BorgWarner Inc (BWA) — Q2 2017 Earnings Call Transcript

Thank you, Sharon. Good morning, everyone, and thank you for joining us. We issued our earnings release at 6:30 AM Eastern Time. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations homepage. The replay of today's call will be available through August 10th. The dial-in number for that call is 855-859-2056, and the conference ID is 49070364. You can also listen to the replay on our website. Regarding our Investor Relations calendar, we'll be attending several conferences before our next earnings release. Please check the Events section of our Investor Relations homepage for a complete list. I would, however, like to highlight our upcoming Investor Day on August 7th. This will be at the New York Stock Exchange and will feature presentations by James Verrier, our President and CEO; Ron Hundzinski, our Executive Vice President and CFO; as well as Christopher Thomas, our Chief Technology Officer. The registration deadline is the close of business tomorrow, so please contact me for registration details if you'd like to attend. Before we begin today's call, 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. Also during today's presentation, we will highlight certain non-GAAP measures in order to provide a clear picture of how the core business performed as well as provide comparison with prior periods. When we say on a comparable basis, that means excluding the impact of foreign exchange, net mergers and acquisitions, and other non-comparable items. When we say on a reported basis, that means U.S. GAAP. Now, on to today's call. First, James Verrier, our President and CEO, will comment on the industry, provide a high-level overview of our Q2 results as well as discuss some of our recent product wins. Then Ron Hundzinski, our CFO, will discuss the details of our results as well as our guidance. Please note that we posted an earnings call presentation on the IR page of our website. You'll find the link in the Events and Presentations section beneath the notice for this call. We encourage you to follow along during our discussion. With that, I'll turn it over to James.

