Talphera Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Britney, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 First Quarter Results Conference Call. All lines have been placed I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr.

Operator

Nolan, you may begin your conference.

Speaker 1

Thank you, Britney. Good morning, everyone, and thank you for joining us today. We shared our earnings release earlier this morning. Posted on our website borboner.com, on our homepage and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release.

Speaker 1

Please see the Events section on our IR homepage which involve risks and uncertainties as detailed in our 10 ks. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non GAAP measures in order to provide a clearer picture of how the core business performed And for comparison purposes of prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, Net M and A and other non comparable items. We hear us say adjusted, that means excluding non comparable items.

Speaker 1

When you hear us say organic, that means excluding the impact of FX and net M and A.

Speaker 2

Thank you, Pat, and good day, everyone. We're very pleased to share our results for the Q1 2023 and provide an Overall company update starting on Slide 5. With approximately $4,200,000,000 in sales, We delivered double digit organic growth in the quarter, and we outperformed the market in both Europe and North America. As we expected going into the quarter, our margin performance was negatively impacted by our planned ER and D investment, debt inflationary costs and the impact of lower production in China. Our free cash flow usage in the quarter reflected our planned capital spending to support our e product growth Importantly, our charging forward progress continued on multiple fronts.

Speaker 2

We secured multiple new e product awards since our last earnings report. We also announced multiple new e product capacity investments during the quarter. And as I will highlight, our battery pack expansion in Seneca, South Carolina Shows our ability to utilize our foundational assets and people. Lastly, We continue to work towards the intended separation of Finnair. Since our last call, we announced Finnair's name As well as the key leadership roles, Brady Erickson will serve as President and CEO Chris Gropp will serve as the CFO for Finnair.

Speaker 2

Both Brady and Chris have been at BorgWarner for more than 20 years have served in numerous important roles across a variety of Ball Warner Business Units. Teams are progressing well through the various work streams. We now expect to complete the separation of Finnair by the end of the Q3. Now let's look at some new e product awards on Slide 6. First, Port 1 has been selected to provide eMotors to a leading automotive manufacturer in China.

Speaker 2

The e motors will be used in the Chinese automakers' dedicated hybrid transmissions and range extended electric vehicles With mass production expected to start in August 2023, we're excited to supply this leading Chinese OEM With a new motor application, strengthening our partnership by providing them with the support needed to meet the growing challenges in new energy vehicles. Next, BorgWarner has partnered with the Pontiac Michigan School District to provide direct current fast charges to support the district's electric school buses. This program will utilize BorgWarner's sequential charging technology that allows up to 5 dispensers to charge from a single power control This greatly reduces the initial investment and lowers installation costs while providing the ability to charge at Next, BorgWarner has been selected by global commercial vehicle manufacturer To provide eFANS for battery electric trucks in both the North American and the European market With production expected to begin in 2025. For this project, BorgWarner was deployed complete eFan R10 system, which includes a fan, an e motor and an integrated high voltage inverter. Notably, the high voltage inverter utilizes the expertise and capabilities of Crytek, the company acquired in December of last year.

Speaker 2

Now let's look at the growth and expansion of our battery pack business on Slide 7. BorgWar has been selected by a global power technology company to supply battery pack This battery pack contains state of the art safety features, including current overcharge protection, Cell level passive propagation resistance and electrical disconnect at the individual cell wire bond During the quarter, BorgWarner announced plan to expand its Seneca, South Carolina production facility By adding battery module production to the facility. After this expansion, BorgWarner is expected to have annual U. S. Battery module capacity of approximately 3 gigawatt hour.

Speaker 2

This investment will contribute to the growth of the company's battery module and pack production in the United States focused On commercial vehicles, trucks and buses, our battery pack business is exceeding Our initial expectations. Last quarter, we increased our 2025 revenue outlook for this business to approximately $1,000,000,000 5 years ahead of our 2,030 business case when we announced the Akastor acquisition. We expect volume demand from our largest battery pack customers to continue to grow, And we have secured multiple new product awards for our battery pack business over the past 2 years. We to support this business growth, which is a big driver of the step up in our CapEx outlook for 2023 versus last year. So in our opinion, the Acastel acquisition from 2 years ago is But now I'd like to turn our attention to how Last year, Centrals acquisition is performing on Slide 8.

