BorgWarner Inc (BWA) — Q1 2022 Earnings Call Transcript

Thank you, Jerome. Good morning everyone and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, on both our home page and our Investor Relations home page. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the Events section of our IR home 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 during this call. 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 for comparison purposes with prior periods. When you hear us say on a comparable basis, that means excluding the impact of foreign exchange, net merger and acquisition 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 foreign exchange and net merger and acquisition. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we posted an 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 first quarter 2022 and provide an overall company update starting on Slide 5. I am pleased with the resilience of our revenue relative to the industry decline. With approximately 3.9 billion in sales, we were up about 1% organically and we outperformed in both Europe and North America. Our margin performance was negatively impacted by higher commodities and other inflationary costs. However, our merger and acquisition synergies and restructuring savings helped partially mitigate these headwinds. Free cash flow was a usage during the quarter due to inventory increases. However, we still expect to generate significant free cash flow in 2022. While navigating the near-term industry headwinds, we took steps to drive our long-term positioning during the quarter. We completed the acquisition of Santroll's light vehicle eMotor business. In addition to deploying capital to our merger and acquisition investment, we opportunistically repurchased $40 million of stock. And lastly, we secured multiple new electrification program awards. Let's look at two electrification awards on Slide 6. First, I'm excited to announce our first OEM business win for our flexible battery management system. We have been selected by a leading global vehicle manufacturer to equip all its B-segment, C-segment and light commercial vehicles, with production expected to begin in 2023. We've been working with this global manufacturer for over two decades, and we are delighted to further strengthen our relationship by contributing our advanced battery management solutions for their vehicle platforms of tomorrow. Our battery management system for hybrid and electric is designed to monitor the state of charge, the state of health, and the battery temperature of each individual battery cell while precisely measuring current flow in and out of the battery pack. The cell balancing is performed during both the charge and discharge consumption cycles. It allows the highest state of charge to be achieved, optimizes battery lifespan and enhances battery safety by preventing over or undercharging. The system is suitable for battery applications operating at up to 800 volts. This is another great example of our wide range of products available for electrified vehicles. Next, I'm excited to announce our second dual inverter program. We will be providing a leading Chinese OEM with our highly efficient dual inverter for high voltage hybrid vehicle models slated to launch in 2023. By combining different power electronic technologies into one compact package, our dual inverter provides unrivaled functionality. A single unit can control and drive two electric motors while delivering cost and weight reductions. It also comes with a DC/DC converter as an option. These advanced inverter awards showcase not only the product leadership we have in these domains but also the trust and confidence we've built in our electric side application with multiple OEMs globally. In addition to their mid-term revenue opportunities, advanced high voltage hybrid programs such as these allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicles. On Slide 7, I'm happy to highlight an additional eMotor