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 BoardWarner 2023 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 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, BoardWarner.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 event section of our IR page 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'll 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 and commercial vehicle production weighted for our geographic exposure. Lastly, starting in the third quarter of 2023, BorgWarner will no longer consolidate its fuel systems and aftermarket segments. Results of those segments for all periods prior to the Finneas spinoff we've reflected as discontinued operations. Our guidance relates to our continuing operations, and our commentary on today's call will focus on those continuing operations, which includes looking at some results on a pro forma basis to reflect the spinoff. We will not answer questions related to the performance of the fuel systems and aftermarket segments. please direct them to Finia, who will conduct their earnings call on Monday, August 7th. Please note that we've posted today's earnings call 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.

Thank you, Pat, and good day, everyone. We're very pleased to share our results for the second quarter of 2023. and provide an overall company update starting on slide five. With approximately $3.7 billion in sales, we delivered 22% organic growth in the quarter. Our margin performance was strong and positively impacted by the growth and by customer pricing. Our free cash flow usage in the quarter reflected our planned capital spending to support our e-product growth, as well as the working capital usage. Importantly, our charging forward progress continued on multiple fronts. We received several new product awards since our last earning report, as well as securing an additional long-term component supply agreement. In June, we unveiled Charging Forward 2027, which summarized the next steps in our accelerating e-product portfolio. We also released our 2023 Sustainability Report, which highlighted the progress we have made towards meeting our environmental stewardship, social responsibility, and governance objectives and outlined additional goals for 2023 and beyond. We announced the planned acquisition of the electric and hybrid segment of Eldor Corporation. And lastly, on July 3rd, we completed the spin-off of Finneir. I would like to wish the Finneir team good luck as they move forward as an independent company. Now, let's turn to slide six. summarizing Charging Forward 2027, which we unveiled at our investor day back in June. Charging Forward 2027 builds on the success that we've had with our initial Charging Forward strategy that we announced back in March 2021. Charging Forward 2027 has three pillars. The first pillar is to continue our e-products growth. We're expecting more than $10 billion of e-product revenue in 2027 compared to an estimated 2.3 to 2.4 billion in 2023 and an estimated 5.6 billion in 2025. This 10 billion target for e-product was the size of the overall company in 2019. So this gives you an idea of how purposefully we're moving. Second pillar is e-products profitability. We continue to move towards breaking even on those products by the end of this year. On the challenging fall of 2027, we set a target of 7% adjusted operating margin in 2027 on our way to double-digit margin later in the decade. The third pillar relates to our foundational products that remain after the spin-off of Finia. Here, we want to maintain our strong, top-quality margins and really maximize the value of those foundational products. These three pillars are simple. They are clear and measurable. As in the past, we will update you on our progress over time. On slide seven, I would like to discuss the plan acquisition of the electric and hybrid segment of Eldor Corporation, which was announced in late June. We believe Eldor's portfolio of high-voltage boxes DC-DC converters and on-board chargers will be a great complement to BorgWarner's e-propulsion portfolio, particularly as it relates to expanding in high-voltage power electronics beyond the inverters. Relative to our charging forward 2027 targets, we expect the acquisition to generate about €250 million in additional 2027 sales after synergies. The acquisition is as much about the portfolio and engineering capabilities as it is about short-term projected sales. We expect the Eldor acquisition to augment our existing resources with additional scale, capacity and capabilities with more than 100 engineers, two facilities and more than 125 million euros of R&D investments that have been deployed by Eldor over the last five years. We estimate that power electronics outside of inverters is a $31 billion addressable market by 2030. The on-board charger market is more fragmented and is trending towards high voltage and combination boxes. Until this point, BoardWarner's success in inverters has largely consumed our power electronics engineering resources. Eldor's experienced engineering team will now provide the base for BoardWarner to grow even faster in on-board chargers and other power electronics. We will build upon this strong base to accelerate our program pursuits. Next on slide eight, Let's look at the long-term agreement that we announced with OnSemi during the quarter. The resiliency and flexibility of our supply base will become even more important as we rapidly grow our e-product portfolio. Based on the growth of our power electronics products, we expect to purchase close to 200 million semiconductor dies annually by 2027. By the same year, our inverter business is expected to be 70% silicon carbide based, with almost 50% of our inverters being 800 volts. This really highlights the need to partner with quality semiconductor suppliers. Over the last quarters, we've taken several steps to secure the long-term supply agreements necessary to support our growth. In late 2022, we announced a significant capacity corridor for silicon carbide supply with Wolfspeed. We're now expanding our strategy collaboration for silicon carbide with Ansamai. As a result, with agreements to date, you can see the strong mix of semiconductor suppliers we now have in place to support our strong growth. Now, let's look at some new product awards on slide 9. First, 4WARN has been selected by a leading Chinese OEM to supply its IDM for hybrid vehicles expected to start production in 2024. The provided IDM comprises dual inverter units, dual e-motors, and an e-gear ensuring reliable durability. We're pleased to continue our collaboration with this leading Chinese OEM further strengthening the partnership through supplying our IBM product. Next, BorgWarner has been selected by a major East Asian OEM to supply e-motor and inverter for the automaker's new electric vehicle platform. We're very pleased to continue our longstanding relationship with this major East Asian OEM. And finally, Fort Warner has secured a contract with a thermal and energy management solution supplier to deliver high-voltage coolant heaters for use on a series of three electric vehicle platforms for major OEM. Our heater will be added to the supplier's heating and cooling module and will be used to provide heat to the battery pack and cabin in BEVS. The takeaways from today are this. Fort Warner's second quarter results were strong. We delivered strong organic growth and margin performance. We expect another year of strong top-line growth in 2023. Our top-line guidance is also increasing modestly based on our industry outlook and customer pricing actions. Looking beyond the near term, we believe we are successfully executing on our long-term strategy. Challenging Forward 2027 has now laid out the path forward for BorgWarner for the next four years, and we plan to continue to share our successes along this journey. And with that, let me turn the call over to Kevin.