Speaker 2

Similar to our battery pack business, the revenue related to Central's e motor business has tracked ahead of the expectation we had at the time we announced the transaction. In 2024, we expect this business to generate Approximately $250,000,000 of e product revenue, about 40% higher than our original acquisition planning. If you recall, a key pillar of the transaction was for Central to improve our cost competitiveness through improved e motor design and manufacturing capabilities. As a result of the improvements that we are achieving, We expect this business to already approach BorgWarner's average profitability levels by 2024. We expected this business to increase our speed to market and increase our scale in eMotors.

Speaker 2

And we are seeing just that The takeaways from today are obvious. BorgWarner's 1st quarter results were broadly in line with the directional guidance that we provided on our earnings call last quarter. Importantly, our sales growth once again outperformed the industry And we continue to make investment to support our growth. As Kevin will detail, we expect Another year of strong top line growth in 2023, especially driven by strong demand of our e products. Our guidance is also increasing based on FX tailwinds.

Speaker 2

We continue to expect our e product portfolio to approach breakeven in late 2023, early 2024. And our new segment disclosure will help provide evidence of this. Looking beyond the near term, we believe we are successfully executing on our long term strategy, challenging forward, Before I turn the call over to Kevin, I would like to again share a thank you to the Paul Werner team. Proud to see both our e product The progress made in just over 2 years since announcing charging forward is truly remarkable. It is the entire BorgWarner team and our culture of execution that continue to be the drivers With that, let me turn the call over to you, Kevin.

Speaker 3

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a brief overview of our Q1 results. 1st, we reported double digit organic revenue growth driven by outgrowth in Europe and North America and higher industry production Despite weaker production in China during the quarter. 2nd, our margin performance reflected a planned increase in e product related R and D investment and net inflation headwinds, both of which we had indicated would be margin headwinds during last quarter's earnings call. Despite this, We believe we remain on track for our expected full year performance.

Speaker 3

Let's turn to Slide 9 for a look at our year over year revenue walk for Q1. Last year's Q1 revenue was just under $3,900,000,000 You can see that the strengthening U. S. Dollar drove a year over year decrease in revenue of over 4% or approximately $162,000,000 Then you can see the increase in our organic revenue, about 12% year over year. That compares to an approximately 7% increase in weighted average market production.

Speaker 3

Finally, the acquisitions of Santrell and Rhombus added $22,000,000 to revenue year over year. The sum of all this was just under $4,200,000,000 of revenue in Q1. Turning to Slide 10, you can see our earnings and cash flow performance for the quarter. Our first quarter adjusted operating income was $396,000,000 equating to a 9.5% margin. That compares to adjusted operating income of $389,000,000 or 10.0 percent from a year ago.

Speaker 3

On a comparable basis, excluding the impact of foreign exchange and the impact of M and A, adjusted operating income increased $32,000,000 on $446,000,000 of higher sales. This performance includes a planned e product related R and D increase of $26,000,000 And about $28,000,000 of net commodity and other material cost inflation headwinds. As we mentioned on last quarter's call, We anticipate Q1 to have a higher level of material inflation headwinds as we're still in the process of negotiating with our customers the extent to which Excluding these higher costs, both ER and D and net material inflation, we converted at approximately 19% on our additional sales. Our adjusted EPS improved by $0.04 in the Q1 compared to a year ago, driven by the increase in our adjusted Operating income and a lower year over year share count resulting from the $240,000,000 of share repurchases we executed last year. And finally, free cash flow.

Speaker 3

Our free cash flow was at $290,000,000 usage during the Q1 due to higher capital spending to support our growth in e products, increased working capital during the quarter and the annual payout to the company's incentive Capital spending during the Q1 was ahead of the pace implied by our full year guidance. However, this was in line with our internal planning As we're putting in place the capital that we believe is necessary to support the ramp up in our e product revenue. Let's now turn to Slide 11, where you can see our perspective on global industry production for 2023. We expect our global weighted light and commercial vehicle markets to be flat to up 3% this year, which is unchanged compared to our prior guidance. However, within this overall outlook, our regional expectations are mixed.

