BorgWarner Inc (BWA) — Q3 2022 Earnings Call Transcript

Thank you, Shelby. 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 our homepage and on our Investor Relations homepage. With regard to our IR calendar, we will be attending multiple conferences between now and our next earnings release. Please see the Events 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 will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed, and for comparison purposes with prior periods. When you hear us say, on a comparable basis, that means excluding the impact of FX, net M&A, and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light 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 our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. We're pleased to share our results for the third quarter 2022 and provide an overall company update, starting on slide five. I continue to be impressed with the strength of our revenue relative to the overall industry; with about $4.1 billion in sales, we were up over 29% organically. This is approximately 7% better than the year-over-year growth in industry production. This outperformance was in part supported by the execution of the pricing actions with our customers around the world. From a margin perspective, our performance was very strong in the quarter and also benefited from our customer pricing. While navigating the near-term industry environment, we continued to take steps to drive our long-term positioning during this quarter. Year-to-date, we have repurchased $240 million of stock. During the third quarter, we announced the acquisition of the charging business of SSE, in China. And we secured new electrification program awards. Next, on slide six, I would like to discuss the acquisition of the charging business of SSE, which we announced last month. SSE will add a China presence to our existing European and North American footprint. So, we have now established global charging capability upon which to build. The SSE acquisition is expected to close in early 2023, so there will be no revenue impact in 2022. However, we now expect our total DC fast charging-related annual revenue to be in a range of $225 million to $275 million by 2025. Our charging strategy can be summarized in four points. One, our initial focus will be on high-value DC fast charging hardware enabling software and services. Two, our objective is to establish product leadership and competitiveness in this category. We will improve the chargers' quality that is key to enabling electric mobility. Also, over 50% of the different materials in a DC fast charger are in components where BorgWarner has existing expertise and global scale. Three, we plan to leverage BorgWarner's regional sales capabilities and government interaction. And four, we want to explore potential sales synergies with our CV customers, especially the customers buying our battery packs. As we look ahead, we believe you will see further success as we continue to strengthen our capabilities in the charging area. Now, let's look at some new electrification awards, on slide seven. First, BorgWarner will supply its integrated drive module to a leading Chinese automotive manufacturer. This marks the first time that we have supplied our iDM on a hybrid P4. And this is also the first time that this manufacturer has awarded this system to an external supplier. Importantly, this iDM is substantially similar to the iDM used in future EV-specific application which will drive additional scale benefits for this product. Second, BorgWarner will supply electric motors for the E-Axles of a European commercial vehicle OEM. This E-Axle is designed to equip new electric light commercial trucks ranging up to 7.5 tons. Production is expected to begin in early 2023. It will use our very modular HVH250 motors, and we can supply them in various stack lengths and winding configurations, either as fully assembled motors or as rotor/stator assemblies. Lastly, BorgWarner has been granted a production increase supply its 800-volt silicon carbide inventors for a premium European OEM. The initial order has now been significantly increased. The suitability of our product has been further endorsed by this uplift. Our power loss reducing silicon carbide inverter technology is helping our customer reach its strategic goals of a high-energy efficient drive train with exceptional electric driving range. Importantly, the increase of volumes to previously awarded programs is more and more becoming the new normal for many of our EV products. As you can see, we have made progress on key aspects of our Charging Forward strategy. So, let's look at what this means in the progress report, on slide eight, starting first with organic electric vehicle revenue growth. With the awards secured as of this goal, we now have electric vehicle programs that we believe will account for about $3.1 billion of booked revenue in 2025. Turning to M&A, we have now completed or announced four acquisitions since the start of Charging Forward, AKASOL, Santroll, Rhombus, and SSE. Based on our due diligence, we believe those businesses will generate $900 million of additional EV-related revenue in 2025. We're not done here though. We expect to take additional M&A steps and are actively engaged with several potential targets which could enhance various parts of our EV portfolio. So, we are already on track to achieve about $4 billion of electric vehicle revenue by 2025 based on new business awards and actions announced to date. This is a great achievement by the BorgWarner teams and a significant milestone for the company. And we believe it puts us well on our way towards our $4.5 billion EV revenue target for 2025. So, let me summarize our third quarter results and our outlook. Overall, our third quarter performance was strong. We delivered strong organic growth. We also made key progress in the quarter on the pricing actions with multiple customers. As Kevin will detail shortly, we have increased the low-end of our full-year 2022 outlook for both organic growth and margins based on our performance year-to-date, and our full-year EPS guide has also increased. Looking beyond this year, I'm very proud of the steady progress on Charging Forward, and extremely excited that we're now on track to achieve $4 billion in pure electric vehicle revenue by 2025. It is clear to me that our EV business is accelerating, but I expect more to come. We intend to carry on booking more new business across our vast portfolio. We expect to utilize our strong cash generation to acquire great assets to become even stronger as the world continues to accelerate towards electrification. And I look forward to sharing with you additional progress in the future. With that, let me turn the call over to Kevin.

