BorgWarner Inc.

Good morning everyone, this is Patrick Nolan. I apologize about the technical difficulties we've had this morning, but we're going to kick off today's call. So we issued our press release earlier this morning. It's posted on our website, bookowner.com. It's on our homepage and now our destinations homepage. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involves lists and searches of details in our same case. 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 the preparedness and purposes of product sales. 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. will also refer to our growth compared to on-market. When you hear the market, it means the change in light vehicle and commercial vehicle production rated for our geographic exposure. Please note that we've posted an RASL presentation to the RFHWA website. We encourage you to follow up with these slides during our discussion. With that, I'd be happy to turn the call over to Seth.

Thank you, Pat, and good morning, everyone. I have a bit of an allergic reaction this morning impacting my speech, so Kevin will cover the prepared remarks. I'll stay with you and answer the questions.

Kevin? All right. Thanks, Fred, and good morning, everyone. We're pleased to share our results for 2022 and provide an overall company update starting on slide five. We continue to be very proud of the strength of our sales relative to the overall industry. With about $15.8 billion in sales, we were up approximately 14% compared to our market, which was up a little less than 4%. Importantly, our BEV-related sales contributed meaningfully to this growth. We're also pleased with our solid margin performance, which we delivered despite the significant production volatility and inflationary headwinds that we faced during 2022. This performance was achieved while continuing to significantly increase our ER&D investment to support the continued growth in our e-product portfolio. We also delivered record-free cash flow, which allowed us to continue to make inorganic investments that support our future, while at the same time returning cash to our shareholders. Beyond our near-term results, we continued to drive our long-term positioning during the quarter. We took several leading steps in our sustainability efforts. I'll detail those more in just a moment. We made a significant advancement in charging forward with the announcement of the planned separation of the fuel systems and aftermarket segments. And we also secured multiple new electrification program awards since our last earnings report. Next on slide six, I'd like to give you more color with respect to our progress in our SBTI targets. In mid-December, Board Warner announced its commitment to reduce its absolute Scope 3 emissions by at least 25% by 2031 from a 2021 baseline. This Scope 3 target, along with our previously announced target to achieve 85% absolute Scope 1 and Scope 2 emissions reductions by 2030, was formally submitted for validation to SBTI. These science-based targets align with charging forward, our accelerated path to electrification, by aiming to achieve a net zero carbon emissions future for all. We've made some meaningful progress in 2022 toward achieving our scope one and two emissions targets as we have tied employee bonus opportunities across our global operations to reducing energy intensity while also promoting energy management certification and the procurement of renewable energy. To meet the Scope 3 target, BorgWarner intends to focus its efforts on a number of actions, including transitioning the product portfolio to electrification, increasing content of recyclable remanufactured material, reducing product weight, and driving sustainable raw material selection. We'll also be working with our supply base to do the same. Next on slide seven, I'd like to summarize the planned separation of our fuel systems and aftermarket segments, which we refer to as NUCO. We announced this planned separation in December as we believe that now is the right time to separate these businesses and unlock shareholder value. For NUCO, we've driven significant margin improvement over the last couple of years, despite the challenging industry environment. From a product leadership standpoint, we've solidified NUCO's position in the commercial vehicle segment, including with hydrogen injection, in the passenger car segment with our cutting-edge GDI technologies, and in the aftermarket business. We believe these things position NUCO well for success as a standalone public company. For Board Warner, we believe the intended separation accelerates our charging forward strategy and focuses all of our energy towards electrified propulsion. It enhances all of our management attention, our focus, and our flexibility to pursue attractive EV investments and supports our vision of a clean energy efficient world. The intended separation will allow each company to pursue its own strategies. with an overarching focus on maximizing the value opportunity for our shareholders. The teams are progressing well through the various work streams, and we plan to provide updates as appropriate. We continue to expect the intended separation to close in late 2023. Now let's look at some new electrification wards on slide eight. First, BorgWarner