award. BorgWarner has been selected to provide our high-voltage hairpin eMotors for a leading electric vehicle brand in China. The eMotors will be used in the company's second generation 800-volt propulsion system platform. The first vehicle equipped with this platform is expected to start mass production in 2023. These motors deliver peak efficiency of over 96% and feature our patented high-voltage hairpin stator winding technology. As you can see by the chart on the slide, our booked eMotor volumes, which are a testament to the recognition of our customers, are expected to grow rapidly from 800,000 units in 2022 to 2 million units by 2025, more than a 30% compound annual growth rate. With the additional booking opportunities that we see over the next one to two years, we believe our eMotor volume could reach more than 3 million units by 2025. Santroll's acquisition is a key part of our eMotor strategy, and I would like to provide a brief update on this acquisition on Slide 8. Starting with revenue, we expect Santroll acquisition to contribute $60 million to $70 million to 2022 revenue over the next three quarters. We expect the impact to EBIT to be a modest negative for the full year. However, we did not acquire Santroll for its near-term impact on results. We continue to expect the Santroll acquisition to drive approximately $300 million of revenue by 2025, inclusive of assumed revenue synergies. Santroll's added manufacturing capabilities and eMotor design improvement should advance our overall competitiveness in eMotors. With Santroll, BorgWarner now has a full suite of eMotor products at scale, with application in small and larger passenger vehicles as well as commercial vehicles that we will bring on a global scale. On the right side of the slide, we've provided a sampling of the revenue synergies that we're now in position to pursue. And we're excited that we've already secured two programs on the synergy list, and we expect to see additional success in the coming quarters. So let me summarize our first quarter results and our outlook. Overall, our first quarter performance was respectable. Our revenue once again proved more resilient than the industry volume. And while our margins are being negatively impacted by inflation, the proactive steps we have been taking to implement restructuring and cost synergies over the past several months and years are helping to partially mitigate these headwinds. As Kevin will detail shortly, our reduced full year 2022 outlook is a reflection of the foreign exchange date, the moderated industry volume outlook at the top end of our range, and increased commodity costs. However, I'm encouraged that our relative revenue performance outlook has nonetheless improved. We are not accepting our current environment and its impact on our profitability and cash flow. As a management team, we are absolutely taking the measures that we believe are necessary to continue to optimize the short-term margins and cash flow. My eyes are focused on the longer term, and I'm extremely excited about charging forward. We're taking significant steps that we believe will help us to secure our profitable growth well into the future. We're continuing to secure business in the electric world, and we have now booked significant scale across multiple product lines for electrified vehicles. By 2025, we have booked programs that will support approximately 2 million eMotors, 3 million inverters, and close to 4 million e-heaters, together with integrated drive module, electric drive module, battery management systems, and battery packs. This represents more than $3.3 billion of book business already in 2025, ready to carry on booking more and acquiring great assets to become even stronger. We're focused on disciplined inorganic investments, like the acquisitions of AKASOL and Santroll's eMotor, which already are adding great technology to our portfolio while supplementing our growth profile. With that, I'll turn the call over to Kevin.