Thank you, Fred, and good morning, everyone. Before I dive into the financial details, I'm going to provide you the key takeaways coming out of our third quarter. First, we reported strong organic growth driven by customer pricing actions and industry volumes that were at the high end of our expectations going into the quarter. Second, our year-over-year margin performance benefited from normalized conversion on higher revenue and successful execution of our customer pricing actions. However, these benefits were partially mitigated by our planned increase in e-products R&D investment. Let's turn to slide nine for a look at our year-over-year revenue walk for Q3. After adjusting for the disposition of our Water Valley facility, last year's Q3 revenue was almost $3.4 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in revenue of over 9% or approximately $320 million. Then, you can see the increase in our organic revenue about 29% year-over-year. That compares to a 22% increase in weighted average market production, which means we delivered another quarter of strong outperformance. The sum of all this was just under $4.1 billion of revenue in Q3. Turning to slide 10, you can see our earnings and cash flow performance for the quarter. Our third quarter adjusted operating income was $438 million or 10.8%, which compares to adjusted operating income of $336 million or 9.8% 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 increased $138 million on $990 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 17% on our additional sales. But this conversion was partially offset by two things. First, we continued to execute on our planned increase in e-products R&D. In Q3, we increased these investments by $24 million relative to last year. Second, material cost inflation net of customer pricing recoveries was an $8 million year-over-year headwind in the quarter. Our adjusted EPS improved by $0.44 in the third quarter driven by the $138 million improvement in our adjusted operating income and a much lower effective tax rate that we have been experiencing in the last couple of years. This tax rate reduction was driven by a favorable mix of earnings across taxing jurisdictions and the impacts of ongoing tax planning initiatives. And finally, free cash flow; we generated $167 million of positive free cash flow during the third quarter. Let's now turn to slide 11. We can see our perspective on global light vehicle industry production for 2022. As we can see our market assumptions incorporate a range of potential outcomes. However, we have incorporated several adjustments to prior assumption including a small decrease in the high end of the North American market, continued production increases in China as we expect third quarter strength to continue into Q4, and a further decrease in European production due to the market uncertainty associated with the ongoing conflict in Ukraine. As a result of these assumptions, we now expect our global weighted light and commercial vehicle markets to increase in the range of 3% to 4.5% this year, which is a bit narrower than the range outlined in our prior guidance. Now let's take a look at our full-year outlook on slide 12. First, it's important to note that our guidance assumes an expected full-year headwind from weaker foreign currencies of more than $1 billion. This represents an additional headwind of $230 million versus prior guidance. While the appreciation of the U.S. dollar is having a significant top line impact, remember that our strategy is generally to purchase and produce components in the same region as our customer. As a result, the impact of currencies in our guidance is predominantly translational in nature. Next as I previously mentioned, we expect our end markets to be up 3% to 4.5% for the year, which contributes to the organic net sales changes you see on the slide. But the much bigger impact on that line item is the continued revenue growth we expect to