BorgWarner Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

Key Takeaways

  • Strong Q2 results: Sales of ~$3.7 B with 22% organic growth and a 10.1% adjusted operating margin, while raising full-year revenue guidance to $14.2-14.6 B and EPS to $3.50-3.85.
  • Charging Forward 2027 strategy: Targets $10 B in e-product revenue by 2027 (vs. ~$2.3 B in 2023), aims for e-product breakeven margins this year and 7% adjusted e-product margin by 2027, plus top-quartile margins on foundational products.
  • Eldor acquisition & SC supply deals: Agreed to acquire Eldor’s electric/hybrid unit, expected to add €250 M of 2027 sales and bolster high-voltage power-electronics capabilities, alongside long-term silicon carbide agreements to secure semiconductor supply.
  • New EV component awards: Won contracts with major Chinese and East Asian OEMs for integrated drive modules, e-motors, inverters, and high-voltage coolant heaters, positioning for meaningful 2H23 production ramps.
  • Finisa spin-off completed: Spun off fuel systems and aftermarket segments on July 3, returning ~$450 M cash to BorgWarner and refocusing on continuing operations.
AI Generated. May Contain Errors.
Earnings Conference Call
BorgWarner Q2 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning. My name is Chelsea, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2023 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. Warner.

Speaker 1

Warner

Operator

I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, You may begin your conference.

Speaker 2

Thank you, Chelsea. Good morning, everyone. Thank you for joining us today. We shared our earnings release earlier this morning. It's posted on our website borgwarner.com, on our homepage and on our Investor Relations homepage.

Speaker 2

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 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 ks. Our actual results may differ significantly from the matters discussed today. Following today's presentation, we'll highlight certain non GAAP measures in order to provide a clearer picture of how the core business performed Warner.

Speaker 2

And for comparison purposes with prior periods.

Speaker 3

When you

Speaker 2

hear us say on a comparable basis, that means excluding the impact of FX, net M and 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 and A. We will also refer to our growth compared to our market. Warner.

Speaker 2

Lastly, starting in the Q3 of 2023, BorgWarner will no longer consolidate its fuel Systems and Aftermarket segments. Results of those segments for all periods prior to the Finneas spin off Reflected as Discontinued Operations. Our guidance relates to our continuing operations, and our commentary on today's call will focus on those continuing operations, which includes looking at some results Warner on a pro form a basis to reflect the spin off. We will not answer questions related to the performance of the Fuel Systems and Aftermarket segments. Please direct them to Finia, who will conduct their earnings call on Monday, August 7.

Speaker 2

Please note that we've posted today's Warner 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.

Speaker 4

Thank you, Pat, and good day, everyone. We're very pleased to share our results for the Q2 2023 And provide an overall company update starting on Slide 5. With approximately $3,700,000,000 in sales, We delivered 22 percent organic growth in the quarter. Our margin performance was strong Warner and positively impacted by the growth and by customer pricing. Our free cash flow usage in the quarter Reflecting our planned capital spending to support our e private growth as well as the working capital usage.

Speaker 4

Importantly, our charging forward progress continued on multiple fronts. We received several new product awards since our last earnings report, as well as securing an additional long term component supply agreement. In June, we unveiled challenging forward 2027, which summarize the next steps in our Accelerating E Product Portfolio. We also released our 2023 Sustainability Report, responsibility and governance objectives and outline additional goals for 2023 beyond. We announced the planned acquisition of the electric and hybrid segments of Eldor Corporation.

Speaker 4

And lastly, On July 3, we completed the spin off of Finian. I would like to wish the Finian team good luck as they move forward as an independent company. Now let's turn to Slide 6, summarizing charging forward 2027, success that we had with our initial charging forward strategy that we announced back in March 2021. Moving forward 2027 has 3 pillars. The first pillar is to continue our e products growth.

Speaker 4

We're expecting more than $10,000,000,000 of e product revenue in 2027 compared to an estimated $2,300,000,000 to $2,400,000,000 in 2023 and an estimated $5,600,000,000 in 2025. This $10,000,000,000 target for e product was the size of the overall company in 2019. So this gives you an idea of how purposefully we're moving. 2nd pillar E Products Profitability. We continue to move towards breaking even on those products by the end of this year.

Speaker 4

On the charging forward 2027, we've set a target of 7% adjusted operating margin in 2027 on our way to double digit margin later in the decade. The 3rd pillar Relates to our foundational products that remain after the spin off of Finian. Here, we want to maintain our strong top quartile margins And really maximize the value of those foundational products. These three pillars are simple. They are clear and measurable.

