BorgWarner Inc.

Good morning. My name is Chelsea and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2022 second 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 star 2. If you are using a speakerphone, please pick up the handset before asking your question. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Patrick Nolan, Vice President of Investor Relations Thank you, Chelsea. Good morning, everyone. Thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, BorgWarner.com, on our homepage, and on 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 IR homepage for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed 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 vehicle and commercial vehicle production weighted for our geographic exposure. Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. We're pleased to share our results for the second quarter 2022 and provide an overall company update starting on slide five. I continue to be impressed with the strength of our revenue relative to the overall industry. With approximately $3.8 billion in sales, we were up about 7% organically, despite global production being down slightly, and we outperformed in North America and Europe. From a margin perspective, our performance was negatively impacted by a planned increase in e-products R&D investment, net material headwinds, and sudden production shutdowns in China during this quarter. That said, we were able to partially mitigate this impact through overall cost performance and progress on executing customer pricing actions with a number of key customers. You will see that our guidance implies a sequential improvement in margin into the second half of 2022, which is driven by volume improvements and our expectation of continued success in executing our customer pricing actions. We're pleased with the progress we made in Q2 on this front. However, there are still some other ongoing customer discussions that we expect to resolve in the back half of the year. We expect that the successful execution of these actions will position our financials more strongly heading into 2023. While navigating the near-term industrial environment, we also took steps to drive our long-term positioning during the quarter. First, we completed the acquisition of Rhombus Energy Solutions. In addition to deploying capital to fund our M&A investment, we opportunistically repurchased 100 millions of stock. And lastly, we secured multiple new electrification program awards. Next, I would like to highlight our recent ESG report on slide six. In June, we released our 2022 sustainability report called Charging Forward Together. I am proud of the work of Forward employees around the globe delivering on our vision of a clean, energy-efficient world and embodying our beliefs of inclusion, integrity, excellence, responsibility, and collaboration. And this comes across in the report. Together, we are accelerating the world's transition to e-mobility by empowering everyone to drive sustainably by living cleaner, healthier, and safer lives. Our charging forward target to generate 45% of our revenue from electric vehicles by 2030 is consistent with our environmental goals. We remain committed to carbon neutrality in Scopes 1 and 2 by 2035. In addition, we have now introduced a target to reduce our greenhouse gas emissions by 85% by 2030. We have formalized our commitments to diversity, equity, and inclusion with measurable targets. We continue to advance towards our vision and build our future each day with industry's top talent. Our employees are changing the world's mobility. I invite you to read more in our 2022 sustainability report on our website and join us on this journey. Next, I would like to highlight our e-product portfolio for hybrids on slide seven. Over the last quarter, we've been asked about the amount of revenue we were generating from these products on advanced hybrids. And as you can see on this slide, it's actually quite sizable. We have a wide range of e-hybrid products that are helping our customers bridge to EVs, to name a few. This includes inverters, motors, advanced and efficient drive modules, and high-voltage coolant heaters. The hybrid products help provide the bridge to EVs for many OEMs by pairing efficient gasoline engines with electric drivetrains. In many instances, and as I have mentioned before several times, the technical profiles of these products are very similar to the same e-products used in a full electric vehicle. This is what allows us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicles. As you can see from the chart, we expect our e-hybrid sales to be close to $1.1 billion by 2025. And this does not include our highly efficient combustion product that will also be used on many of these same hybrid vehicles. So this is a substantial revenue opportunity for World Warner. and one that really reinforces our product leadership in electrification, which goes beyond pure battery electric vehicles. Now let's look at some pure BEV awards on slide eight. First, I'm happy to announce that we have secured two additional high voltage coolant heater programs. One is for global OEM, and the other is for an emerging electric vehicle brand in China. By offering consistent temperature distribution inside the battery pack and its cells, BorgWarner's high-voltage cooler heaters can be used for improving battery energy performance. They