Thank you, Fred, and good morning, everyone. Here are the two key takeaways from our second quarter financial results. First, we reported double-digit organic revenue growth driven by higher industry production and outgrowth in Europe and China. Second, our margin performance was strong, driven by solid conversion on higher revenue and customer recoveries of material cost inflation more than offsetting higher input costs coming from our suppliers. Let's turn to slide 10 for a look at our year-over-year revenue walk for Q2. Old format for the spinoff of FINIA, last year's Q2 revenue was just over $3 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in revenue of approximately 1% or $33 million. Then you can see the increase in our organic revenue, about 22% year-over-year. That compares to an approximately 15% increase in weighted average market production. Finally, the acquisitions of Santral, Rhombus, and SSE added $18 million to revenue year over year. The sum of all this was just under $3.7 billion of revenue in Q2. Turning to slide 11, you can see our earnings and cash flow performance for the quarter. our pro forma second quarter adjusted operating income was $369 million, equating to a 10.1% margin. That compares to pro forma adjusted operating income of $258 million, or 8.5% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of M&A, adjusted operating income increased $126 million on $667 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 18% on our additional sales. In addition, our customer recoveries in the second quarter, net of material cost inflation from our suppliers, were an $11 million tailwind year over year. You'll recall that last quarter we were incurring supplier cost inflation with very little in the way of customer recovery to offset that headwind. In Q2, we negotiated a number of settlements with our customers that contemplated recoveries of material cost inflation for both Q2 and Q1. Because we essentially under recovered inflation in Q1 and over recovered in Q2, When you think about the jump off for our go-forward margin performance, you should really be looking at the total first half performance, not any individual quarter. Go-forward for the spin-off of Finia, our adjusted EPS improved by 31 cents compared to a year ago, driven almost entirely by the increase in our adjusted operating income. Turning to free cash flow, excluding one-time spending, our free cash flow was a $42 million usage during the second quarter due to higher capital spending to support our growth in e-products and increased working capital related to our sequentially increasing revenue and the customer recoveries that we booked late in the quarter but have not yet collected. Now let's take a look at our full year outlook on slide 12. First, as Pat mentioned, our full-year guidance now reflects the spin-off of FINIA and treats the prior period results of those particular segments as discontinued operations, which importantly is not reflected in many of the external estimates within the Street Consensus. Starting with foreign currencies, our guidance now assumes an expected full-year headwind from weaker currencies of $35 million. This is a headwind of $111 million in revenue versus our prior guidance, with the Chinese yuan being the largest driver of the change in our outlook. Second, we expect organic growth of approximately 13% to 16% year over year, compared to our prior guidance of 10% to 15%. The increase is driven predominantly by our higher production outlook, reflecting the stronger first half volumes. However, our assumption for inflation cost recoveries from our customers has also increased modestly. As it relates to e-product revenue, we're expecting to deliver between $2.3 and $2.4 billion in 2023, which is up from the approximately $1.5 billion we generated in 2022. As you can see, we've adjusted the high end of this outlook versus