Speaker 4

As in the past, we will update you on our progress over time. On Slide 7, I would like to discuss the planned acquisition of the electric and hybrid segment of Eldor Corporation, which was announced in late June. We believe Eldor's portfolio of high voltage boxes, DCDC converters and onboard charges will be a great complement to Board Warner's e Propulsion portfolio, Particularly as it relates to expanding in high voltage power electronics beyond the inverters. Warner. Relative to our charging forward 2027 targets, we expect the acquisition to generate about €250,000,000 In additional 2027 sales after synergies.

Speaker 4

The acquisition is as much about the portfolio and engineering capabilities as it is about short term projected sales. We expect the El Dor acquisition to augment our existing resources with additional scale, capacity and capabilities with more than 100 engineers, 2 facilities and more than €125,000,000 Warner. R and D investments that have been deployed by Endor over the last 5 years. Warner. We estimate that power electronics outside of inverters is a $31,000,000,000 addressable market by 2,030.

Speaker 4

The onboard charger market is more fragmented and is trending towards high voltage and combination boxes. Until this point, BorgWarner's success in inverters has largely consumed our power electronics engineering resources, and our experienced engineering team will now provide the base for BorgWarner to grow even faster in Onboard Charges and Other Power Electronics. We will build upon the strong base to accelerate our program pursuits. Next on Slide 8. Let's look at the long term agreement that we announced with Alumni during the quarter.

Speaker 4

The resiliency and flexibility of our supply base We become even more important as we rapidly grow our e products portfolio. Based on the growth of our power electronics products. We expect to purchase close to 200,000,000 semiconductor dies Warner. By the same year, our inverter business is expected to be 70% silicon carbide based with almost 50% of our inverters being 800 volts. This really highlights the need to partner with quality semiconductor suppliers.

Speaker 4

Over the last quarters, we've taken several steps to secure The long term supply agreements necessary to support our growth. In late 2022, We announced a significant capacity corridor for silicon carbide supply with more speed. We're now expanding our strategic collaboration for Silicon Carbide with Antenna. As a result, With agreements today, you can see the strong mix of semiconductor suppliers we now have in place to support our strong growth. Now let's look at some new product awards on Slide 9.

Speaker 4

First, Board Warner has been selected by a leading Chinese OEM to supply its IDM for hybrid vehicles, expected to start production in 2024. The provided IDM comprises dual inverter units, Dual E Motors and an E Gear, ensuring reliable durability. We're pleased to continue our collaboration with this leading Chinese OEM, further strengthening the partnership through supplying our IBM product. Next, BorgWarner has been selected by a major East Asian OEM to supply e motor and inverter for the Automaker's new electric vehicle platform. We're very pleased to continue our long standing relationship with this major East Asian OEM.

Speaker 4

And finally, BorgWarner has secured a contract with a Thermal and Energy Management Solutions supplier to deliver high voltage coolantheaters Warner for use on the series of 3 electric vehicle platforms for major OEM. Our heater will be added to the supplier's heating and Warner. And will be used to provide heat to the battery pack and cabin in beds. The takeaways from today are this. Board Warner's 2nd quarter results were strong.

Speaker 4

We delivered strong organic growth Warner. We expect another year of strong top line growth in 2023. Our top line guidance is also increasing modestly based on our industry outlook and customer pricing actions. Looking beyond the near term, we believe we are successfully executing on our long term strategy. Challenging Forward 2027 has now laid out the path forward for BorgWarner for the next 4 years, And we plan to continue to share our successes along this journey.

Speaker 4

And with that, let me turn the call over to Kevin.

Speaker 3

Thank you, Fred, and good morning, everyone. Here are the 2 key takeaways from our 2nd quarter financial results. First, we reported double digit organic revenue growth, driven by higher industry production and outgrowth in Europe and China. 2nd, our margin performance was strong, driven by solid conversion on higher revenue and customer recoveries of material cost inflation Slide 10 for a look at our year over year revenue walk for Q2. O form a for the spin off of Finia, Last year's Q2 revenue was just over $3,000,000,000 You can see that the strengthening U.

Speaker 3

S. Dollar Drove a year over year decrease in revenue of approximately 1% or $33,000,000 Then You can see the increase in our organic revenue about 22% year over year. That compares Warner. Approximately 15% increase in weighted average market production. Finally, the acquisitions of Santrol, Rhombus and SSE added $15,000,000 to revenue year over year.

Speaker 3

The sum of all this was just under $3,700,000,000 of revenue in Q2. Turning to Slide 11, you can see our earnings and cash flow performance for the quarter. Our pro form a second quarter adjusted operating income was $369,000,000 equating to a 10.1% margin. That compares to pro form a adjusted operating income of $258,000,000 or 8.5 percent from a year ago. Warner.