will supply a major German vehicle manufacturer with innovative battery cooling plates for the OEM's next generation electric vehicles in Europe and the United States. This is our first award for this new organically developed product with an expected launch in 2025. Compared to alternative solutions, the BorgWarner cooling plates provide greater cooling capacity within a smaller installation space, as well as reduced weight and cost. We believe that as a global market leader in exhaust gas recirculation cooler technology, BoardWarner's expertise in thermal management and the associated manufacturing processes positions the company to be an ideal pioneer of new developments for the battery cooling market. On the right side of the slide, you can see that we're announcing a sizable expansion of our silicon carbide inverter business with a top global OEM with an 800-volt award. After partnering with this car manufacturing on a 400-volt inverter product, we're now being sourced to launch two new 800-volt variants in 2025, 250 kilowatts for an all-wheel-drive crossover utility vehicle and a 350-kilowatt module for the OEM's performance vehicles. This expanded business strengthens our position as one of the strategic inverter suppliers for this long-standing customer as that customer transitions to the next phase of its BEV strategy. As you can see, we've made further progress toward our charging forward objectives. So let's look at what this means in our progress report on slide nine. Starting first with organic electric vehicle sales growth. With the award secured as of this call, we now have pure BEV programs that we estimate account for about $3 billion of book sales in 2025. Of note, this estimate reflects about a $150 million headwind versus our prior disclosure, stemming from an update to reflect the FX rates underlying our 2023 guidance. This FX headwind was partially offset by the new business wins I discussed on the prior slide. Turning to M&A, we've now completed or announced five acquisitions since the start of charging forward. Akasol, Santral, Rhombus, FSE, and DriveTech. Based on our due diligence, we believe those businesses will generate about $1.3 billion of EV-related sales in 2025. This is higher than our previous outlook based on our revised projections for Arkansas, which is seeing a faster ramp up in sales than we initially anticipated. But we're not done here. We continue to expect that we'll execute additional acquisitions and are actively engaged with a handful of potential targets that we think will enhance various parts of our EV portfolio. And finally, the planned separation of NUCO will address the third pillar of charging forward for which we set an original goal to complete about $3.5 billion in dispositions by 2025. With all that we've accomplished in the last couple of years, we believe we're already on track to achieve about $4.3 billion of pure electric vehicle sales in 2025. And we believe it puts us within striking distance of our $4.5 billion EV sales target for 2025. Now let's move into the financials, starting on slide 10, for a look at our year-over-year revenue walk for Q4. After adjusting for the disposition of our Water Valley facility, last year's Q4 revenue was just over $3.6 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in revenue of over 8 percent, or approximately $307 million. You can see the increase in our organic revenue, about 21% year over year. That compares to a less than 1% increase in weighted average market production, which means we delivered another quarter of strong outperformance. The sum of all this was just over $4.1 billion of revenue in Q4, a strong finish to the year. Turning to slide 11, you can see our earnings and cash flow performance for the quarter. our fourth quarter adjusted operating income was $428 million, equating to a 10.4 percent margin. That compares to adjusted operating income of $398 million, or 10.9 percent, from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of M&A, adjusted operating income increased $74 million on $769 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 15% on our additional sales. But this conversion was partially offset by our planned increase in e-products R&D. In Q4, we increased these R&D investments by $38 million relative to last year. Our adjusted EPS improved by 20 cents in the fourth quarter. Driven by the improvement in our adjusted operating income, and a nearly 400 basis points lower year-over-year tax rate. That lower tax rate was driven by a favorable mix of earnings across taxing jurisdictions, qualifying for more favorable tax rates in certain jurisdictions, and the impact of ongoing tax structuring initiatives, all of which we believe should contribute to a lower tax rate going forward than what we've experienced over the last few years. And finally, free cash flow. We generated $670-plus million of positive free cash flow during Q4. The year-over-year increase was driven by three things, the improvement in operating income, the timing of collection of a meaningful amount of inflationary price recoveries from our customers, and the non-recurrence of a one-time $130 million warranty payment to a customer last year. Let's now turn to slide 12, where you can see our perspective on global industry