our prior guidance, primarily related to two things. First, we're experiencing a slower than anticipated ramp up in our battery pack production. Demand for our commercial vehicle battery packs is increasing rapidly. However, our capacity installation to support that demand has progressed a little more slowly in 2023 than we planned. Second, we're currently seeing lower customer volumes on a North American EV program that is already in production. Finally, the Santral, Rhombus, and SSE acquisitions are expected to add approximately $75 million to 2023 revenue. Based on these expectations, we're projecting total 2023 revenue in the range of $14.2 to $14.6 billion, which compares to our prior guidance of $14.0 to $14.6 billion. Let's switch to margin. we continue to expect our full-year adjusted operating margin to be in the range of 9.2% to 9.6%, which compares to our 2022 margin of 9.4%. Looking at the net impact of inflationary costs versus customer recoveries, our current expectations are that the net year-over-year impact of material cost inflation on full-year margin is likely to be a 10 to 20 basis point headwind. As it relates to R&D, our full-year 2023 guidance continues to anticipate a $60 to $70 million increase in e-product-related R&D. With our ongoing success securing new electrified business winds, we're continuing to lean forward by investing more in R&D to support our e-product portfolio. Excluding the impact of this planned increase in e-product-related R&D, Our 2023 margin outlook contemplates the business delivering four-year incrementals in the mid-teens. Based on this revenue and margin outlook, we're expecting four-year adjusted EPS from continuing operations in the range of $3.50 to $3.85 per diluted share. Turning to free cash flow, we continue to expect that we'll deliver free cash flow from continuing operations in the range of $400 to $500 million for the full year, excluding approximately $150 million in one-time cash costs related to the spinoff of FINIA. That's our 2023 outlook. Turning to slide 13, you can see an update for our e-propulsion segment. We were pleased with the sequential improvement in second quarter revenue as compared to the first quarter. The improved margins you see on the slide benefited from that higher revenue, roughly flat ER&D sequentially, and second quarter customer recoveries of first half material cost inflation from suppliers. Despite a modestly lower full-year revenue outlook for our E propulsion segment, we continue to expect a slightly positive segment margin in Q4. ePropulsion's second-half revenue growth is heavily weighted towards program launches and volume ramp-up in the Chinese NEV market. As you can see on the right side of the slide, our Chinese NEV customer base is quite diverse, as we supply many of the leading NEV manufacturers in the country. This customer diversity is a critical element of why we believe we'll ultimately be successful in the world of electrification. And it doesn't apply only to China. At BorgWarner, we currently have e-product business with seven of the 10 largest global light vehicle manufacturers of electric vehicles and high-voltage plug-in hybrids. So let me summarize my financial remarks. Overall, our second quarter financial results were strong. We achieved organic growth of approximately 22% year over year. We generated 10.1% adjusted operating margin based on a 19% all-in conversion on incremental revenue. And we delivered strong revenue growth year-over-year and bottom-line adjusted EPS. As we look ahead to the second half of 2023 and beyond, we continue to expect to deliver strong organic growth to drive improved profitability in our e-products as we leverage our top-line growth. and to continue to make the necessary investments to support the long-term profitable growth of our e-product portfolio. With that, I'd like to turn the call back over to Pat.