Thank you, Patrick, and good day to everybody. Thanks for joining the call. Ron and I are very pleased today to share our results from Q2 2017, and we will update you on our progress towards delivering our targets for 2017. Let me start by sharing a few thoughts on the macro environment in the industry. For those of you following along on the slideshow, this is slide number 7. We still recognize some instability in many aspects from a macro perspective. In general, the outlook for the auto industry is in line or modestly weaker than our expectations going into the quarter. Global light vehicle production was flat in Q2, with production down about 1.5% for our adjusted geographic exposure. We saw European light vehicle production declining approximately 4%, which actually was slightly better than our expectations. China light vehicle production was down about 1%, slightly weaker than our expectations going into the quarter. North America light vehicle industry production declined about 3%, against slightly weaker than our expectations going into the quarter. Looking at the market for the rest of this year, we closely align with IHS. We see light vehicle production in China at about 1% growth, Europe up around 2%, and North American production down a little over 2%. For our geographic exposure, this translates to less than 1% growth for us. Regarding commercial vehicles, we observe that the outlook for Europe and China continues to improve while expectations for North America growth have moderated slightly. Notably, we monitor where we stand in the North American cycle clearly in our minds. We've seen schedules weaken a little, although I would describe it as modestly, and we are closely watching inventory levels. The diesel/gas mix is important in Europe, and we continue to witness that shift occurring. Diesel share declined approximately 390 basis points year-over-year in Q2, and we expect the diesel/gas mix to continue its shift through the end of the decade. The positive takeaway for us at BorgWarner is our ability to offset that headwind. In China, we still anticipate modest growth in 2017. More importantly, from our perspective, growth above market levels continues to be very strong, driven by our increased share and content per vehicle. If you summarize it, we remain confident about our outgrowth of the market in 2017, driven by strong demand for our products. Shifting to the regulatory and technology outlook, the strong drive for fuel economy and emissions regulations shows no signs of slowing down. We continue to see accelerated movement particularly around advanced propulsion technology. Activity is increasing in gas engine technology, hybrid technology, and electric vehicle technology, and we are actively engaged in these fields with all of our customers worldwide. The transition to electrification continues, and our Q2 new business bookings showed additional awards with various customers, regions, and propulsion systems. While I will not go into detail on that here, we plan to share more at the upcoming Investor Day on August 7th. Let's move to slide 8 for a quick financial recap. Ron will provide more detail, but our Q2 performance was commendable. Our growth surpassed the high end of our guidance, and our operating performance was consistent with our expectations. We reported $2.4 billion in sales, equating to 7.8% organic growth when excluding foreign exchange and Remy. This compares favorably against our light vehicle market exposure, which declined about 1.5%. From a regional perspective, performance was as expected from BorgWarner's standpoint, with strong growth in China largely driven by DCT, and notable growth in North America through new business and mix. Europe remained flat, which reflects strong performance considering the industry's production declines. This light vehicle growth was further supplemented by positive revenue trends in commercial vehicle off-road segments. This led to a robust EPS performance of $0.96, excluding non-comparable items, with an impressive operating margin of 12.5%. Drilling down a bit more by segment, I was thrilled to see strong growth across all of our products. Our Engine segment reported $1.4 billion in sales, which represents 4.5% organic growth. We noted particularly robust growth in timing systems and thermal products. Despite the changes in diesel/gas mix, we observed top-line growth in our engine business. The Drivetrain segment generated sales of $921 million, reflecting a 13.9% organic increase, driven by strong all-wheel drive, DCT, and transmission sales across North America, China, and Europe. Looking ahead, we are pleased to announce an increase in our revenue and earnings forecast for 2017. Our organic growth is now projected to be between 6.5% and 7.5% year-over-year versus our prior guidance of 3.5% to 6%. This compares with the market, which is expected to grow less than 1%. We also anticipate our consolidated operating income margin to expand by 30 to 40 basis points, and our EPS guidance range has shifted to $3.65 to $3.70 per diluted share, up from the previous $3.50 to $3.60 per diluted share. If we can turn to slide 9 for those following along, I'd like to highlight a couple of key growth areas. First, the dual-clutch and control modules for Great Wall Motors represent a critical milestone for us, and this business is ramping nicely. I recently visited China to witness it in action, and I was genuinely impressed with the advancements we've made in DCT technology there. Second, the 48-volt eBooster is an important technology launch for us with Daimler on their 3.0-liter gasoline engine, which is crucial for hybrid vehicles. This example showcases BorgWarner at its best, as we blend our leading-edge turbocharger technology with our power electronics expertise to offer a comprehensive system solution for Daimler. These are just two examples, and there are many more worth discussing at the Investor Day. The key point here is that our balanced approach is yielding results. We are witnessing excellent win rates across all propulsion systems: combustion, hybrid, and electric. Moving to slide 10, I would like to recap our recent acquisition of Sevcon. This is a significant step for us, as Sevcon is a global player in electrification technologies, including power electronics. I genuinely believe this acquisition bolsters our existing strategy to provide leading technology for all propulsion systems: combustion, hybrid, and electric. Power electronics design and development expertise is a core competency, and Sevcon complements BorgWarner's existing capabilities in this area. Importantly, accelerating our power electronics capabilities enhances our positioning to meet customer demand for electrified systems, both in the near- and long-term. The enterprise value is approximately $200 million, and we anticipate closing this in Q4. More updates on this will follow. In summary, Q2 was a strong quarter for us. We surpassed our expectations for top-line growth, and our operating performance is in line with our plans. Given our robust first half performance, we feel confident in raising our revenue and EPS guidance for the year, despite a modestly weaker industry production outlook. We firmly believe the company is poised to deliver mid- to high-single-digit growth over the long-term. I look forward to meeting many of you on August 7 in New York to share further details.

