And you spoke a little bit already around what led you to win there, but that's a pretty competitive segment, and I thought it was very encouraging that you picked up the BMS win. So if you could also speak to what differentiated your BMS product line and what allowed you to win. Thanks.
spk00: Yeah, so on the 2.7, I mean... we're not updating, you know, three or four digits after the coma, so this is a rounding. We're not going to update that each time we book a business. So, as far as the BMS, let's say competitive advantages, it is our ability to combine, again, hardware and software, and And this is part of the winning equation that I always alluded to, mechanical hardware and software all together. And this is what we do very well and starting being absolutely recognized globally for a whole suite of products, including now battery management systems for PaaScar independently, but also together with Accasol and commercial vehicles. Thank you.
spk12: All right. We have time for one final question, and that question comes from David Kelly with Jefferies. Your line's open.
spk04: Hi, Sam. This is Gavin Kennedy on for David Kelly. I believe you mentioned that M&A synergies and restructuring savings partially offset the margin headwinds you saw in the first quarter. Can you remind us of your expectations for synergies and restructuring savings for the full year?
spk10: For the full year, it's north of $100 million combined.
spk04: Great. And then, of the major wins you highlighted in your presentation today in electrification to or for China, do you expect the pace of new business awards and bids to be impacted by the COVID-related shutdowns in that region, or is it business as usual despite the disruption?
spk00: It's business as usual, except when it comes to production, but I'm not expecting any delay as far as new technology and sourcing are concerned.
spk13: All right. Thanks, Tim. I'd like to thank you all for your great questions today. If you have any follow-up questions, feel free to reach out to me or any member of my team. Jerome, you can go ahead and include the call.
spk12: That does conclude the BorgWarner 2022 First Quarter Results Conference Call. You may now disconnect.
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