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our first quarter results. First, our revenue came in at the high end of our expectations, despite significantly weaker industry volume in Europe, which is our largest light vehicle market. Second, our margin performance in the quarter was respectable given inflationary pressures that our business is currently facing. Performance was supported by our synergy and cost restructuring actions that we've been executing on for the last couple of years. Let's turn to Slide 9 for a look at our year-over-year revenue walk for Q1. We start with last year's revenue, which was just under $4 billion after adjusting for the disposition of our Water Valley facility this past December. You can see that foreign currencies decreased revenue by about 3% from a year ago, the U.S. dollar strengthened year-over-year and has continued to strengthen beyond the quarter end. Then you can see the increase in our organic revenue, about 1% year-over-year. That compares to a 7% decrease in weighted average market production. That means we delivered another quarter of strong outperformance in the face of a challenging end market environment. This outperformance was driven by Europe, North America, and Korea. The sum of all this was just under $3.9 billion of revenue in Q1. Now let's look at our earnings and cash flow performance on Slide 10. Our first quarter adjusted operating income was $389 million, or 10.0%, which compares to adjusted operating income of $464 million, or 11.6%, from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of the Water Valley disposition, adjusted operating income decreased $62 million on $30 million of higher sales. This performance includes nearly $50 million of net commodity and other material cost headwinds that we experienced in the quarter. The balance of the operating income decline year-over-year is explained by the impact of higher e-products related R&D and the acquisition of AKASOL. Moving on to free cash flow. Our free cash flow was a $61 million usage during the first quarter due to increased inventory as a result of ongoing production volatility. Let's now turn to Slide 11, where you can see our perspective on global light vehicle industry production for 2022. When you look at this slide, you can see that our market assumptions incorporate a range of potential outcomes. That's primarily a result of the semiconductor supply challenges, the additional supply chain impacts as a result of the conflict in Ukraine, and the impact of COVID-related shutdowns in China. With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of 2.5% to 5% this year, which is down from our previous assumption of a 6% to 9% increase. Looking at this by region, Europe is where we see the largest reduction relative to our prior guidance. We expect a blended market increase of 2% to 4%, which is down significantly from our prior outlook of plus 12% to 15%. This is driven by weaker production in both light and commercial vehicle markets. In North America, we're planning for our weighted markets to be up 11% to 13%. And in China, we expect the overall market to be down 4% to 7%, which is worse than our previous outlook. This has an underlying assumption that the COVID-related shutdowns are resolved by early June, and that most of the loss volumes can be recovered in the second half of the year. Now let's talk about our full year outlook on Slide 12. First, our guidance assumes an expected $650 million headwind from weaker foreign currencies, which is based on FX rates as of the end of April. While the U.S. dollar had already appreciated somewhat against foreign currencies through the end of March, we've seen additional meaningful appreciation of the dollar through the month of April as well. So we factored that into our outlook for the balance of the year. But remember, our strategy is to produce and purchase components in the same region as our customers. As a result, the impact of currencies on our guidance is predominantly translational in nature. Next, as I previously mentioned, we expect our end markets to be up 2.5% to 5% for the year. But we expect our overall organic revenue growth to continue to exceed industry growth. In fact, our current outlook for outperformance is stronger than our prior outlook based on both our year-to-date performance and an increase in our expected pricing recoveries for commodity and other inflationary costs. Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 13% relative to 2021 pro forma revenue. That means we expect to outgrow the market by approximately 7% to 8%, which is higher than our prior outlook of 4% to 5%. To look at it in another way, our stronger relative performance is almost entirely offsetting the impact of lower industry production. Finally, as it relates to our revenue outlook, the Santroll acquisition is expected to add $60 million to $70 million to 2022 revenue, as Fred previously noted. Adding these items together, we're projecting total 2022 revenue to be in the range of $15.5 billion to $16.0 billion. From a margin perspective, we expect our full year adjusted operating margin to be in the range of 9.8% to 10.2% compared to a pro forma 2021 margin of 10.9%. This represents a 40 to 50 basis point reduction versus our prior outlook. Of this, approximately 40 basis points, or just over $60 million, is the result of higher commodity and other inflationary costs, net of additional pricing recoveries, and about 10 basis points relates to the Santroll acquisition, which is expected to be modestly diluted this year. As it relates to R&D investment, our guidance still anticipates a $130 million to $160 million increase in e-products R&D investment in 2022. Despite this challenging environment, we are not constraining the key investments that support the long-term growth of this company. Excluding inflation, and this e-products R&D investment, our 2022 margin outlook contemplates the business delivering four-year incrementals in the high teens. Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $3.90 to $4.25 per diluted share. It's important to note that the translation impact alone of the strengthening U.S. dollar is impacting our year-over-year EPS outlook by about $0.20 per share. And finally, we expect that we'll deliver free cash flow in the range of $650 million to $750 million for the full year. The reduction from our prior guidance is being driven by our lower adjusted operating income, partially offset by lower capital spending expectations. That's our 2022 outlook. So let me summarize my financial remarks. Overall, we had a respectable start to the year. Our revenue proved more resilient than the decline in industry volume, with our outgrowth tracking ahead of our expectations coming into the year. And we still delivered double-digit margins despite significant material cost inflation and higher R&D investment. As we look out to the balance of 2022, near-term industry pressures are likely to continue with ongoing production disruptions in multiple markets, as well as continuing material cost inflation pressure. As a management team, we continue to work to strike a balance between managing the present by sustaining our strong margin and cash flow profile, while at the same time maintaining the momentum and delivering our long-term plans under charging forward. But we know how to meet this challenge. Managing near-term results and long-term profitable growth has been and will continue to be the hallmark of BorgWarner's success.