generate above growth in end market production. That's about $1.4 billion of our organic revenue growth or just over 9% growth above market. That current outlook for our outperformance is stronger than our prior outlook, primarily due to the impact of estimated pricing recoveries for material inflation, which we now estimate will contribute just under 4% of our growth for the full year. Finally, as it relates to our revenue outlook, the Santroll and Rhombus acquisitions are expected to cumulatively add $45 million to $55 million to 2022 revenue. Adding these items together, we're projecting total 2022 revenue to be slightly lower than before in the range of $15.4 to $15.7 billion. This slightly lower revenue outlook is being driven almost entirely by the additional FX headwinds. However, our expectation for organic growth is increased at 12% to 14% compared to our previous outlook of 11% to 14%. That is helping to mitigate the FX impact we're seeing. Switching to margin, we're updating our full-year adjusted margin outlook to 10.0% to 10.2%, compared to our prior outlook of 9.8% to 10.2%. So, higher material cost inflation continues to negatively impact our financials, we're pleased with the progress we've made in negotiating recoveries of a portion of these costs from our customers. And that's helping mitigate the impact on our P&L. For the full year, we now expect net material cost inflation to negatively impact our results by $110 million to $120 million, which is lower than our previous expectation of $145 million to $155 million. As it relates to R&D investments, our guidance anticipates a $145 million to $150 million increase in e-products related R&D investment in 2022. Excluding the impact of net material cost inflation and the increase in e-products related R&D investments. Our 2022 margin outlook contemplates the business delivering a full year incremental in the high teens. We're now expecting full year adjusted EPS of $4.25 to $4.45 per diluted share. This is an increase from our prior guidance reflecting two things. First, we're expecting a lower full-year tax rate of 25% down from our prior guidance of 27% driven by our expected mix of earnings and the benefits of tax planning initiatives we've been executing over the last couple of years. Second, we're benefiting a bit from the lower average share count, which is a result of the stock buyback we executed during the quarter. And finally, we continue to expect that we'll deliver free cash flow in the range of $650 million to $750 million for the full year. That's our 2022 outlook. So, let me summarize. Overall, we had a strong quarter. We delivered robust organic growth. Our margin performance was strong, driven by incremental margin performance and successfully negotiated pricing recoveries with our customers. And we are increasing the midpoint of our EPS outlook for the full year driven by our strong year-to-date performance and a lower tax rate going forward. Year-to-date, we've taken a number of actions to drive our future profitable growth and to create value for our shareholders. We've continued our disciplined M&A with the completed acquisitions of Santroll and Rhombus, as well as the announced acquisition of SSE. We've returned more than $360 million of cash to our shareholders through our buybacks and dividends. And we've secured meaningful new business awards for electric vehicles across multiple parts of our portfolio. These awards have added more than $800 million to our booked electric vehicle revenue for 2025 compared to the same point last year. As a result of our bookings and M&A, we believe that we have already achieved an important milestone of $4 billion secured EV revenue for 2025. We view this as a huge success for the company. But we've done all of this while still delivering on our near-term commitment, once again showing the balance that is the key to our ongoing success. With that, I'd like to turn the call back over to Pat.