Thank you, James, and good morning, everyone. Before I review the financial details, I would like to highlight some observations from the quarter. First, it was another strong quarter, actually, it was a great quarter. Second, the operating performance met our expectations. Finally, considering our robust first half performance, we are confident in raising our full-year guidance. As Pat mentioned, I will refer to the supplemental financial slide deck posted on our IR website, and I encourage you to follow along. Let's turn to slide 12. On a reported basis, sales were up 2.6%. However, on a comparable basis, our organic sales increased by 7.8%. This was around 130 basis points ahead of the high end of our guidance. Our weighted average light vehicle industry production decreased by more than 1%. Notably, we observed a 25% growth in China against a backdrop of a production market that was down about 1%. The commercial vehicle sector also contributed positively. The primary headwinds versus our expectations were the diesel/gas mix in Western Europe and market share loss from our largest Korean customer in the Chinese and North American markets. Before I proceed to operating profit, I want to touch on our gross profit and SG&A line items. Our gross profit as a percentage of sales stood at 21.5% in the quarter, which is a 20 basis point increase from last year. SG&A accounted for 9% of sales, with R&D spending, included in that figure, at 4.4% of sales. SG&A grew 30 basis points year-over-year, primarily driven by R&D expenditures and the timing of stock-based compensation. Now, let's examine year-over-year comparisons for operating income on slide 13. Q2 operating profit was $300 million, or 12.5% of sales, compared to $287 million in Q2 2016, which was 12.3% of sales, resulting in a 20 basis point improvement. On an organic basis, operating income increased by $18 million on $176 million of higher sales, leading to an incremental margin of 10% for the quarter, which is in line with our expectations. Further down the income statement, equity and affiliate earnings were about $14 million this quarter, reflecting a $4 million increase from last year. Interest expense and finance charges totaled $18 million for the quarter, showing a decline of $3 million from last year due to lower debt levels. Excluding a $10 million one-time favorable tax adjustment, the provision for income taxes was $86 million, resulting in an effective tax rate of 29% for the quarter. Net earnings attributable to non-controlling interest stood at approximately $9 million, down $2 million from Q2 2016. This line item reflects our minority partner share in the earnings and performance of our Korean and Chinese consolidated joint ventures. Earnings per share on a reported basis reached $1 per diluted share. On a comparable basis, net earnings were $0.96 per diluted share. Let's take a closer look at our operational segments for the quarter starting on slide 14. Reported Engine segment net sales were $1.482 billion in the quarter. Sales growth for the Engine segment on a comparable basis was 4.5%, benefiting from demand for our light vehicle OEM products, complemented by growth in our commercial vehicle business. Adjusted EBIT for the Engine segment was $244 million, or 16.5% of sales. On a comparable basis, the Engine segment's adjusted EBIT rose by $12 million on $65 million of sales, resulting in an incremental margin of 18%. Turning to slide 15, Drivetrain segment net sales were $921 million in the quarter. This figure reflects a reduction of $77 million from the divestiture of the Remy light vehicle aftermarket. Drivetrain segment sales growth on a comparable basis surged 13.8%, primarily due to higher all-wheel drive transmission components and strong DCT growth in China. Drivetrain adjusted EBIT was $110 million, equating to 11.9% of sales. On a comparable basis, the Drivetrain segment's adjusted EBIT increased by $16 million on $133 million of higher sales, yielding an incremental margin of 14%. I would like to take a moment to discuss incremental margins further. Our total company incremental margin for Q2 was 10%, below our long-term goal of mid-teens, although it improved slightly from our Q1 performance. It's essential to highlight a few items in understanding this. The Engine segment's incremental margins were 18%, which we view as strong performance, especially given our ongoing operational challenges within our emissions business. Drivetrain segment incremental margins were 14%, which represented an improvement from 13% in Q1 and 11% in Q4, showing solid performance as we ramp up our launch programs in that area. Overall, segment incremental margins were 15%. Corporate costs remained relatively flat sequentially and are expected to decrease in the third and fourth quarters, yet experienced a year-over-year increase of about $9 million. This increase is primarily attributed to the timing of additional stock-based compensation costs and various