Thank you, Kevin. Jerome, we're ready to open up for questions.

Great. Thanks for taking my questions. Just to start, I think you mentioned there's about a $60 million increase in the assumption on commodities. Where does that sort of bring your sort of full year headwind for commodity and input costs? And quite frankly, surprisingly not nearly as bad as a lot of other suppliers are talking about, it seems like a pretty relatively small number. And you're doing a really good job offsetting that because the incrementals on the sales cut aren't really that bad. What are the sort of key offsets that are kind of keeping those detrimentals in a pretty low range?

So a couple of things. On the $60 million, if you remember last quarter, we talked about having $50 million to $60 million of net commodity headwind and then we talked about double-digit million of additional inflationary pressures. With the $60 million addition where we're actually at on a full year basis for both elements, the commodity piece and the other inflationary pressures, it's about $130 million to $140 million net. That's net of the recoveries. And so that's an increase of $60 million. In terms of managing the incrementals on the sales cut, aside from the $60 million flowing through, keep in mind, the bulk of the sales cut is really driven by foreign exchange. If you look at the production cuts, the math of the production cuts that we're talking about in our guide translates to somewhere around $500 million to $600 million of lower revenue. But the increased outgrowth that we're delivering is kind of in that $450 million range. So it's substantially offsetting the production impact. So the lower revenue is really predominantly driven by the foreign exchange. That's why you're not seeing a huge detrimental on lower revenues, because it's mainly translation.

Got it. Thanks. Any update on the divestitures that you were planning for internal combustion engines? It seems like the recent volatility is probably not helping the market currently. I think the target was to do $1 billion by the end of this year.

Yes. We're still actively involved in our processes. But I'd say it's highly likely that the current market environment is going to have some impact on the timing of that disposition process. I think until there's more clarity around things like the resolution of inflationary cost pressures, the impact of Russia-Ukraine, and the impact of COVID lockdowns in China, I think it has the potential to impact certain buyers, making them a little bit more hesitant in different processes that we're undertaking. So I think that's okay. We're not a desperate seller. We're looking at disciplined approaches to selling positive cash flow generating businesses that have a certain value to us. So I would tell you those processes we're involved in right now are continuing to progress. But I think it's fair to assume that this has the potential to impact the market environment for executing these dispositions in the near term, until there's more clarity about the situation.

Okay. Thanks for taking my questions.

Good morning, everyone. This is Aileen Smith on for John. Of course, I wanted to start asking the flipside to Colin's question from a longer term perspective and the charging forward plan. You mentioned that there may be some impacts of timing around the divestiture target for this year. But does the volatility in the capital markets and what may be going on with valuations from a public and private side of things change anything from your perspective in terms of the acquisition opportunities that are available?

Aileen, I think you need to think about it depending on the attributes or the characteristics of the target. So if you have an acquisition that we're going after that has a substantial current business in production, the current market conditions will have more impact on us looking at it versus a target that would be more of a startup in nature. And that's the way we look at it. The startup in nature, if there is a low level of production and if the bulk of the business comes in the years to come, the impact is way more marginal. In any case, we've always applied a very disciplined approach as far as M&A is concerned, actually mergers and acquisitions are concerned. This will carry on. And over the past two quarters, we've turned down some acquisitions that we looked at for economic reasons. So very disciplined in those approaches.

Okay, got it. That's helpful. And then we've asked this question a few different ways to suppliers on the cost inflation side, but your automaker customers have been pretty successful in passing on cost inflation more recently to their customers in the form of price. And I think we can understand the dynamic of commodities and pass-throughs between you and your customers, the cost inflation is really everywhere. So in the past few months, have automakers been in any way receptive or kind of opened the door to discussions of taking on some incremental cost burden from you beyond commodity as they may be able to pass it down to their customers?

Yes, I think I am getting encouraged by the discussions that we have with our customers. Those are not easy discussions, but we're making progress. And I think we will have substantially more clarity in the next earnings call to give you more detail. But the discussion is ongoing and encouraged by the tone.

Okay, great. And one quick housekeeping or clarification question, if I may. The battery management system win that you highlighted on Slide 6, is that technology that came from the AKASOL acquisition?

No. It's a technology that came with the Delphi acquisition that has been enhanced since we're together.

Thanks so much. I just wanted to ask about the pace of quoting and award activity. It feels like from what we can see, it's continuing to accelerate. You've maintained your outlook for R&D spend this year. Any considerations that we should have about maintaining that with activity picking up? Just wondering how to reconcile the two?

We're very happy with the intensity of discussion with the customers' intensity of quotes and book business, and also very happy with the increase of $130 million to $160 million year-over-year on R&D on e-Products. And we want to maintain that. And again, this increase is linked to application engineering and launch and quoting activities for businesses where we have high confidence. It's not R&D, scratching our heads on what products we're going to develop. It's really concrete, linked to launch activities. And we feel good about those numbers.