Thank you, Kevin. Shelby, we are ready to open it up for questions.

Good morning, everyone, and thank you for joining us today. My first question is about the current situation regarding customer recoveries, settlements, and pricing, which often come up together in discussions with suppliers and automakers. I'm curious, as you pursue recoveries, do you see some of this as a one-time occurrence, or is it indicative of a shift in the pricing dynamics with your customers or how pass-throughs are indexed? I'm trying to determine if this is just a reconciliation of past discrepancies or a change in strategy moving forward. It's interesting to hear that some automakers were not fully aware of how volatility was affecting suppliers, especially since they are directly involved. Some of these results stem from addressing inefficiencies related to that volatility. As schedules stabilize, it could mean that these recoveries might not continue at the same level. What are your thoughts on this?

Hi, John. So, some of it is in price some of it is one-time. But it's true that when we negotiate and when we talk to our customers, they realize that this is a big hit, and that big hit may be here to stay. So, I expect that for 2023, we will have ongoing discussions with our customers around inflation. What's important is that we make sure that the nature of the recovery that we get from our customer base matches pretty much the nature of the help that we are giving to our supply base. And that will be our goal also going forward.

And maybe, John, I'll just jump in and add on the one-time nature of certain elements of recoveries that we generated in the quarter. Included in that 10.8% margin that we posted was about a 40 basis point margin benefit arising from retroactive pricing recoveries partially offset by retroactive supplier costs. So, there was a little bit of a tailwind in the quarter, about 40 basis points coming from that in our margin.

But that 40 basis point is the net of those two, Kevin, is that correct?

That's the net of the two.

Okay. And just really one quick follow-up, on slide eight, it looks like, as you've mentioned, you did $4 billion combined here versus the total target of $4.5 billion. So, you're overperforming on organic, and a little bit underperforming on M&A so far. Fred, as you think about this going forward, is it necessary to catch up on M&A or chase things if you're winning more and more on organic and it might get you to your total goal more on the organic side as opposed to the M&A side? Or is there something specifically on the technology side that might not be as associated with a dollar number here that you're trying to get to in M&A, instead of just bolstering that, the total revenue number? How do you think the balance of these two is really the key question?

Yes, John. First, I would say that I'm very proud at where we are, 18 months into Charging Forward we're already 45% on our way into a five-year plan, so very proud of that. From an M&A perspective, what we are focusing on is building capabilities, product leadership, and scale from grid to wheel in this, that's the target. And so, we're not chasing a number, we're chasing that type of mindset really.

Good morning. Thanks for taking the questions. Next to the traction on those pricing recovery, just illustratively, how should we think about rollover benefits for 2023 at this point just given the timing of these actions seems reasonable to assume a couple points benefit for next year. Maybe you could comment on that. And I think, Fred, you mentioned that some of the recovery discussions would remain dynamic. So, maybe you can help us think about timing of potential further recoveries as we look over the coming quarters?

Yes, I'll begin. Regarding 2023, when we analyze 2022 alongside the recoveries and costs we've been facing, we do not anticipate fully covering all the costs reflected in the profit and loss statement. We have been negotiating to defer a significant part of those cost increases, but not completely. Thus, we are absorbing some of those expenses. Therefore, looking ahead to 2023, I wouldn't expect a favorable impact on our margins because we do not foresee being able to fully offset all the cost increases we incurred in 2022.

Right. I mean, the question is for the top line, that there'll be some benefit to the top line from those recoveries rolling over.

Yes, if the inflationary impacts persist as we move into 2023, and if we need to maintain pricing to manage the ongoing inflation costs, we anticipate that our revenue will continue to benefit. Looking back at our growth for the year, we are achieving approximately 9% growth beyond our guidance, slightly above 9%. Around 4% of that is attributable to the pricing recoveries related to material inflation costs, which indicates that the remaining 5% of growth is derived from other factors. This summarizes the situation in 2022. You can also consider how you expect the inflation environment to evolve in 2023 and how that nearly 4% in pricing might carry forward.

Right. And then just to clarify, Kevin, have your expectations of that material cost inflation changed relative to last quarter or are we still looking at the same number?

They have. I think, last quarter, we were expecting that the contribution to our outgrowth from the pricing recoveries was closer to 3%. I think now we're suggesting in our guidance that the full-year impact of those pricing recoveries is a little bit under 4%. And that's part of the reason that you see in my remarks, that the net impact that we're now expect on a year from material cost inflation is down from our prior guide, it's $110 million to $120 million, which is a $35 million improvement from what we guided to last quarter. And it's being driven by improved customer pricing actions.

All right, great, and nice to see that improving. And then, I guess, sort of shifting to, Fred, some of your commentary around the management of the portfolio and how you view M&A. That certainly makes sense on a high-level, strategically. I'm curious to know what the tenor and the activity within the pipeline is like at this point? Obviously, there's still a volatile production environment and lots of challenges for nascent EV businesses. But maybe you can talk a little bit about the depth and kind of the actionability of the pipeline at this point?

Right. It's very active. We are engaged with several companies as potential targets, still focusing on the same areas: scaling products from grid to wheel and achieving product leadership, which means essentially improving the efficiency of transferring electricity from the grid to the vehicle, as well as exploring new products in the EV sector. So, there's quite a bit happening.