Speaker 3

Specifically, in North America, we're planning our weighted markets to be up about 1% to 5%. In Europe, we expect our blended markets to be roughly flat to up 2%, which is a bit higher than our previous forecast based on the stronger start of the year. And in China, we expect the overall market to be down approximately 3% to up 2%, which is slightly worse than our previous expectation due in large part to the weaker than anticipated production we saw during the Q1. It's important to note that our guidance now assumes an expected full year tailwind from stronger foreign currencies of $55,000,000 This is an improvement of $340,000,000 in revenue versus our prior guidance. 2nd, as I previously mentioned, we expect our end markets to be flat to up 3% for the year, which contributes to the organic net sales change you see on the slide.

Speaker 3

But more important than the modest growth in end markets, we expect our revenue to continue to grow in excess of industry production,

Speaker 1

driven by

Speaker 3

our expectations for a for a modest increase in inflationary cost recovery from our customers and various expected new business launches, especially in our e product portfolio. As it relates to e product revenue, we're expecting to deliver between $2,300,000,000 $2,600,000,000 in 2023, which is up significantly from the approximately $1,500,000,000 we generated in 2022. Finally, The Santrol, Rhombus and SSE acquisitions are expected to add $70,000,000 to 2023 revenue. Based on these expectations, we're projecting total 2023 revenue in the range of $17,100,000,000 to $17,900,000,000 Which equates to organic growth of approximately 7.5% to 12.5%. This is higher than our previous revenue guidance $16,700,000,000 to $17,500,000,000 due to foreign currencies, the impact of the recently completed acquisition of SSC and our slightly higher customer recovery expectations.

Speaker 3

Switching to margin, we continue to expect our full year adjusted margin to be in the range of 10.0 percent to 10.4 percent compared to our 2022 margin of 10.1%. As it relates to R and D, our full year 2023 guidance continues to anticipate a $60,000,000 to $70,000,000 increase in e product related R and D investment. With our ongoing success securing new electrified business wins, we're continuing to lean forward by investing more in R and D to headwinds of around $65,000,000 Based on this revenue and margin outlook, we're expecting full year adjusted EPS in the range of $4.60 to $5.15 per diluted share. Turning to free cash flow. We continue to expect that we'll deliver free cash flow in the range of $550,000,000 to $650,000,000 for the full year.

Speaker 3

As a reminder, this cash flow outlook includes one time cash cost of approximately $150,000,000 guidance would be $700,000,000 to $800,000,000 which is only slightly lower than the record free cash flow of $846,000,000 we generated in 2022. That's our 2023 outlook. Turning to Slide 13, You can see our new segment disclosure for e Propulsion. In an effort to increase transparency into our e product profitability, We've made the decision starting with the Q1 to break our previous e Propulsion and Drivetrain segment into 2 separate external reporting segments, e Propulsion and Drivetrain and Battery Systems. Our e Propulsion segment includes multiple e products, including inverters, eMotors, eGear Drives, IDMs and other power electronics such as onboard chargers.

Speaker 3

We These e products to account for roughly 2 thirds of the segment's revenue in 2023. In addition, The e Propulsion segment is expected to account for approximately 2 thirds of Board Warner's total e product revenue in 2023. As you can see, the business reported a negative operating margin in the Q1, but it's expected to have a slightly positive margin by the Q4. We believe a significant driver of this improved margin outlook will be the conversion on the growth in e product revenue as quarterly segment revenue is expected to grow to $750,000,000 to $850,000,000 by the 4th quarter compared to $487,000,000 of revenue in Q1. And as you can see, the expected growth in e product related R and D segment.

Speaker 3

Importantly, we expect profitability to continue to improve as we look forward beyond 2023. We believe this is a very good illustration of the profitability trajectory of our e products more generally. That's because we expect that as each e product starts to see acceleration in revenue growth, the conversion on that growth starts to overcome the upfront cost of R and D and other investments, thereby leading to profitability. So let me summarize my financial remarks. Overall, our Q1 results were broadly in line with our prior outlook.