Okay, very helpful. Thanks, Fred. And then just to clarify, how much of the anticipated weakness in the European markets have you really started to see here quarter-to-date versus what you're thinking for the back half?

So I would tell you that I think that the people that have been impacted by the Ukraine war directly, and it's not really our case, have done a pretty good job over the past weeks getting around some of the origin or supply chain that we saw when this conflict arose. And so we've reduced the midpoint of our European forecast by about 1.3 million units. But remember, 40% of that reduction is Russia where we have very, very low exposure. So I think even if Q2 is going to be under pressure still, I think our customers are really doing an effective job managing through those supply issues in Europe.

Very helpful. Thank you.

Good morning, everybody. Just first of all, a couple of housekeeping things. You originally at the beginning of the year pointed to 4% to 5% growth of the market. Now it's 7.5% to 8% relative to your weighted production assumption. Within that organic growth, what is the commodity reimbursement? And to Kevin, you mentioned two numbers for net inflation, one was $60 million and one was $130 million to $140 million. Which one is the net for the year?

The increase in outgrowth of 300 basis points is primarily due to the flow through from what we experienced in Q1 and the expected incremental pricing recoveries. The additional pricing, which relates to both contractual and non-contractual commodities we are addressing, will depend on negotiations with suppliers and how much of that impacts us as well as what passes through to customers. You should consider that out of the 3 points of additional outgrowth, approximately 2 points will be linked to this pricing, with the remaining coming from Q1 outgrowth. This still indicates that we could deliver 5 or 6 points of outgrowth over the full year. Regarding the $130 million to $140 million figure, I apologize for any confusion, but that range reflects the total net impact of material cost inflation, including commodities, on a year-over-year basis. It represents a $60 million increase from what was in our previous guidance.

Okay. Thanks. And your R&D increase for the year, the definition changed a little bit. Originally, it was R&D. Now it's e-products R&D. I just wanted to see if there's anything there. And it seems like you have a different cadence of margin expectations than we've heard from others that you did roughly 10% margin in Q1, and you've got the midpoint of your margin targets around 10% for the year. Can you maybe give us a little bit of color on how you expect the year to evolve? Does this production look a little bit better or a mix for commodity absorption later in the year?

Yes, regarding R&D, you are correct that we adjusted the terminology. The primary reason for this change is that, as we manage our cost structure and other elements within our financials, we actually reduced our R&D spending on the combustion side in the last quarter compared to what we had indicated in our guidance. This was part of our cost management efforts. In total, the company's R&D increased by $8 million year-over-year, but R&D for our e-products in the first quarter rose by over $20 million, indicating a decrease in combustion-related R&D on a year-over-year basis. We aimed to clarify that our commitment to investing the same amount in e-R&D remains unchanged. Regarding margins, while we aren’t providing quarterly guidance, it's likely that Q2 will experience the most pressure due to volume challenges. As Fred mentioned, the production challenges in Europe will be most noticeable in the second quarter. We're also currently facing impacts from shutdowns in China, which will affect second quarter revenue and conversions. However, as we progress into the latter half of the year, we expect these pressures to lessen as OEMs develop solutions for the European situation, and we anticipate a recovery in China that will compensate for the volume lost in Q2. Furthermore, we expect to see significant progress in the next 90 days as we collaborate with our customers on recovery strategies, which should help alleviate some of the anticipated headwinds associated with the net figures of $130 million to $140 million.

Okay. And just really quick, Fred, this BMS contract, it seems like it's very short lead timing. Is that going to be typical and any thoughts on the size of that contract?

Yes, this is a little untypical. We've been working with this customer for quite some time. And we've announced it since they have really spread the volumes to all those platforms. I would still say that for such a product, 18 months would be a good proxy, 18 to 24 months. Usually, we do not start from scratch. We have modular battery management systems available. And this is why we can launch very rapidly. You've seen some of the other launches also in eMotors. eMotors also linked to the modular design, we can be up and running pretty rapidly. So 18 months would be a good proxy.