You'll see we're ready to open 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 Colin Langen with Wells Fargo.

Oh, great. Thanks for taking my questions. Any color, how should we think, why the second half seems to imply based on guidance a bit of moderation and margin? I think you're sort of running at 9.6 in the first half, and I think to get to the midpoint of guidance, you'd be more like 9.2 in the second half on what should be slightly higher sales. Any factors that are driving that weakness? Are you including some risk from a UAW strike in the second half? Any color there?

Yeah, I think you have the numbers right there, Colin. It's 9.6 in the first half, and the midpoint of the guide is about 9.2 in the second half of the year. The biggest things that are happening, if you're really looking sequentially, like on a first-half to second-half basis, one is you have to look at the mix of our revenue as we go to the second half of the year. Our e-products revenue is ramping up in our guide about $450 to $550 million first half to second half. And so we're converting on that nicely, about 15% on an all-in basis. which is good for a business that's really ramping up and incurring the cost that you would normally expect for a startup of production. At the same time, when you look at our revenue, keep in mind our sequential outlook is that markets are effectively down first half to second half about 6%. And that's not unusual. It's just the way that our market assumptions work, which means that underlying that, the rest of our revenue, our foundational revenue, is seeing a decline first half to second half, and that tends to come with higher decrementals. So when you look at that revenue mix going first half to second half, that's a bit of a drag on the margin that takes it down a bit. There's also a little bit of incremental inflation, first half to second half, a little bit of incremental R&D, but that's really the overall picture. The bottom line from our perspective, we're pretty pleased with the fact that we're driving 13% to 16% full-year organic growth year over year and sustaining that 9.2% to 9.6% margin outlook.

Got it. And any UAW in the second half risk there, or is that sort of not in the guidance?

We haven't put anything in the guidance. I mean, it's hard for us to sit here and guess with a crystal ball what that might look like. What I can tell you is just so you can dimension maybe your assessment of the exposure that we have. If we look at our North American exposure to Ford, Stellantis, and GM across Mexico and U.S. as we supply them, our production runs about a little less than $250 million a month. So, you know, you can look at that however you want in terms of assessing what you think some scenarios might be. But we haven't embedded anything in our guidance as it relates to potential strikes.

Got it. And just lastly, you highlighted some slowing demand for at least one of your products, one of your e-products. You know, obviously there's some concerns from automakers about EV adoption slowing. And I think as your investor today, you talk sort of longer term, you know, sort of being de-risked on the sort of sales versus margin. But how should we think about that near term? If EV starts to slow into already doesn't see the high adoption to next year, does that put pressure on your overall profitability? How should we think about the puts and takes on sort of potential for EV to slow and impact you?

So we've adjusted the top line. Two main reasons. First is We have issues keeping up with the demand on battery pack, and despite a 350% year-over-year increase on our Gen 3 pack, we need more output. So we have all hands on deck, especially from a manufacturing engineering perspective. And remember, 1,000 buses or trucks is $100 million revenue for BorgWarner. Also, we see the production of a current North American EV output not as high as expected. Those are the two main factors. If your question is around, has it changed our long-term outlook, our clear answer is absolutely not. It's not going to be a steady upline, right? It is going to be with years or quarters going higher and some going, you know, not as high and still going to grow. But don't expect a straight line from a BEV or high-voltage plug-in every growth.

Got it. All right. Thanks for taking my question.

Mm-hmm. Your next question will come from John Murphy with Bank of America.

Good morning, guys. I just wanted to follow up on that question Colin was asking. Fred, if you think about this in the short run, EVs are ramping a little bit slower than folks were expecting. They're still ramping, so the long-term strategy still obviously makes sense. But could this benefit margins here in the short run as those EVs aren't produced and more ICE vehicles are produced and you're getting better margins there. Just curious, you know, in the next one, two years, if that might, you know, drive better cash flow and help, you know, reinvest into that transition to the future.

John, what I can tell you is that we see strong customer pool. We see a very steady drumbeat on product wins globally. And remember, we're both on dev and on hybrids, and especially high-voltage plug-in hybrids, but I would agree with you. This emphasizes the importance of maintaining strong margin on our foundational business, and that's the third pillar of Charging Forward 2027. So that's what I would tell you.

Okay. And then just a follow-up on the on-semi aspect. you know, announcement. I'm just curious, you know, what this means for the Wolfspeed deal? Or is this really just, you know, dual sourcing that might even go to, you know, triple sourcing over time? Is this sort of just standard course? Or is there something specifically you're getting out of on semi wouldn't get out of Wolfspeed? Or does it put the Wolfspeed deal at risk? And how should we interpret all this?

It's all about supply chain resiliency. We're happy with the Wolfspeed capacity corridor. Wolfspeed is our largest silicon carbide supplier, and we are putting in place additional agreements. It's all about security and supply chain resiliency.

Okay, great. Thank you very much, guys. Thank you, John.