Speaker 3

We outgrew the market with growth driven by various e products and foundational products. And our incremental margin performance, We continue to expect to deliver strong revenue outperformance compared to industry production to complete the work to successfully spin off Finia, which we now expect to happen by the end of the Q3 and to continue to make the necessary investments to support the profitable growth of our e product portfolio. With that, I'd like to turn the call back over to Pat.

Speaker 1

Brittany, we're ready to open up for questions.

Operator

Your first question comes from Logan Ligon with Wells Fargo.

Speaker 4

Thanks for taking my question. It's Colin. I just want to follow-up on the comments, I'm not sure if I misheard. Did you say there's you're expecting $65,000,000 of inflationary costs for the year? I thought the initial guidance was Something that it would be not material for the year.

Speaker 3

That's correct. We've effectively increased the expectation of the net inflation cost to It was relatively small in our previous guidance, but increased as we've seen the continued escalation of supplier costs, predominantly non commodity related costs. But despite that, we're continuing to expect to hold our margin guide 10.0 percent to 10.4% for the full year.

Speaker 4

Got it. Okay. And it's actually it's not related to the steel price, it's actually related to your sub supplier costs pressure going through?

Speaker 3

It really is. I mean, if you look at indices, commodity indices are a little bit all over the place. You have certain indices, certain steel indices, aluminum are down on a year over year basis. You have copper, which is actually up relative to the second half of the year and you have nickel and stainless steel that are actually up on a year over year basis. So commodities are a little bit of a mix But the bulk of what we're seeing come through is really non commodity related, the other inflationary costs coming through the supply base.

Speaker 4

And what helps you keep your guidance, I guess, actually slightly up with your rate of sales, but with the $65,000,000 incremental headwind, what's offsetting that?

Speaker 3

The continued performance of the business and conversion on incremental revenue. So we continue to have confidence in our ability to deliver on that conversion, Which mitigates the impact of that $65,000,000

Speaker 4

And just lastly, fuel systems looked pretty Weak in the quarter, anything unusual going on in Q1? And should that sort of bounce back or is that kind of stay at these kind of levels? Thanks.

Speaker 3

Fuel Systems was one of the segments most impacted by some of the China mix issues we saw, particularly China CD. So that had an impact on margin. In addition, the segment also saw some impacts from higher supplier related costs and higher R and D costs. But as we look at the business on a full year basis, we do expect much like the rest of BorgWarner to see sequential improvement over the balance of the year and fully expect that business will continue to in line with where it's been performing the last couple of years.

Speaker 4

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

Operator

Your next question comes from Noah Kaye with Oppenheimer.

Speaker 5

Good morning. Thanks for taking the questions and thank you for breaking out e Propulsion. Very helpful to get that visibility.

Speaker 6

I guess, would it be fair to say that getting to

Speaker 5

the high end of the revenue guide e Propulsion really depends on production cadence and supply chain. And would that primarily be a function of your own supply chain for electronics and other components? Or

Speaker 2

No, I would say that, yes, it's not demand related. If we get the chips, we will be at 1.8. If we don't get enough chips, we will be at 1.5. So It's essentially linked to the ability to get what we need in order to deliver the demand.

Speaker 5

And your thoughts on line of sight to getting the chips this far in the year?

Speaker 2

Well, that's what I mean, we have teams of people working really hard with our suppliers and so far so good, I would say. But we still have volatility. And as you know, the supply chain is has no buffer whatsoever. So You have a little blip somewhere, then it impacts us and our ability to ship. So That's why you have that band of revenue that is still open from 1.5 to 1.8.

Speaker 5

And then just the last one, I mean, the margin trajectory in eProPulsion, should we potentially similar incrementals moving into 2024. And I think the dynamics here of the gross profit contributions more than offsetting the R and D increases. Is what we're seeing here from 1Q to 4Q kind of a fair

Speaker 3

I think it's a fair way to think about it. I mean, it's what we've been suggesting all along is that as we start to get the Gail and start to see the revenue ramp up. That revenue ramp up drives gross margin and the pace of that growth is outpacing the growth in R and D. You can see the R and D starting to flatten a little bit more relative to that growth. So as we get beyond 'twenty three and into 'twenty four and beyond, we do expect to see that continued improvement in the margin trajectory linked to the continued growth in the e product related revenue.