also allow comfortable cabin temperature to be generated in a short time, improving passenger experience. This is a great internally developed product success story at BorgWarner and one where we've quickly established product leadership. Second, BorgWarner has been selected to deliver battery systems for a European commercial vehicle OEM. This battery system will be utilized in the company's first range of heavy duty electric trucks expected to launch in 2024. For this exciting new project, our customer will benefit from the latest generation of our ultra-high energy battery system, which provides a 50% increase in energy density over its predecessor. This upgrade increases vehicle range significantly, making it a great solution for long-distance electrified commercial transportation. Lastly, I'm excited to share that the first units of the new BorgWarner fast charging station, Hyperion 120, have been installed in Italy. We've been working on the organic development of charging capabilities at BorgWarner since 2017. And I'm really pleased to see our investments in this space starting to bear fruit. We will look to accelerate our success in stationary charging with some inorganic investments as well, which I will discuss on the next slide. This quarter's award activity once again highlights our wide range of products available for electrified vehicles and our grid two wheel capabilities. Next, on slide 9, I would like to discuss the acquisition of Rhombus Energy Solution, which we announced this morning. We plan to accelerate the charging business with particular focus on high-value DC fast-charging hardware and enabling software. We believe that we can leverage the local knowledge and footprint of Rhombus to complement our existing ball-warner charging capability to accelerate organic growth Specifically, Rhombus will add a North American regional presence to our existing European footprint. We plan to leverage board-owner synergies across product quality, engineering, supply chain, manufacturing, and global sales. We also see potential synergies with battery system customers. In terms of revenue, we expect Rhombus to add approximately $10 million to our 2022 revenue over the next two quarters. We expect our combined DC fast charging business to approach $175 to $200 million in revenue by 2025. As a supplier to the auto and commercial vehicle market, We are not only delivering innovative products for electric drivetrain, but we also care about supporting certain key elements of the infrastructure for electric mobility, especially charging. And as we look ahead, we believe that you will see further success as we continue to strengthen our capabilities in this area. As you can see, we've made progress on key aspects of our charging forward strategy, so let's look at what this means in the progress report on slide 10. Starting first with organic electric vehicle revenue growth. With the award secured as of this call, we now have electric vehicle programs that we believe account for about $2.9 billion of booked revenue in 2025. This is a great achievement by the board on the teams. Turning to M&A, we have now completed three acquisitions since the start of charging forward, Accasol, Central's late vehicle e-motor business, and Rhombus Energy Solutions. Based on our due diligence, we believe those businesses will generate $800 million of additional EV-related revenue in 2025. We're not done here, though. We expect to take additional M&A steps, and we are actively engaged with a number of potential targets which could enhance various parts of our EV portfolio. So less than 18 months since the announcement of charging forward, we're on track to achieve approximately $3.7 billion of electric vehicle revenue by 2025 based on new business awards and actions announced to date. So let me summarize our second quarter results and our outlook. Overall, our second quarter performance was solid. Our revenue once again outperformed the industry volume as we delivered strong organic growth. We also made key progress in the quarter on the pricing actions necessary to deliver our full year commitments. As Kevin will detail shortly, our full year 2022 outlook is unchanged from a top line and margin perspective despite industry volume pressure in our largest market in Europe, and sizable FXL winners. Fundamentally, our relative revenue performance outlook has improved, and we believe we are on track to deliver double-digit organic growth this year. As I look beyond 2022, I'm very proud of the continuing progress I'm charging forward. We're booking electric vehicle revenue across our portfolio, and we are successfully executing our disciplined M&A process. Our booked organic base business and M&A completed to date puts us on track to achieve $3.7 billion in electric vehicle revenue by 2025. Combined with our e-hybrid business, our total e-product portfolio is now expected to reach approximately $4.8 billion in 2025, with what we've already achieved. To put that in context, this is nearly half the size of the company when I became CEO in 2018. But we're not done. We intend to carry on on booking more new business and acquiring great assets to become even stronger as the world continues to accelerate towards electrification. And I look forward to sharing that additional progress with you in the future. With that, I will turn the call over to Kevin.