Your next question will come from Noah Kay with Oppenheimer.

Thanks for taking the questions. I appreciate all the reconciliation details for the Phineas spin. Can you just update us on where net leverage actually fits post-spin and how much dry powder you have in your view for M&A?

Yeah, I mean, what I'd say is, you know, you can see some of the metrics we have as a quarter end. But the one thing that doesn't get reflected in the quarter end numbers is that when we executed the spinoff, there was an inflow of cash to BorgWarner. So effectively on July 3rd of about $450 million. And that was because Finia issued $800 million of debt. and then retained about $350 million for its cash balances and remitted the rest back to Board Warner. So when you look at our balance sheet, you can see what the balance sheet looks like, and you have to think there's another $450 million out there. From our perspective, the way we think about our leverage profile is we'll continue to manage that in a way that we drive toward keeping below two times on a gross debt to EBITDA basis. and we'll look at whatever actions we might need to take over the coming quarters to get there. But I think overall what it means is it doesn't slow down our ability to execute from an M&A perspective opportunistically as we see it, the opportunities that might be able to help strengthen our product leadership position in electrification.

And a follow-up to that, good commentary on Eldor, and you've done quite a lot of M&A over the last year and change, but just give us a view of the pipeline now. And there have been some comments on this call and others around what the puts and takes of a slower-than-expected EV adoption rate might mean for industry. Curious to know how that might be impacting the pipeline in terms of potential candidates for acquisition.

No, we continue to look at opportunities in a very disciplined way, as we've done in the past. We're happy with the portfolio that we have. If those opportunities can strengthen our electrification capabilities and accelerate the EV transition, we look at them, again, in a very disciplined way.

Okay, maybe just one more. You mentioned... you know, the pace of battery production ramp, which, I mean, again, very high growth, so not necessarily getting to the full level you expected. But can you help characterize that? You know, I don't believe Seneca expansion was factored in that, right? I mean, that's not until next year. So what are the gating factors? Is it labor? Is it, you know, process equipment? Is it, you know, cathode or other materials? Just trying to understand the gating factors on production.

It is equipment. It is related to manufacturing equipment. It's going to take us about 18 to 24 months to get to the 2027 capacity that is required. We announced about $1.3 billion of revenue in battery packs in 2027. and we're working on ramping that up as fast as we can for all our customers, especially in the Western world.

Very clear. Thanks, Fred.

Thank you, Mel.

Your next question will come from Emmanuel Rosner with Deutsche Bank.

Thank you very much. My first question is on the e-propulsions. as well as your confidence in getting to slight positive margins in the first quarter. But will that benefit from timing or recovery in the fourth quarter? Or can we think about it as sort of like a solid exit rate on which to build further progress in 2024?

Yeah, I mean, the way we're looking at it is achieving that break-even, actually positive margin at the end of the fourth quarter is a solid jump off into 2024. I mean, you might remember we talked about it before. If you look at our quarter end Q4 2022, e-propulsion was actually slightly positive, but we know it was on the back largely of 2020. increased recoveries from an R&D perspective. And so at that moment, it wasn't really a sustained positive margin profile. As we get to the end of this year and achieve that positive margin profile, it's more because of the scale that we're generating in the business and the conversion on that incremental revenue. So I think it positions us to have a 2024 that's also positive and growing from there. That's very clear.

And then one follow-up on the small change in the full year guidance. So your organic growth outlook is somewhat better thanks to better production, but then you left your operating margin range essentially unchanged. What are sort of like some of the puts and takes with that?

Yeah, I mean, we didn't move the upper end of the range. Obviously, we kept the $14.6 billion of revenue, so we didn't really move much there. We do have a little bit of incremental conversion coming on the increase at the bottom end of the range, but there's not a significant amount of movement to really comment on, so our 9.2% margin at the bottom end of the range held. I mean, if you're looking at it from a pure operating income perspective, you've got a little bit of incremental conversion, and then you have a little bit of FX headwind that's impacting us as well. Understood. Thank you.

Your next question will come from Luke Young with Baird.

Good morning. Thanks for taking the question. Fred, for starters, just be great to get your perspective on the competitive landscape for power electronics outside of inverters. If you could just talk about the fragmentation you see right now and the level of synergy that you would expect or even that customers have told you with the fact that you're already a major player in inverter and bringing that to things like onboard charger and other related products. Thank you.