Great, thanks for taking my questions. You mentioned, at the midpoint, the inflationary costs were down about $35 million. If I look at operating margins, the outlook for the year is still fairly flat, looks like sales down just a bit at the midpoint of guidance. What is offsetting that underlying $35 million of good news?

Well, I think it depends when you look at the guide. I mean, if you look at the top end of our guide, one of the things to keep in mind is we took industry production down, and so that has an impact on organic growth in the high end of our guidance range. And then at the low end of our guidance range, as you look at Q4, that it's actually not being offset, it's really flowing through that $35 million benefit, which is why we raised the bottom end from 9.8% to 10%.

Okay. And then as I look into the implied guidance implies sort of a sales decline into Q4. Again, I think like IHS has light vehicle production up. Are you not seeing the market up, is it just FX that's washing all that out, is it commercial offsetting some of that? What's causing the softness into Q4?

Yes, sequentially going into Q4, we do have an almost $90 million FX headwind Q3 to Q4. So, that is a big piece of what's impacting revenue. And then the range of outlook that we have going from basically with underlying our $15.4 billion to $15.7 billion revenue guide is at the lower end and at the midpoint, some pressure on organic growth. Sequentially that is.

Got it. And then just lastly, the 110 to 120 impact, how was in Q3? And how much would be less for Q4 as headwind, so we can model that? Thanks.

We didn't break that out in terms of Q3 and Q4. But because of the nature of some of the retroactive recoveries on a net basis that we generated in Q3, it really mitigated the impact on Q3 relative to the other quarters that we have seen. So, in Q3 we had a negative $8 million impact. I think as we looked at Q4, it's on a year-over-year basis a little bit larger because we don't expect the same size of retroactive-related benefits of what we got in Q3.

Thanks so much guys. Maybe we could start on actually some of the ICE products. In particularly, the margins, the revenue, the fuel injection aftermarket has been quite good. And we haven't really discussed sort of individual segment margins some of them are new. Maybe you could talk about some of the strength you have been seeing and ways to think about some of the segment margins for fuel injection or aftermarket on a go-forward basis?

Chris, I think the team has done a formidable job right after the closing of the Delphi transaction to turn this business around. Should look back the fuel system margins that we took the business at and what it is now, it's been pretty good both on the fuel system side and aftermarket as well.

Is there anything unusual about the margins we're observing in Q3, particularly regarding some of the benefits from one-time price recovery? We're trying to understand the trend, as margins have been quite variable in the first three quarters. Any insights on the margin rate and what could be considered normalized would be helpful.

Yes, I mean I think it's hard to compare on quarter-to-quarter this year because there has been such volatility. Q2 obviously we were pretty significantly impacted by the combination of revenue being relatively low as well as material cost inflation and the recoveries haven't entirely been kicking in yet. As you go to Q3, you see obviously we delivered over $4 billion of revenue in the quarter and a strong level of customer recoveries. And so, you are seeing a lot of swings quarter to quarter right now in this volatile environment. And that's really pushing through the segments as well. So, I think that's why you look in Q2 going to Q3 you saw air management up quite a bit. You saw fuel systems up quite a bit as well. And I think it's really a function of what we are seeing from both the revenue and cost recovery perspective.

Okay, great, super helpful. If we move to the EV outlook and the $4 billion, I really appreciate the consistency in your updates. Regarding the methodology as we observe global EV volumes increasing, can you discuss how often you're adjusting the 2024-2025 assumptions for the base business? Is that done quarterly or annually? I'm curious about the timing of booking the business, as projections increase if that benefits you. Additionally, could you share what you're observing in Europe for the EV outlook, perhaps for next year?

So, the way we compute those EV wins is we look at the individual businesses, the volume that we are booking the business at. We sometimes apply some market intelligence adjustments and that's how we are monitoring the 2025 organic revenue bookings. As far as your second question around Europe, I would say overall EV is accelerating. And we can see that in the marketplace. We can see that with the intensity with which we are discussing with our customers and we can see that with our business too. And that also applies for Europe, and very happy to see our growth in EV being across the three continents and also across a pretty sizable product portfolio.