Speaker 5

Okay. Thanks so much.

Operator

Your next question comes from James Figueroa with BNP Paralysis. Your line is open.

Speaker 1

Hi. Can you hear me?

Speaker 3

Yes. Yes, I can.

Speaker 1

Hi. Good morning, everyone. So the Finu Fin is now targeted by to be completed by the end of the Q3. Any Any thoughts or color on the timing of the CMD and the capital structure potentially

Speaker 3

for Finia?

Speaker 2

Yes, I think nothing has changed really. We're getting more precise. The teams are doing a great job We come back to you when we have even more precision on those dates. But we're marching towards And of the 3rd by the Q3. And it's a lot of work, but people are working really diligently and Just wanted to give you a little bit more precision.

Speaker 3

And so as we get more honed in on a particular date, then we'll be in a position to talk about when those Investor Days might be for both companies. And at that time, we'll also talk about the capital structure of both businesses.

Speaker 1

Got it. And then on the commodities So the net impact now for the year at $65,000,000 headwind. As you think about The top line recovery component of this, right, last year, I believe it was roughly $580,000,000 flowing through your revenue in terms of commodity recovery. What does that number now look like within your revenue guidance?

Speaker 3

On a year over year basis, it contributes about a point to our revenue. So that and net of that recovery, we end up with $65,000,000 of headwind.

Speaker 6

Understood. Okay. Thank you, guys.

Operator

Your next question comes from Emmanuel Rosner with Deutsche Bank.

Speaker 7

Thank you so much. So just to clarify again Inflation headwind. So are you expecting $65,000,000 on a full year basis That's the net number and then $28,000,000 of that happened in the Q1. Is that correct?

Speaker 3

That's correct.

Speaker 7

And the I guess the general drivers of sort of improvement in sort of like total incremental margins From the Q1 to the rest of the year, so you would have a higher proportion of recoveries, I

Speaker 2

guess, on that

Speaker 7

growth Headwind, inflation headwind, what are the drivers would you point to?

Speaker 3

Yes, I mean fundamentally the 2 things that really drive the performance over the balance of the year, one is We do expect to start to generate some of the customer recoveries linked to the inflationary headwind. So the biggest headwind is really in the Q1. But 2nd, we do see sequential improvements in revenues and converting on that over time. I mean, if you look at our Q1 revenue was $4,180,000,000 If If you look at the midpoint of our guide, it suggests that the average quarter for the last three quarters is higher by $260,000,000 of revenue. So there's still revenue growth coming over the balance of the year, particularly driven by the growth in our e product portfolio.

Speaker 3

So converting on that as well as mitigating some of these inflation impacts over the balance of the year are really what drives the conversion and gets us to that 10.0% to 10 point percent margin for the

Speaker 7

full year. And this is tied to the timing of your launches?

Speaker 3

Correct. It's really the ramp up of our e product revenue over the balance of the year and you can really see it in that e Propulsion segment disclosure that we had In the deck, the primary driver of that growth growing from $487,000,000 of revenue in Q1 to $750,000,000 to $850,000,000 in Q4 is e products. And so really capitalizing on that growth It is what we're looking for over the balance of the year.

Speaker 7

Thank you so much. And then following up, not just on the disclosure. So e products Expected to be about 2 thirds of the net segment sales. I guess what else is in e Propulsion?

Speaker 3

Predominantly electronics.

Speaker 7

Understood. Thank you so much.

Operator

Your next question comes from John Murphy with Bank of America.

Speaker 7

Good morning, guys. I just wanted to focus on Slide 13. Kevin, you kind of alluded to that Two thirds of actual electric product will be in this eProportion segment and that kind of sort of indicated there's about $1,300,000,000 in 2023 that's outside of this segment and I presume that's all in drivetrain and battery. If that's correct, are we looking at a similar progression in the profitability in that other 1,300,000,000 Yes. You need to move money right now and it will get to breakeven or better by the end of the year.