Look, what we're doing with inverters, with onboard chargers, with DC-DC converters, and also from a charging perspective, is power conversion. You can convert DC to AC, DC to DC, DC to DC. But at the end of the day, the core is power conversion. So the synergies from an engineering perspective, a purchasing perspective, and a product similarity perspective is fairly high.

Okay.

Thank you for that. And then, for my follow-up, just wondering if you've commented or could comment on what the geographic mix of e-product revenue looks like sitting here. In 2023, I guess I'm thinking of the downside risk, say, customer delays in North America, which showed up in the revision to numbers this morning relative to China pushing higher in the back half of the year. How should we just think about that mix between, I guess, broadly North America, Europe, and China? in e-products? Thank you.

Yeah, I would say what we're really seeing, particularly as you look at that $450 to $550 million of ramp-up going first half to second half in e-products, an important piece of that ramp-up is really coming in the e-propulsion segment, which is really being driven by product launches and ramp-up in China. So we have a healthy mix of e-product revenue across the globe, but as we ramp up here in the back half of 2023, China is a big piece of that ramp up.

Got it.

Thank you.

Your next question will come from Dan Levy with Barclays.

Hi. Good morning. Thank you for taking the questions. I wanted to first just start with a question on your growth dynamics. And I know you have walked away from providing an explicit growth over market target, but the implied number for the year is 9% to 12%. You just did 7% in the second quarter. So if you could maybe just give us a sense of what's driving acceleration into the back half of the year. It sounds like part of it is e-products, but to what extent is it also that you're seeing further traction on the foundational business.

Dan, you're right. At the midpoint, our growth is 1,000 basis points or 1,050 basis points. It's driven by e-product. It's a significant driver for this growth. And actually, second half is even higher than the first half. 2021 was also above 1,000 basis points outgrowth, and it's difficult to time it. Customer pricing plays also a role on a full year basis with 170 basis points. So this is what I would tell you, and e-products plays a significant role in this, and you will see that also first half to second half.

And the foundational business, is that playing any role here, or this is purely driven by e-products?

I mean, the foundational business is continuing to outperform overall as well, but the biggest driver of why the second half is so much stronger than the first half, if you do the math of what's underlying outgrowth, it's that $450 to $550 million increase sequentially from first half to second half in e-products revenue. I mean, keep in mind, we're making that, that's what we're expecting when sequentially, if you're looking at it that way, markets are actually down globally during that period, but revenue in e-products is up 450 to 550. So it's a big driver of outgrowth. Okay, great. Thank you. And then as a follow-up relatedly, I was wondering if you could just talk about your hybrid business within the foundational piece. You know, we heard last week from one of your large customers that, you know, they're taking efforts to accelerate hybrids, you know, outside of the, you know, plug-in hybrids. So maybe you can give us a sense for the latest that you're hearing on hybrids, you know, within the foundational piece, how accretive that is to CPD, how accretive it is to margins, and maybe if you could just frame, you know, within foundational how large it is today.

I don't think we've disclosed yet, but what we've disclosed is 1.3 billion of hybrid in 2025 on the east side. And on the foundational side, that would come on top. Most of the next generation or current generation high voltage plug-in hybrids that make a difference from meeting the regulatory environment, especially in Europe and in China, do carry turbos, do carry EGR and other products that we're making. So it is an important part, and we've always told you that the products that we retain play a key role into the growth of hybrids, especially high-voltage plug-in hybrids, which are part of the NEV environment in China also.

Is the extended range EVs, is that somewhere where you play, meaning the non-plug-ins?

We play in all kinds of hybrids. We play more in high-voltage plug-in hybrids, which are making a bigger difference from a fuel efficiency, overall fuel efficiency standpoint. But we do play into what we can call range extenders, whatever you call those types of powertrains.

As a reminder, that is star one to ask a question. And your next question will come from Rod Lash with Wolf Research.

Good morning, everybody. Good morning. I wanted to ask maybe just two strategic questions. A week ago, we saw a platform sharing agreement between Volkswagen and Xiaopeng. I know that Xiaopeng is a significant customer of yours. Stellantis, on their earnings call, also talked about countering the Chinese invasion of Europe with better utilization of low-cost country sourcing. And I was hoping you might just, if it's relevant, just talk about whether this is significant for BorgWarner whether you see this as a global or a local phenomenon, just the utilization of these Chinese, lower-cost Chinese platforms, whether that actually has implications for you.