Thank you for taking the question. I apologize, if just said this in the prepared comments, I had to log on late here, but just wondering first question regarding the granting of increased production on the inverter award that you disclosed this quarter, to possibly give us a better feel of how widespread this sort of activity might be going forward? Especially thinking relative to the 2025 Organic EV awards that you've booked already? Are we talking tens of millions, or maybe even hundreds of millions of potential upside from these sorts of activities?

Yes, it is. I won't quantify that. But it's sizable and I would say that this is not a one-off. There are a lot of discussions with uplifting volumes. And I would say that, one thing that it's important is that the scale that we have in electronics and in power electronics, in both purchasing and manufacturing, electronics and power electronics, allows us to offer our customers specific supply chains that are not intertwined. And so, I think this is a very, very good success for us. It enforces the fact that we have great products, great efficiency, and also that the resiliency of our supply chain is something that our customers have trust in.

Okay. That's helpful. And then it kind of leads into my second question on the E-Axle award, so you said in the release that this can scale up to seven and a half ton trucks. I'm wondering, was that the customer's specific need or could you've scaled that up to even larger trucks with your current portfolio? And then related question, bigger pictures wondering how important scale is in the e-motor business as it relates to pursuing commercial vehicle opportunities? Can you leverage your scale in light vehicle as you go into that world and you clearly very important in color electronics, just learning how transferable that would be in commercial vehicle as well, any modern thinking?

Yes, no, for sure our motors can go above seven and a half tons. And this came from the customer's specification on all this can go much higher than that. And yes, the answer to your second question is absolutely yes. Scale matters in CV for product leadership, but also competitiveness. This is a strategy that has been applied for one or for many, many years, where we have numerous products that cut across fast car, and commercial vehicle. We learn from both segments, and we can offer our commercial vehicle customers products that one fit for their function, but also are competitive because we have that scale.

Hi, team. This is Gavin Kennedy on for David Kelley. First question, can you just remind us of your disposition strategy? I believe prior expectations were for $3.5 billion in targeted dispositions by 2025?

Yes, we're still that's still part of our Charging Forward plan. As I mentioned last quarter, that challenging market environments really disrupted those potential disposition processes in the short-term. And that's really due to two things. The uncertainty and industry production and the inflationary impacts and how those are going to play out impacts potential buyers and those types of businesses in the near term. And second, there are obviously challenges in the capital markets and the financing markets more generally. So, those things have really slowed down our ability to transact over the last couple quarters. But it doesn't change the direction we're headed over time here. But that pause is okay because as you know, we have a lot of high-quality cash flow generating assets in our portfolio. So, we're not under pressure at all to sell anything. And we're perfectly content to continue to generate the benefits of the cash flows from those businesses, and then assess those as the market situation improves to look at re-engaging in some of those disposition processes to make sure that we deliver a disposition that's going to generate appropriate value for our shareholders. But until the markets clear up from that, we're perfectly content to continue to generate strong cash flows from these businesses.

Got it? That makes sense. And then as a follow up switching gears, you raised your DC fast charging expectations to $225 million to $275 million by 2025, which is good to see. Can you give us any commentary on margins today, and expectations for margins going forward as these charging businesses scale? Thank you.

We're not giving margin guidance yet as it relates to any of the specific acquisitions. But I think the strategy of BorgWarner and establishing product leadership as we get into different product categories and driving top quartile margin performance as a company over time. And so you should expect that as we get into any of these product lines, that the expectations for what we ultimately deliver financially on those products, is the same as what we expect to deliver from all parts of our business.

I guess I wanted to ask about AKASOL noted as a growth driver in Europe. And while we first ask about the revenue trajectory, maybe just any color relative to the targets that you laid out for AKASOL then also as it relates to IRA in the battery, the battery pack assembly credit, is there an opportunity for AKASOL to benefit at least from the 10 kilowatt hour, 10 megawatt per kilowatt hour portion of that subsidy in the U.S.?