advisory fees for tax and legal planning. These factors adversely impacted our incremental margins by approximately 500 basis points in the quarter. Now, let's move to our balance sheet and cash flow. We generated $399 million of net cash from operating activities in the first half of the year, an increase of $37 million from the first half of 2016. Capital spending reached $254 million year-to-date, up $20 million compared to the prior year. Free cash flow, defined as net cash from operating activities less net capital spending, was at $145 million, reflecting a $17 million increase from 2016. Our balance sheet reflects flat debt levels while cash decreased by $57 million compared to the end of 2016. The $57 million increase in net debt was mainly due to return of capital activities. Our net debt to net capital ratio was 33.2% at the end of Q2, slightly down from 35% at the end of 2016. The ratio of net debt to EBITDA at the end of the quarter was 1.16 times. We will now discuss our 2017 guidance, which we have raised. Please refer to slide 17 for our sales growth guidance for the full year. Backlog, pricing, and market-related growth are expected to drive organic sales growth of 6.5% to 7.5%. Currency is anticipated to reduce sales by $100 million. The strength of the first-half backlog is flowing through into our increased guidance. I would like to highlight a few factors impacting our second half organic growth compared to the first half, as I anticipate many of you will ask questions on this. First, North America mix changes from key programs, some of which are changeover-related or experiencing modernization issues in the second half. The diesel production impact relative to sales is also a factor in the second half. We foresee continuous volume reductions from our largest South Korean customer in China and North America, as well as North America commercial vehicle modernization challenges relative to the first half. Overall, we maintain a guided organic growth range of 6.5% to 7.5% for the year, which is robust given the industry backdrop and exceeds our expectations heading into the year. Next, let's look at slide 18 for insights into operating income. From a performance perspective, we continue to target mid-teens incremental margins on our sales growth. Some headwinds from corporate costs persist. We also expect inflationary pressures and compliance cost considerations. Our consolidated operating income margin is anticipated to expand by 30 to 40 basis points. Moving to slide 19, our EPS range now stands at $3.65 to $3.70 per diluted share, reflecting a $0.12 increase driven by our improved sales outlook. Free cash flow, defined as net cash provided by operating activities minus capital expenditures, is now anticipated to be between $450 million and $500 million. Capital spending, including tooling, is expected to range from $500 million to $550 million, slightly increased to support several program lists, effectively offsetting increased earnings and cash flows. Given our announcement regarding Sevcon, the acquisition of our share repurchase program will see about $100 million spent in 2017. R&D spending as a percentage of sales is projected to be 4% in 2017. We expect our tax rate to be 29%, and our dollar to euro exchange rate assumption has been updated to $1.10 from $1.05. Every $0.01 change in the dollar-to-euro exchange rate translates to about $30 million to $35 million. While the exchange rate is currently around $1.16, $1.10 represents an average rate for the year. Transitioning to our third quarter guidance on slide 21, sales are expected to reach $2.2 billion at the midpoint, starting from a base of $2.146 billion, taking into account the divested Remy light vehicle aftermarket sales of $68 million. We anticipate that organic sales growth will be driven by net new business, pricing, and market-related growth ranging from 3% to 6%. Currency is expected to deduct around $36 million from sales growth. From an EPS standpoint on slide 22, we expect $0.03 to $0.06 per share from our backlog, and foreign currencies may decrease earnings by about $0.02 per share in the quarter. Lower share counts and a reduced tax rate are poised to contribute $0.05 per share below the operating income line. On a consolidated basis, we foresee earnings of $0.84 to $0.87 per share. In summary, we have witnessed a strong second quarter and a solid first half of the year overall. Organic sales growth reached nearly 8%, despite a decline in industry volume. Incremental margins improved slightly sequentially and were in line with our expectations. We anticipate this will continue to improve in the second half of the year. As we look forward to 2017 and beyond, we remain focused on intensifying new product development and supporting it with acquisitions to participate in the growing electrification trend. This transition will undoubtedly sustain growth for many years. With that, I would like to turn the call back over to Pat.