Speaker 3

Yes. I mean, I think your $1,300,000,000 is a little Hi, when you're doing the math on that, because we're guiding to overall the $2,500,000,000 to $2,800,000,000 of e product revenue. So when you cut do a of that, it's going to be a little bit less than that number. But where you see the other pockets of e products related revenue are really the battery pack business, which is in the drivetrain And Battery Systems segment, you have a lot of our thermal products, which is in the Air Management segment as well as the charging stations which are in the Air Management segment as well. So that's really where you see the other components of the e product related portfolio.

Speaker 3

In terms of the trajectory, I think it's right to think that what you see on Slide 13 is the right template or way to think about The progression of margin in any one of those e product businesses. They start off by generating losses when they don't have much revenue scale because we're making a lot of investment particularly in R and D and other startup costs. And as we start to get to scale and we start to grow revenue to the point where the revenue growth outpaces the growth in R and D, we start to drive profitability. So when you look at the e product portfolio within e Propulsion, we're already starting to get to that scale point. Some of the other businesses are simply at different points of maturity along the way.

Speaker 3

But as they get to the same levels of maturity as what we see in e Propulsion, We expect the exact same type of trajectory.

Speaker 7

Okay. And then just a follow-up on that. I mean, the midpoint is 2.6. That's 2 thirds of your total e product That would indicate there's another $1,300,000,000 outside. I mean, that's the math.

Speaker 7

I mean, is there something else? I'm just am I misunderstanding something?

Speaker 3

I mean 2.6 divided by 3 gets you about $850,000,000 to $900,000,000 So it's

Speaker 7

Oh, you're saying that's a total. Okay, that's Because the way this is shown is if that's what's in the e Propulsion segment, you're saying that's so you're saying that's the

Speaker 3

full number? The expected net And that said, the $2,500,000,000 to $2,700,000,000 that's the e Propulsion segment revenue, 2 thirds of which

Speaker 7

So basically, we should be thinking about $866,000,000 outside of this segment. Is that correct? Ballpark. Okay. Got it.

Speaker 7

Okay. Just want to make sure we got that right. Then just a second question. When we think about Finian, it sounds like this is going faster than expected. So it sounds like there's good progress.

Speaker 7

How should we think about post separation, potentially stranded costs and opportunities to work those down? Yes.

Speaker 3

I mean, from a cost perspective, we'll talk about that more when we get to The Investor Day that we expect to have closer to the date of the spin. And when you think of the potential dis synergies we see from the transaction, one of them is just as you're alluding to, Some of the incremental costs associated with establishing a corporate cost structure for a new public company, Finia. So we'll give more details on that and the impact Overall, that dissynergy, but as we look at it, the value creation opportunity of creating 2 separate companies both focused on pursuing their independent strategies more than offsets the potential dissynergy associated with setting up the corporate cost structure for Finia.

Speaker 2

John, the affiliate is made of 2 reporting segments that will run under the board of decentralized operating model. So besides The creation of a topco, there is not much stranded costs.

Speaker 7

That's very helpful. Thank you very much, Chris.

Operator

Your next question comes from Adam Jonas with Morgan Stanley.

Speaker 6

Thanks everybody. So for your internal combustion businesses Across Air Management and within drivetrain, given they're in some, let's say, early stage of a runoff phase, I would imagine That the capital requirements for these businesses in a runoff over the next 10 or 20 years may be very different versus the past 10 or 20 years. Can you confirm the CapEx and R and D spends, for example, as a percentage of sales for the ICE focused Products can decline versus history. And can you quantify that?

Speaker 2

Yes, thanks. First, I would say that what we're doing with the plant in Seneca, which is our biggest in North America is a good proxy of what we're doing to you today is the capital and the human capital that we have in our foundational products, Putting Barry back in there. If you look at Eaters and we announced more than 4,000,000 Eaters in 2025, We are using plants in Michigan and Portugal and China. For motors, IDMs, we're using Wuhan and Tianjin In Korea and North America, also in Mexico, we have Power to Evol program where already about 300 engineers have gone through and they are, I would say, now very Up to their task in the world of this. So we are focusing on utilizing both Capital and human capital, when do we also make the transition from C to E?