production for 2023. When you look at this slide, you can see that our market assumptions continue to contemplate the types of macro uncertainty we've been experiencing over the last few years. With that background in mind, we expect our global weighted light and commercial vehicle markets to be flat to up 3% this year. Looking at this by region, we're planning for our weighted North American markets to be up about 2% to 5%. In Europe, we expect our blended market to be up 1% to down 2% year over year. And in China, we expect the overall market to be roughly flat to up 3%. Now let's take a look at our full year outlook on slide 13. First, it's important to note that our guidance assumes an expected full-year headwind from weaker foreign currencies of $285 million. Second, as I previously mentioned, we expect our end markets to be flat to up 3% for the year, which contributes to the organic net sales change you see on the slide. But more important than that slight growth in end markets, We expect our revenue to continue to grow well in excess of industry production, driven by new business launches and higher electric vehicle revenue. In fact, in 2023, we're expecting to deliver between $1.5 and $1.8 billion in EV revenue, which is up significantly from the $870 million we generated in 2022. Finally, the Sancho and Rhombus acquisitions are expected to add approximately $35 million to 2023 revenue. Based on these assumptions, we're projecting total 2023 revenue in the range of $16.7 to $17.5 billion, which equates to organic growth of approximately 7% to 12%. Switching to margin, we expect our full-year adjusted operating margin to be in the range of 10.0% to 10.4%, compared to our 2022 margin of 10.1%. We do expect some variation in the margin level across the quarters in 2023. Specifically, we believe that Q1 is likely to be the weakest reported margin during the year as we work with our customers and suppliers on finalizing the extent to which inflationary pricing actions negotiated in 2022 carry over into 2023. In the end, our current expectations are that the year-over-year impact of inflationary pressures on full-year margins is likely to be negligible. However, we could see some negative impact in Q1. As it relates to R&D, our full-year 2023 guidance anticipates a $60 million to $70 million increase in e-products-related R&D investment. With our continued success securing new electrified business winds, we're continuing to lean forward and invest more in R&D to support our e-products portfolio. But importantly, as you see on the slide, the year-over-year increase in 2023 is expected to be lower than the year-over-year increase in 2022. Excluding the impact of this increase in e-products-related R&D, our 2023 margin outlook contemplates the business delivering four-year incrementals in the mid-teens. which we view as a solid conversion given the amount of product launches and ramp-ups occurring this year. Based on this revenue and margin outlook, we're expecting four-year adjusted EPS of $4.50 to $5 per diluted share. This EPS guidance contemplates two slight headwinds relative to 2022. First, we expect an effective tax rate of approximately 25%, up a couple percentage points relative to last year. However, that rate remains far lower than what we've experienced in recent years, and we think it's a rate that's likely to be sustainable on a go-forward basis. Second, our EPS guidance assumes a $0.13 per share negative impact coming from higher net pension expense as a result of higher discount rates. Turning to free cash flow, we expect it will deliver free cash flow in the range of $550 to $650 million for the full year. This cash flow outlook includes a one-time cash cost of approximately $150 million related to the intended spinoff of our fuel systems and aftermarket businesses, arising from outside advisor fees, cash tax payments to facilitate the separation, and IT costs to create a standalone IT environment for NUCO. Excluding these one-time costs, our cash flow guidance would be $700 to $800 million, which is only slightly lower than the record-free cash flow of $846 million we generated in 2022. That's our 2023 outlook. So let me summarize this morning's remarks. Overall, we delivered strong performance in 2022, despite a volatile end market environment and significant inflation headwinds. In the face of this environment, we outgrew the market significantly. We maintained our adjusted operating margins above 10% by delivering incremental margins on our higher sales and successfully completing commercial negotiations with our customers, while also investing $150 million more in R&D to support the future growth of our e-business. And finally, we delivered a record year of free cash flow. As we continue to successfully manage the present, we were also continuing to successfully deliver on the future by making significant progress on our charging forward plan. Now, as we look ahead to 2023, we'll be keenly focused on continuing to manage the present by sustaining strong, high single-digit revenue outperformance compared to industry volumes and driving conversion on this revenue growth, successfully executing the intended spinoff of our fuel systems and aftermarket businesses, 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.