Thank you, Ron. Sharon, we're ready for questions.

Thanks. Good morning, everyone, and congrats on the quarter.

Good morning, Joe.

Good morning, Joe.

I wanted to inquire about the margin expansion for the year, which appears to have decreased a bit. Some of that could be due to FX flow through; is that a result of the transaction and translation impact or is there something else at play here?

That's correct. Regarding FX, even though there is a benefit from our previous guidance, we only achieve about $0.12 on the dollar, 12% incremental versus our operating incremental of mid-teens. Thus, there tends to be a drag on margins looking forward from incremental margins.

Additionally, you clearly indicated a point regarding the margin expansion for the rest of the year. From your guidance, it seems like this will occur more notably in the fourth quarter than the third. Is that mainly because of volume driving that change? Also, could you provide more color on a segment basis, especially considering tougher incremental margin comparisons in Engine, but easier ones in Drivetrain?

Joe, there are a lot of factors influencing this. To address your question, yes, we do expect more margin expansion in the fourth quarter. Corporate costs will trend lower than last year, enabling us to capture the full benefits of the operating segment's contribution margin. Additionally, we anticipate a bit of volume coming from our DCT plants that are ramping up, which should also positively impact our Drivetrain segment margins. It's a combination of these factors.

Thank you!

Good morning, everybody.

Hi, Rod. How are you?

I have a couple of queries. Could you discuss your guidance for the year? I noticed that the midpoint of your backlog guidance is $715 million, and you've achieved about two-thirds of that in the first half. However, the assumption only reflects $100 million to $150 million in Q3. Are there conservative elements factored into that number, or are you factoring in significant backlog driven by China?

Rod, it's Ron. You are correct that the original guidance indicated approximately $500 million, and now the organic guide suggests about $715 million, a $200 million increase. While projecting the second half, we have encountered several unexpected headwinds recently, especially from our largest Korean customer in China and North America. Additionally, we expect normalization from commercial vehicles. We have also experienced a changeover affecting one of our largest customers in North America. These factors are impacting our expectations for the second half; however, we have not adjusted our backlog expectation too much. The removal of risks from our original guidance results in positive outgrowth.

Understood. For clarity, when you discuss these headwinds – such as diesel or challenges with your Korean customer – do these factors impact your market growth bucket, or are they incorporated into your backlog assessments?

Those factors would primarily affect the backlog count, though they might also slightly affect the market. We anticipated some launches that are now facing delays which complicate the delineation between the two buckets.

Okay. Additionally, regarding the margin improvements in Drivetrain, as I recall, you described two factors that have negatively influenced Drivetrain: the DCT plant ramp-up in China and the capacity shifts to Eastern Europe. Would you say these issues are resolved now, and when do you foresee more favorable margin targets for Drivetrain?

Yes, Rod, in terms of those two issues, transitioning to Eastern Europe is largely complete, and we anticipate more robust DCT plant performance in China from the second half onward, significantly benefiting us as we approach 2018. In essence, I expect Drivetrain margins to continue improving as we scale.

Understood. Thank you.

Good morning. Hope you are well!

Good morning, David.

Good, David.

I have a couple of matters to discuss, particularly regarding the diesel/gas shift. It seems there is a lot of uncertainty surrounding this. People are suggesting potential bans on diesel vehicles, however, there is limited capacity to switch to gas engines quickly – would you agree with that?

Yes, definitely, David. The shift you've observed this year has accelerated, indicating close to 400 basis points in the quarter. However, there are natural limits to how quickly this transition can occur; we cannot simply transition everything from diesel to gas instantaneously, as there are inherent capacity constraints. Importantly, as OEMs pivot from diesel to gas, they often utilize this transition as an opportunity to enhance advanced gasoline engine program timeliness, which adds benefits for BorgWarner due to increased content opportunities.

Can you elaborate on whether customers can transition their Engine plants? For instance, if they have four diesel lines, can they switch them one at a time, or must the entire setup be modified simultaneously? I'm interested in understanding how this strategically gets played out.

It’s contextual, David. Each facility is somewhat different; however, the initial approach is to fully utilize existing gas capacity. After ensuring that is optimized, they can begin considering utilization of diesel lines, which involve significant investment and time. Essentially, it boils down to leveraging existing resources and eventually investing in new capabilities, which takes longer.