Thank you very much. I was hoping to come back to the topic of commodities. And in particular, can you give us a little bit more color around how some of this recovery mechanisms work for you? How you expect them to play out for the rest of the year? Because, obviously, you seem to be very successful in setting a lot of these costs, but $130 million to $140 million is still less than that for the year. Is there any prospective through this mechanism to get some of it back in 2023?

Yes, it is ongoing. As I mentioned earlier, progress is being made and I am encouraged by the interactions and discussions with our customers. I am confident that we will reach the targets we set for ourselves, both in terms of managing the count and maintaining focus on long-term relationships. I expect fairness in these relationships, which includes addressing short-term concerns related to semi, volume, and inflation, while also improving and nurturing long-term connections by providing excellent products at the lowest total cost of ownership for our customers. We are committed to both aspects. Additionally, I bring about 20 years of experience in sales-related roles to this effort.

Just to clear, Emmanuel, the $130 million to $140 million is net. It's net of our assumption about pricing recoveries, which is both the normal contractual commodity recoveries which is still working the way they're designed at 50%, but also an assumption that we're going to be continuing to work with our customers to try to recover some of the extra inflationary impacts that we're seeing. And so the $130 million to $140 million is net of the assumption about those recoveries.

No, I understand. But I guess my question is, so at the end of the day you're left by the end of the year with sort of like this headwind to your margin profile of $130 million to $140 million net of recoveries. Do you have either contractual, mechanical or just commercial discussion processes to then continue these discussions next year, assuming spot prices stay where they are, and go back to the automakers and say, hey, look, the margins are not where they should be, we were still left holding this amount. Can we do something towards that? Or at this point, this is sort of the result of your negotiations will be seen this year and not necessarily additional upside in 2023?

It's already difficult enough to get to a resolution for this year. We don't want to speculate for what's happening next year. Next year will be the next year. Right now, the focus is to get to our targets in some fairness this year.

Okay, that's fair. So then second question will be on the e-products R&D and then the overall R&D for the company. So as you mentioned in the remarks, as part of guidance, the margins are under year-over-year pressure, both because of some of this inflation but also because of extra investment in R&D. How should we think about it going forward? I obviously assume e-products R&D will keep growing, but what about the R&D at the company level? Does that remain a headwind to margins? Or does that stabilize on a same level as a percentage of revenue?

We are not providing updated guidance on total R&D for the company. It's one of the levers we can use to manage our cost structure, particularly when considering non-e-related R&D. However, you can expect that we will continue to invest in and grow our e-R&D to support the launch of our programs and future profitable growth. We anticipate this investment to be between $130 million and $160 million this year. Additionally, it's a good approach to consider total R&D as being in the 5% to 5.5% range on a full-year basis. This reflects our current guidance and underlying expectations.

Okay. Thank you.

Thank you. Just wanted to talk a little bit about price and particularly plug-in hybrids. A couple of things. When you look at your growth over market, how much is still driven by uptake of your product line on internal combustion engine vehicles? Is there perhaps a mix effect there driving how you might have felt better? But secondly, given all the discussion around both costs and shortages of battery materials, it seems like the same amount of minerals that could power one electric vehicle could power 10 plug-in hybrids, which for most of the week could be operating in all electric mode. So are you seeing any renewed interest in plug-in hybrids? Are you seeing any uptick? The sales have gone well insofar in your sales and is that helping drive that near-term performance? And is there maybe more upside on the midterm than most investors would think?

Brian, I think we're focusing on charging forward on pure battery electric vehicles and it's the right thing to do. Hybrid is simply a combination of good combustion product and great battery electric vehicle product. The dual inverter program in China is a good example of that, and we're seeing high voltage plug-in hybrids, 400 volts and above still taking some share of the market. And for us, what's really important to understand is that this is giving us scale. This is giving us launch experience in motors, in those inverters that apply in high voltage plug-in hybrids for now, but would get us really scaling in battery electric vehicles too. So high voltage plug-in hybrids is a clear trend as well as battery electric vehicles. And with both, we are able to serve our customers without being painted to whether they want battery electric vehicles or high voltage plug-in hybrids. And all that converges into getting us scale. I was mentioning $3.3 billion of pure battery electric vehicle revenue in 2025. If you add the high voltage plug-in hybrids on top of that, I don't have a number today, but it's pretty significant.