Speaker 3

On a comparable basis, excluding the impact of foreign exchange and the impact of M and A, adjusted operating income increased $126,000,000 on $667,000,000 of higher sales. The biggest positive driver of this performance was that we converted Warner. In addition, our customer recoveries in the 2nd quarter, net of material cost inflation from our suppliers, we're in $11,000,000 tailwind year over year. You'll recall that last quarter, We were incurring supplier cost inflation with very little in the way of customer recoveries to offset that headwind. In Q2, We negotiated a number of settlements with our customers that contemplated recoveries of material cost inflation for both Q2 and Q1.

Speaker 3

Because we essentially under recovered inflation in Q1 and over recovered in Q2, When you think about the jump off for our go forward margin performance, you should really be looking at the total first half performance, Not any individual quarter. For the spin off of Finia, our adjusted EPS improved by $0.31 compared to a year ago, Driven almost entirely by the increase in our adjusted operating income. Turning to free cash flow, excluding one time cost. Our free cash flow was a $42,000,000 usage during the Q2 due to higher capital spending to support our gross and e products And increased working capital related to our sequentially increasing revenue and the customer recoveries that we booked late in the quarter, but have not yet collected. Now let's take a look at our full year outlook on Slide 12.

Speaker 3

1st, as Pat mentioned, our full year guidance now reflects the spin off of Finia and treats the prior period results of those particular Warner segment as discontinued operations, which importantly is not reflected in many of the external estimates within TheStreet consensus. Starting with foreign currencies. Our guidance now assumes an expected full year headwind from weaker currencies of $35,000,000 This is a headwind of $111,000,000 in revenue versus our prior guidance with the Chinese yuan being the largest driver of the change in our outlook. 2nd, we expect organic growth of approximately 13% to 16% year over year compared to our prior guidance of 10% to 15%. The increase is driven predominantly by our higher production outlook, reflecting the stronger first half volumes.

Speaker 3

However, our assumption Warner. Warner. I think to deliver between $2,300,000,000 $2,400,000,000 in 2023, which is up from the approximately $1,500,000,000 we generated in 2020 As you can see, we've adjusted the high end of this outlook versus our prior guidance, primarily related to 2 things. First, we're experiencing a slower than anticipated ramp up in our battery pack production. Demand for our commercial vehicle battery packs is increasing rapidly.

Speaker 3

However, our capacity installation to support that demand has progressed a little more slowly in 2023 than we planned. 2nd, we're currently seeing lower customer volumes on a North American EV program that is already in production. Finally, the Sand Trial, Rhombus and SSC acquisitions are expected to add approximately $75,000,000 to 2023 revenue. Based on these expectations, we're projecting total 2023 revenue In the range of $14,200,000,000 to $14,600,000,000 which compares to our prior guidance of $14,000,000 to $14,600,000,000 Let's switch to margin. We continue to expect our full year adjusted operating margin to be in the range of 9.2% to 9.6%, which compares to our 2022 margin of 9.4%.

Speaker 3

Looking at the net impact of inflationary costs versus customer recoveries, Warner. Our current expectations are that the net year over year impact of material cost inflation on full year margin is likely to be a 10 to 20 basis Point headwind. As it relates to R and D, our full year 2023 guidance continues to anticipate a Warner to $70,000,000 increase in e product related R and D. With our ongoing success securing new electrified business wins, We're continuing to lean forward by investing more in R and D to support our e product portfolio. Excluding the impact of this planned increase in e product related R and D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid teens.

Speaker 3

Based on this revenue and margin outlook, we're expecting full year adjusted EPS from continuing operations in the range of $3.50 to $3.85 per diluted share. Turning to free cash flow, We continue to expect that we'll deliver free cash flow from continuing operations in the range of $400,000,000 to $500,000,000 for full year excluding approximately $150,000,000 in one time cash costs related to the spin off of Finia. That's our 2023 outlook. Turning to Slide 13, you can see an update for our e Propulsion segment. We were pleased with the sequential improvement in 2nd quarter revenue as compared to the Q1.

Speaker 3

The improved margins you see on the slide Benefited from that higher revenue, roughly flat ER and D sequentially and second quarter customer recoveries of first half material Warner. Despite a modestly lower full year revenue outlook for our e Propulsion segment, We continue to expect a slightly positive segment margin in Q4. E Propulsion second half revenue growth It's heavily weighted towards program launches and volume ramp up in the Chinese Warner. Chinese NEV customer base is quite diverse as we supply many of the leading NEV manufacturers in the country. This customer diversity is a critical element of why we believe we'll ultimately be successful in the world of electrification.

Speaker 3

And it doesn't apply only to China. At BorgWarner, we currently have e product business with 7 of the 10 largest global light vehicle manufacturers of electric vehicles and high voltage plug in hybrids. So let me summarize my financial remarks. Overall, our Q2 financial results were strong. We

Speaker 1

Warner.