Rob, one of the key elements of the strategy was to scale up fast, and I think we've done a pretty good job there. We've done a pretty good job in China. You can see we're producing e-products for the BYDs, the Chang'an, the cherries, the expanding the Liotos, the Great Wall, et cetera, this world. And this will also be in North America and Europe, and I'm not going to comment more. But this thing is going to be, I think, beneficial for suppliers that have technology and scale, which I believe we are part of.

So just to clarify that, Fred, the – These kinds of platform sharing agreements, does that represent an expansion of your existing business, or does it have no effect on you? And is this kind of a global thing, or is this more of a China local thing?

I think, you know, that was in the detail in your question, Ron, it depends on the platform. And I don't think we have the granularity of what will happen across those different OEMs from the platform sharing standpoint. And we'll let you know if we can and when we can.

Okay. And then just maybe at a high level, just given all the focus on UAW discussions now, just taking a step back, how are you thinking about the implications of higher labor costs for these OEMs? Do you see that as a net positive from an outsourcing perspective over time, or is it kind of unclear because OEMs ultimately have to commit to greater union labor utilization.

Rod, I'm not going to comment on this topic. Okay. All right. Thank you.

Our last question will come from James Piccirillo with B&P Paribas.

Hi, guys. Can you just confirm what the net commodities impact was in the quarter and what you're now baking into the full year? And then also with respect to the new slate of restructuring efforts that you outlined at the analyst day targeting 60 to 70 million in savings by 2025 tied to your ice operations. Is there anything hitting in the second half here? Thanks.

Yeah, with respect to the commodities impact, in Q2, when you take pricing minus the net material inflation cost coming from the suppliers, it was a net positive about $11 million in the quarter. And remember, that's because in Q2, we were recovering for Q1 as well because we had very little in the way of recoveries in Q1. So that's why it was a net positive number in Q2. And overall... The pricing element of that in Q2 was a little bit north of 2.5% of our revenue. So, you know, obviously had a meaningful impact on the quarter and contributed about 10 basis points to margin when you cut through that math. When you look on a full year basis, we expect pricing, the pricing side of the equation to be somewhere between one and a half to two points. of pricing all in year over year and we expect the net impact on our p l to be a 10 to 20 basis point headwind all in year over year so that's the way to think about net material inflation cost impacts for us in terms of the restructuring there's nothing unusual as you look in the back half of the year we're progressing along the trajectory of what we laid out in the in the june investor day and generating some of the savings each quarter this year associated with what we laid out on that slide

Got it. And then just a high-level question, if automakers begin to slow down their EV ambitions in some fashion over the coming years, whether it's demand-related or production-constrained, I don't imagine BorgWarner is seeing any change in OEM intentions as of now. But if this does play out, what would the simple response be for the company to flex R&D spend? Could this entail complexities and inefficiencies down the road for BoardWarner? Just curious on your high-level thoughts here on a topic that's gaining some traction, that's all.

Thanks. James, the first thing I would tell you is that we play as a global player. You've seen the impact that we have in China, in Europe, in North America. So we looked at the acceleration of EVs. and electrification overall on the global scale and on the global scale we see momentum again if you think this is going to be a straight line i think it's the wrong assumption and we're ready to flex uh we're also ready to uh maintain strong margin on our foundational business which is absolutely part of one of the three simple pillars of charging forward and and this is This is going to be important no matter what.

And maybe the last thing I would add to that, James, it's why we laid out the scenarios of Investor Day like we did, is because, you know, while we have our expectations on how the market is going to evolve over the coming years and we're marching toward that, you know, we recognize that there could be some additional upside to the e-markets growing and additional downside to that. And that's why, as you look at the portfolio and the way we've constructed it, it's resilience on any of these scenarios and drives operating income performance that we think is relatively comparable under lots of different outcomes like that. So that's why the portfolio is constructed the way it is. Thank you.

With that, I'd like to 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, Chelsea, you can go ahead and conclude today's call.

Thank you, ladies and gentlemen. This does conclude the BorgWarner 2023 Second Quarter Results Conference Call.