And then in terms of the specific outgrowth-related numbers, Brian, I guess if you look at what's embedded in our guidance, that 7% to 8% outgrowth, that translates to more than a $1 billion of outgrowth this year. And separately, we've disclosed that we expect our EV revenue this year to be over $800 million, which is more than double what it was last year. So you can see, there's $400 million plus coming from EVs and the rest is coming from everything else. So to answer your question, yes, we're still seeing outgrowth in parts of our business other than EV.

Hi. Good morning. Maybe we could just start with the margins in the first quarter. And could give us a sense of the extent to which the China COVID shutdowns and the Ukraine war impact your margins? Meaning, excluding those items, what would we have otherwise seen?

Yes, I believe China began to impact us late in the quarter, with more significant effects anticipated as we move into Q2. Regarding Europe, we've seen a decline in production. Typically, we convert a high-teens percentage of incremental revenue, so any revenue loss directly affects our conversion rate. Looking at the first quarter from a margin perspective, excluding foreign exchange effects and the Water Valley sale, three main factors influenced our results. We observed nearly $50 million in net material cost impacts year-over-year, an additional $20 million in R&D related to e-products, and a minor impact from AKASOL. Aside from these, our conversion followed normal patterns. Therefore, if production increased from various regions, we would expect to convert that at our usual incremental margins.

And the go-forward guidance, is that assuming any additional supply impacts from Europe or any lumpiness around the China COVID shutdowns?

It assumes a couple of things. We're expecting that Q2 will be the most challenged quarter from a production perspective, because I think some of the lingering impacts of the Russia-Ukraine situation will likely manifest in Q2 and then probably see some recovery in production beyond that. In China, the lockdowns are going on right now. And our expectation underlying our guide is that the situation in China gets resolved in the early part of June and that we see the bulk of those volumes get recovered later in the year. So embedded in the guide is that Q2 will be the most challenging from a production perspective.

Great. And then, as a follow up, I want to understand in this inflationary environment, how costs are trending between EV versus combustion products, and most notably on the EV side inverters? Is there any difference in the input costs on each side for you? And given the likely added margin pressure for EV products, maybe there's margin pressure for everything, are the levers to mitigate those headwinds any different than what you'd have price?

In terms of the input costs, a lot of it goes back to the overall inflationary environment is really having an impact on, I'd say, just about everything. You see it on semiconductors, you see it on a lot of underlying commodities. Take a commodity like nickel; nickel gets used in batteries, nickel gets used in stainless steel. So that's having an impact across both types of propulsion architectures, whether you're talking about EVs or internal combustion engines. So the way we go about managing our cost structure is pretty much the same whether it's an ICE-based component or an EV component, except that on the EV side, we're very cognizant of making sure that we're continuing to make the incremental e-R&D investments to support our long-term growth and the launch of the programs that are coming into the P&L over the coming years.

Okay. So the cost pressures aren't any worse for EV products than they are for ICE, correct?

We're seeing cost pressures in both. If you look at the indices, even just in the last 90 days what's happened to stainless steel, to nickel, to aluminum, copper, those types of things, you're seeing 20%, 30%, 40% increases in some of those indices. And so that cuts across that can be ICE-based technology or it can be EV-based technology. And then logistics costs, freight costs, labor costs at some of the suppliers, those are impacting across the propulsion type as well. So I wouldn't say it's limited to one technology or the other.

Great. Thank you.

Hi. Good morning, guys.

Good morning.

I really appreciate the eMotors detail on Slide 7. From an industry perspective, you provided the average cost per vehicle for motors at around $500. Just curious if this is trending in line with what BorgWarner is seeing, what it has in backlog? And then within the 2 million units slated for 2025, can you share roughly what the integrated drive module mix is? And is there any way to think about the margin differential between any more eMotor component sale versus the full integrated drive module system? Thanks.