Additionally, as customers transition from older, less efficient diesel engines to higher-efficiency gas engines, how do you see content per vehicle differing, considering potential swaps between current Engine products and future technologies?

In summary, the acceleration is mainly seen in smaller diesel engines—particularly below the two-liter mark—while the transition regarding larger engines remains stable. As smaller diesel engines get phased out, they will transition to more advanced gasoline engines, incorporating technologies such as EGR, putting BorgWarner in a better spot with more content opportunities relative to smaller diesel engines, hence a net positive outlook.

Thank you for your insights.

Thank you, David.

Thank you, David.

Good morning.

Good morning.

Hey, Brett.

You discussed organic revenue growth and the trajectory throughout 2017. As we approach the year's end, do you foresee exiting 2017 at a slower pace, and what should we anticipate in 2018 as well?

Looking ahead, Brett, we'll delve deeper into this at our upcoming meeting in New York. For now, try to view the full year 2017 performance as a solid benchmark—a steady organic growth of around 7% is a reliable groundwork as we head into 2018 and beyond.

I’d like to add to that, James. The reason I highlight this is that, unlike the previous year with concentrated large launches, this year involves more diverse, wide-ranging launches. This distribution makes quarter-by-quarter predictions more challenging, significant variance across launch timing. Hence, a full-year perspective remains crucial.

Regarding incremental margins for 2018, will there be any particular tailwinds or headwinds, such as foreign exchange considerations?

The emissions business remains a challenge. It is crucial for us to address this to restore performance. This would be my primary concern regarding margin expectations moving forward.

In assessing 2018, we do not anticipate any significant deviation from our mid-teen incremental margin objectives as we enter the new year.

That’s accurate.

Thank you.

Thank you.

Thanks, Brett.

Good morning, guys.

Hi, John.

I have a quick question. While it seems that the schedules deteriorated this quarter to some extent, there is concern regarding the cycle in the U.S. and potential risks in China. How do you envision leveraging these changes? Additionally, as we see a mix shift from cars to crossovers, are you experiencing any significant advantages?

John, regarding those markets, if we observe moderation and shifts in schedules, we can slow our growth accordingly. It's crucial to note that we are still in a growth mode in both North America and China, notwithstanding any adjustments needed. We remain in a favorable position for the upcoming periods.

I was also curious about the mix change you mentioned—this seems to be offering you some disconnection from aggregate schedules. Is that correct?

You are correct. The mix changes are slightly beneficial, particularly with increased truck sales in North America, as we leverage transfer case technology for trucks. However, the overall impact remains moderate as our content is typically similar across both cars and trucks.

Thanks for your insights.

Can you provide some insights into your commercial traffic market? I remember in the past, it represented almost 10% of sales. Is it still substantial today, and are these commercial on- and off-highway markets experiencing a recovery?

Yeah, Colin, our commercial segment currently represents about 12% of revenue in 2017. This segment is split fairly evenly between on-road and off-road applications. We have roughly one-third in North America, one-third in Europe, and the remaining third spread across China and South America. As mentioned earlier, growth has been primarily benefiting from the recovery in Europe and China. While we experienced some positive contribution in the first half from North America, that area has moderated a bit in the second half, particularly in terms of the on-road segment.

I want to sneak in one more question regarding the Sevcon acquisition. Can you elucidate what specific powertrain electronic capabilities you’re acquiring and whether this acquisition represents a scaling opportunity for you?

With Sevcon, we are acquiring immense design and development capability from their engineering team, which enhances our existing capabilities significantly. It's more than an engineering transaction: they generate about $50 million in revenue from existing inverter and converter products, along with some battery charging technology. This means we gain value targets along with significant customer relationships. Ultimately, BorgWarner and Sevcon are poised to present clients with unique and comprehensive system solutions, particularly in hybrid applications using our distinct technology lines.

Thank you very much for the clarification.