We have a strong customer demand for battery packs, particularly from AKASOL. We anticipate a year-over-year growth of around 200 million from 2021 to 2022. We are confident this business will meet our growth expectations. Our technology is suitable for this expansion, and we are currently increasing our AKASOL operations in North America. These products are effectively addressing our customers' concerns and fulfilling their requirements. Kevin, would you like to address the question regarding the IRA?

Yes, I mean, we think there's a real opportunity for us to benefit from the IRA as we continue to invest to increase our capacity and manufacturing capability in the U.S. So, we'll continue to look at the opportunities afforded by the Inflation Reduction Act and see what opportunities are afforded to us. But we think there's a real opportunity there.

And AKASOL has somewhat of a U.S. footprint right, there's at least one facility, I believe.

Yes, there is one facility in the U.S. right now in Michigan. And we're looking at extending the U.S. footprint, actually, as we speak.

Got it, understood. And then, for China, the industry production obviously picked up pretty dramatically in the third quarter. It appears that there's some customer mix, normalization of programs. Just curious is it tied to one or two important customers in China? And is there a path? Is this something that's a sustainable, a sustained dynamic or something that could revert to the positive figures in terms of trying to production in your mix there?

I'm not sure I have that granularity for you, James, at this point. Maybe Pat can follow-up with you offline? I don't know if that's going right for the Chinese country.

Thank you very much and would now apologize again for joining the call later with some of this was discussed before I apologize, but I was curious if you could give us sort of a high-level walk of search quarter through in place fourth quarter outlook, it looks like you basically going for the lower revenues, but also in the lower margins. And so, just if you could just discuss some of the puts and takes there?

Were you indicating both growth and margin, Emmanuel, is that what you meant or just…

Yes, revenue and margin.

Revenue and margin from Q3 to Q4: starting with revenue, we are providing a range of $300 million. At the upper end of that range, we expect revenue to decline slightly due to foreign exchange, which presents about a $90 million headwind sequentially from Q3 to Q4. At the lower end of the range, we also anticipate that $90 million headwind from foreign exchange, along with an approximate $280 million sequential decline in organic growth. That's the revenue outlook from Q3 to Q4. Regarding margin, we begin with Q3's margin of 10.8%. It's important to note that around 40 basis points stems from the net benefits of retroactive customer pricing recoveries, offset by retroactive supplier cost increases, providing a tailwind in Q3. When adjusting Q3 and looking forward to Q4, we expect Q4 at the high end of our guidance to be relatively flat, perhaps slightly up from the adjusted Q3 level. Conversely, at the low end of our guidance, approximately 9.5% in Q4 would arise from the adjusted Q3 level, factoring in the downside conversion resulting from the roughly $280 million organic decline sequentially. This is how we arrive at the projected figures.

And the $280 million headwind sequentially itself, could you please just provide a little bit more color, and again, apologies if I missed it?

I'm sorry, but what's really driving the sequential change is the production assumptions that underlie the guidance. At the low end of the range, you can see that production decreased sequentially from Q3 to Q4.

And I think it represents the volatility that still exists in this marketplace, Emmanuel. And especially, I would say in Q4, especially in Europe with everything that is happening. So, taking into consideration also in our Q4 top line guide, which is a little wider than usual, but it represents the market environment.

Yes, so if you're looking at like IHS as an example, our Q4, at the low end of the range, is almost a million units below IHS from a light vehicle perspective, globally.

All right, thank you.

Thanks so much guys. Maybe we could start on actually some of the ICE products. In particularly, the margins, the revenue, the fuel injection aftermarket has been quite good. And we haven't really discussed sort of individual segment margins some of them are new. Maybe you could talk about some of the strength you have been seeing and ways to think about some of the segment margins for fuel injection or aftermarket on a go-forward basis?

Chris, I think the team has done a formidable job right after the closing of the Delphi transaction to turn this business around. Should look back the fuel system margins that we took the business at and what it is now, it's been pretty good both on the fuel system side and aftermarket as well. Thank you all for your questions today. Shelby, you can go ahead and conclude the call.