I don't have all the detail. Pat, will you please come back to James. What I can tell you at least that on one of your question is most of the 2 million of eMotor volume in 2025 are standalone motors. And a few go into integrated drive modules, but by far not the vast majority. For the rest, Pat is going to come back to you.

Okay. And just like at a high level, just the margin differential for the full iDM system versus eMotors, is the IDM system materially margin accretive relative to the component?

Yes, we price our business substantially similar. Whether it's a system or a component, we look at the return on invested capital or look at the capital that's required. And it tends to be, since we're in the assembly business, whether it's a system or a standalone motor, we likely have relatively comparable capital intensity for that individual sale, which means that the margin profile on a percentage basis tends to look similar. Obviously, if you're selling more content through a system, the dollar amounts might be bigger, but the ROIC in the margin profile tend to look directionally similar.

Okay, understood. And then is there a tally as to how many battery management system-related awards you have in backlog? And then you do have five months inorganic contribution from AKASOL this year. So curious if you could share what AKASOL's revenue was in the quarter? And how you're thinking about that business for the rest of the year? Thanks.

So with respect to AKASOL, I'll take that question. AKASOL, we delivered between $40 million and $50 million of revenue this first quarter. And I would say, we tend to be trending stronger in terms of what we're seeing is the longer term prospects for that business from a growth perspective.

Okay. And the tally on the BMS-related awards, is this your first one that you announced or?

So this is the first major one that we announced cutting across a lot of volume and a lot of platform for launch globally. There are other BMS businesses in the company that came with the Delphi acquisition. And, of course, we're doing our own BMS as far as commercial vehicle battery packs are concerned. We will not flag that out independently from the battery pack revenue. So that's a little bit of California, James.

Yes. Good morning. And thank you very much for taking the question. I was hoping to better understand the 2025 booked EV-related revenue. I think last quarter, you talked about $2.7 billion was already booked. This quarter, you talked about over $3.3 billion. I'm a little unclear if those are apples-to-apples, or if there's some differences in how M&A has been treated. But the second part of that question is can you bridge us to what's driving that increase from the $2.7 billion to the $3.3 billion?

That's easy. The $2.7 billion is organic. It's the first bar of charging forward that you can see on our website. The additional $600 or $700 million is coming from acquisitions. And it's essentially AKASOL and a little bit of Santroll. And $2.7 billion plus points is a bit more than $0.6 billion, which is $0.6 billion to $0.7 billion. That's how the math works.

Got it. That's helpful. And I guess the follow-up is you got the BMS win you're speaking about today that starts late '23. So I was thinking that might have some contribution to the '25 EV target. So maybe talk a little bit more on what kind of revenue we can be expecting from the BMS program? You spoke a little bit already around what led you to win there. But that's a pretty competitive segment and I thought it was very encouraging that you picked up the BMS win. So if you could also speak to what's differentiating your BMS product line, what allowed you to win? Thanks.

Yes, so on the $2.7 billion, we're not updating three or four digit after the comma. So this is a rounding. We're not going to dig that each time we book a business. So as far as the battery management system, that's a competitive advantage. It is our ability to combine again hardware and software. And this is part of the winning equation that I always alluded to mechanical, hardware and software altogether. And this is what we do very well and starting to be absolutely recognized globally for a whole suite of products, including now battery management systems for various applications independently, but also together with AKASOL commercial vehicles.

Hi, team. This is Gavin Kennedy on for David Kelley. I believe you mentioned that M&A synergies and restructuring savings partially offset the margin headwinds we saw in the first quarter. Can you remind us of your expectations for synergies and restructuring savings for the full year?

For the full year, it's north of $100 million combined.

Great. And then of the major wins you highlighted in your presentation today in electrification, two are for China. Do you expect the pace of new business awards and bids to be impacted by the COVID-related shutdowns in that region, or is it business as usual despite the disruption?

It's business as usual, except when it comes to production. But I'm not expecting any delay as far as new technology and sourcing are concerned.

All right. Thanks, team.

I'd like to thank you all for your great questions today. If you have any follow-up questions, feel free to reach out to me or any member of my team. Jerome, you can go ahead and conclude the call.