Thank you, Colin.

Hi. This is Elad Hillman standing in for Ryan Brinkman.

Good morning.

Good morning.

Could you share your insights on the margin progression at Wahler? With the commercial vehicle production outlook improving, have you made any progress there?

Just to clarify, Wahler was acquired several years ago with expectations of migrating from low single-digit margins to high single-digit and ultimately double digits. Unfortunately, we've fallen behind schedule primarily due to many products having been shifted between facilities, but we are committed to addressing these challenges swiftly to restore profitability.

I would echo that. Our broader commercial vehicle business remains strong, contributing positively to overall performance. The challenges associated with Wahler are more isolated and need focus.

Thank you.

Yes. I want to discuss the backlog. I understand that it has exceeded the original guidance; however, I'm curious if you've baked in any conservatism or risk adjustments for potential launch delays within your regional backlog, and if so, could that number be higher next year?

Brian, you're spot on regarding the original guidance, and it's important to point out that our exceptional first half results have benefited from improved operational execution. However, as we look into the second half, we don’t have a fear of revisiting or adjusting our strategy. We expect to provide clearer insight into our projections for growth rates over the next two to five years at the upcoming Investor Day.

We have incorporated a process in recent years wherein we evaluate gross backlog figures and utilize subjective adjustments based on customer markets, product types, and circumstances. This year's process has been effective and will guide us as we prepare for next year's backlog as well.

Are we to assume that most of the growth witnessed in the first half stemmed from risk factors being removed, rather than larger launches being upsized?

The majority of the outperformance in the first half has indeed been linked to successful launch execution. We have not adjusted the projected number of launches significantly; rather, volume assumptions have proven favorable at this point, validating our previous predictions.

Got it, understood. Thank you very much.

Good morning, guys.

Good morning.

Good morning.

Could you discuss market share in electrification? Specifically, regarding 48-volt and plug-in vehicles, it's been over a year since you've taken substantial orders for 48-volt systems. I’ve inferred you might have insights on whether market share in that range is between 15% and 25% based on your experience.

We will provide more concrete data during Analyst Day. However, I can share that the activity levels surrounding hybrid and electric vehicles has risen significantly compared to last year. The 48-volt model is gaining traction, particularly regarding hybrid fielding—both system growth and market share are important here. Conventionally, our market share has maintained around the low 20% level. For hybrids and electric vehicles, we have modeled our projections conservatively at 15% to 20%, but I expect growth from renewed electrification efforts.

That's helpful. Just a quick follow-up: new businesses have historically been pressured in terms of pricing and margin. Given the suits of competitors, do you think the expectations on your end are consistent with your previous analyses, or are they shifting?

Absolutely, pricing remains a critical discussion point in the industry. However, based on what we’ve achieved, we are not seeing any significant margin dilution for our new products as they solidify into production. Customer quotes and the associated margins reflect our expectations effectively, allowing us to sustain profitability moving forward.

Thank you for your insights.

Hey. Good morning, guys. I wanted to follow-up on the eBooster system content opportunity. Can you compare this with traditional turbocharger content with gas and diesel alternatives?

Regarding market potential for eBooster systems, the typical content per vehicle represents a couple hundred dollars individually. When combined with conventional turbos, overall content might reach about $400. We see substantial growth potential, and we're becoming recognized as a leader in eBoost technology, which will only heighten as adoption increases.

Perfect. Lastly, can you further clarify the incremental addressable hybrid content opportunities now that Sevcon has come into the fold?

Sevcon offers significant content gains through robust power electronics and electrical capabilities, enhancing our current offerings and opening doors to new business. This acquisition allows us to showcase our comprehensive systems capabilities, vital for hybrid applications—all while building relationships with existing customers, enabling further insights into future requirements.

Thank you very much!

Thank you, David.

Thank you.

Thank you, Sharon. As always, thank you all for your thoughtful questions. We look forward to speaking with you at the upcoming Investor Day on August 7th and our next earnings call. Goodbye, and have a great day.