Speaker 2

From a capital standpoint, R and D standpoint, we think that and Q1 is a good proxy too. ER and D goes CR and D goes down pretty much equally or proportionally. Capital is very, very limited. And what we do when and since Quite some years, combustion businesses are quoted with the amortization of the full capital in the length Of the program with volume closes. So I think we're doing everything that is

Speaker 6

That's great, Fred. Just as a follow-up on your EV Backlog, I would be very interested in your comments on how you see the Chinese based Domestic China EV players growing in your book vis a vis the legacy European, Asian and U. S. EV Products, how is that backlog tilting? Thanks.

Speaker 2

Yes. Just to just give you a high level set So this year we're guiding $2,300,000,000 to $2,600,000,000 of e products and in 2025 about $5,600,000,000 That's 50% CAGR, just to give you a perspective on how fast we're growing in this field. In China, our business is 70% with the local Chinese. It was actually the other way around 5, 6 years ago. But the vast majority of our business is With the Chinese OEMs and out of that 70%, 50% of those are with The big guys, the top Chinese OEMs.

Speaker 6

Hope that helps. It does. Thanks.

Operator

Your next question will come from Dan Levy with Barclays.

Speaker 3

Hi, good morning. Thanks for taking the questions. I wanted to just start on the incremental margins. I appreciate the Why constraints seem to be dissipating and you're coming off of relatively, I'd say, easier comps or This more difficult situation a year ago, is it possible that as the year progresses, ex R and D ex inflation that, that incremental margin goes higher? Yes.

Speaker 3

I think we're pretty comfortable with where the guide is right now. I mean, when you cut through the math and you look at the full year guide, excluding the e product related R and D, We're expecting to be converting at about 16 plus percent year over year and that's inclusive of the $65,000,000 net material inflation headwind. So it suggests without that headwind, we'd be converting even higher. So we're pretty pleased with that level of conversion in spite of the fact that we're seeing material inflation pressures Okay, understood. Thank you.

Speaker 3

And then as a follow-up, I wanted to just ask about Silicon Carbide. Hey, could you just remind us of your inverter backlog, how much of that is silicon carbide This is Hi, GDT. And then, we heard a comment from Tesla at its Investor Day, plans to reduce silicon And just wondering in the future how you're looking at the design of your inverters, whether You think that you can reduce silicon carbide content in general what the direction is on silicon

Speaker 2

I'll start with the second half of your question. On the way we use silicon carbide and if If you do teardowns and analysis, we use silicon carbide with a cooling on both sides. And the more power you can get through silicon carbide is related to how Smart. You cool those chips. And we think that we're Chile more competitive from a power density standpoint, thanks to our thermal management And the cooling on both sides than some of the competitions.

Speaker 2

That's item 1. Item 2, Some people are talking about reduction of usage of zinc and carbide, and we do exactly the same. This is something that we all do and all those things are part of our product roadmap. It doesn't mean that the need for secant carbide is reducing. It is still increasing and we're very happy to have secured the capacity corridor with Wolfspeed in order to deliver on our long range plan.

Speaker 2

The first part of your question was around what's the share of silicon carbide versus silicon on our inverter business. I would say that if you look at the announcement that we've seen, we're more tilted towards high end High voltage silicon carbide, then lower voltage silicon type of products with an average price around $700 a top. So that's what I would say, we're more tilted towards the most advanced inverters in the marketplace.

Speaker 3

And within the context of automakers trying to drive cost down to make EVs more affordable, Is there are you seeing a push from automakers to sort of reduce the silicon carbide content to make the inverters more affordable?

Speaker 2

The puts and takes are a little bit more complex than this and you need to put in take in consideration The power output, the level of battery pack, the range, etcetera, it all depends about I think it all depends upon what the carmaker wants to do, what car type, what end product they want to put in the marketplace. The push for efficiency is such that we don't see a slowdown in the usage of silicon carbide And most of the things that we see in the marketplace is pushing for more efficiency and more efficiency, more range or smaller batteries is Sometimes it links to usage of so you can come back. But overall, you should ask the OEMs that question because strategy that we have that they have is more linked to their system and how they want to put Their differentiation into the marketplace.

Speaker 3

Great. Thank you.

Operator

Your next question comes from Luke Junk with Baird.

Speaker 8

Good morning. Thanks for taking the question. For starters, hoping we could just Unpack what's currently reflecting in your e Propulsion gross margins, they're about 15.5% this quarter, not far off from And what's inherent in the incremental gross profit in terms of a margin assumption as you look through the rest of 'twenty three, especially what you'd gross margins to look like as you ramp volumes and launch new product, e product business, should we expect that margin percentage to move higher as well in addition to just the higher GP dollars?

Speaker 3

Yes. I mean, you should expect the gross margin percentage to be improving. If you cut through the math of what's on that Slide 13, it that there's improvement in gross margin. And one of the main reasons you see that is we're growing into the fixed assets as well because there's depreciation in the gross margin It's not fully up to scale yet. So by the time you get to Q4, you would expect to see an improvement from that 15% level you're calculating.

Speaker 8

And then a follow-up question, just quickly, did you say you're expecting now slightly higher recoveries? Can you just to what's driving that and how that aligns with the remaining price execution this year versus what you've already achieved? Thank you.

Speaker 2

Look, it is obvious that those negotiations take some time like it did last year. We that it's not going to take as much time as last year since we have a pretty robust framework that was used last year to negotiate the inflationary Headwinds and the negotiations are happening. Pretty pleased with the pace It's going. It's just not happening in Q1. It's going to take Q2, maybe early Q3 to get to where we want to be.

Operator

Your last question comes from Mark Delaney with Goldman Sachs.

Speaker 9

Yes. Good morning. Thank you very much for taking questions. First one sticking on the semiconductor side, I was hoping to better understand the flexibility that BorgWarner has as you think about For procurement and supporting your customers, either in terms of having multiple silicon carbide supply sources or Being able to perhaps flex between IGBTs and silicon carbide. And I ask in part because you guys have made public your announcement Wolfspeed, I think a few weeks ago, they talked about a slower ramp up of their Mohawk Valley fab.

Speaker 9

So anything you can help us understand around your ability to perhaps derisk From one supplier.

Speaker 2

Good. Well, thanks for the question. Yes, so the we have full flexibility from a design 10.400 volts, 800 volts silicon, silicon carbide, very modular that is clear. And we are pretty relevant in all those inverter types, full flexibility from a manufacturing standpoint also. Regarding the agreement with Wolfspeed, this is not an exclusive agreement.

Speaker 2

So we can get silicon carbide from other sources and we can also work with Directed source if the OEM wants to us to work with a particular silicon carbide maker. So we feel pretty comfortable about the different level of support and optionalities that we have related to our growth in inverters.

Speaker 9

Very helpful context. My other was just on the design and environment. And you guys have had for a number of quarters some good traction designing in your EV Powertrain Products, given how competitive the EV market is for OEMs in terms of the prices in the market, I'm curious, are you seeing any incremental interest OEMs, turning to BorgWarner for some of your powertrain products, perhaps as a way for them to be more efficient in the near term Using BorgWarner as opposed to maybe trying to do some of their own work in house? Thanks.

Speaker 2

We're very happy with the cadence of discussions that we have, Development advanced development and bookings that we have with a lot of customers around the world and the drumbeat is only increasing. It is absolutely clear that when we produce north of 3,000,000 inverters in 2025 and 2,000,000 to 3,000,000 voters, scale matters and Scale brings competitiveness and scale brings the ability to design and manufacture in a very modular and flexible way. So we're happy with the scale that we've gained pretty rapidly. And what we hear from our customers is that As usual with BorgWarner, our products are at the forefront of efficiency. We're not talking about fuel efficiency, but we're talking about Electrons efficiency and low power losses, and I think we're doing a pretty good job

Remove Ads
Powered by Quartr
Earnings Conference Call
Talphera Q1 2023
00:00 / 00:00
Remove Ads