Speaker 3

Warner adjusted operating margin based on a 19% all in conversion on incremental revenue, and we delivered strong revenue growth year over year and Bottom Line Adjusted EPS. As we look ahead to the second half of twenty twenty three and beyond, we continue Warner. To deliver strong organic growth, to drive improved profitability in our e products as we leverage our top line growth and to continue to make the necessary investments to support the long term profitable growth of our e product portfolio. With that, I'd like to turn the call back over to Pat.

Speaker 2

Y'all see we're ready to open up for questions.

Operator

Warner. Warner Your first question comes from Colin Langan with Wells Fargo.

Speaker 1

Great. Thanks for taking my questions. Any color how should we think why the second half seems to imply based on guidance a bit moderation in margin. I think you're sort of running at 9.6% in the first half and I think to get to the midpoint of guidance, you'd be Warner. More like 9.2 in the second half on which should be slightly higher sales.

Speaker 1

Any factors that are driving that weakness? Are you including some risk from UAW strike

Speaker 3

Warner. Yes, I think you have the numbers right there, Collyn. It's 9.6% in the first half and the midpoint of the guide is about 9.2% in the second half of the year. The biggest things that are happening if you're really looking sequentially like on a first half to second half basis. One is you have to look at the mix of our revenue as we go to the Warner.

Speaker 3

Our e products revenue is ramping up in our guide about $450,000,000 to $550,000,000 first half to second half. And so we're converting on that nicely about 15% on an all in basis, which is good for a business that's really ramping Warner. You would normally expect for start up of production. At the same time, when you look at our revenue, keep in mind, our sequential outlook is that markets are effectively down first half to second half about 6%. And that's not unusual.

Speaker 3

It's just the way that our market assumptions work, Which means that underlying that the rest of our revenue, our foundational revenue is seeing a decline first half to second half and that tends to come with higher decrementals. So when you look at that revenue mix going first half to second half, that's a bit of a drag on the margin that takes it down a bit. There's also a little bit of incremental inflation first half to second half, a little bit of incremental R and D, but that's really the overall picture. The bottom line from our perspective, we're pretty pleased with the fact that we're driving 13% to 16% full year organic growth year over year and sustaining that 9.2% to 9.6% margin outlook.

Speaker 1

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

Speaker 3

We haven't put anything in the guidance. I mean, it's hard for us to sit here and guess with a crystal ball what that might look like. What I can Tell you is just so you can dimension maybe your assessment of the exposure that we have. If we look at our North American exposure To Ford, Stellantis and GM across Mexico and U. S.

Speaker 3

As we supply them. Our production runs about a little less than $250,000,000 a month. So you can look at that however you want in terms of assessing what you think some scenarios might be, but we haven't embedded anything in our guidance as it relates to potential strike.

Speaker 1

Got it. And just lastly, you highlighted some slowing demand for at least In deeper to one of your e products. Obviously, there's some concerns from automakers about EV adoption slowing. And I think at your Investor Day, Warner. Sort of longer term sort of being derisked on the sort of sales versus margin.

Speaker 1

But how should we think about that near term? If EV starts Warner. Slow into already doesn't see the high adoption to next year. Does that put pressure on your overall profitability? How should we think about the puts and takes on sort of

Speaker 4

Warner. So we've adjusted the top line, two main reasons. First is we have issues keeping up with the demand on battery pack and despite a 3 50% year over year increase on our Gen III bet. We need more output. So we have all hands on deck, Especially from a manufacturing engineering perspective.

Speaker 4

And remember, 1,000 buses or trucks is $100,000,000 revenue for BorgWarner. Also, we see the production of the current North American EV output not as high as expected. Those are Warner. The 2 main factors. If your question is around, has it changed our long term outlook?

Speaker 4

Our clear answer is absolutely not. It's not going to be a steady upline, right. It is going to be with Years or quarters going higher and some going not as high and still going to grow, but Don't expect a straight line from a bev or high voltage plug in every growth.

Speaker 1

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

Operator

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

Speaker 5

Good morning, guys. I just wanted to follow-up on that Warner. Fred, as you think about this in the short run, EVs are ramping a little bit slower Than folks were expecting, they're still ramping. So like the long term strategy still makes obviously makes sense. But I mean could this benefit margins Here in the short run is those EVs aren't produced and more ICE vehicles are produced and you're getting better margins there.

Speaker 5

Just curious in the next 1, 2 years if that might drive better cash flow and help reinvest into that transition to the future?

Speaker 4

John, what I can tell you is that we see strong customer pool. We Warner. See a very steady drumbeat on product wins globally. And remember, we're both on dev and On hybrids and especially high voltage plug in hybrids, but I would agree with you. This emphasizes the importance of maintaining strong margin on our foundational business and that's the 3rd pillar of challenging forward 2027.

Speaker 4

So that's what I would tell you.

Speaker 5

Okay. And then just a follow-up on the On Semi announcement. I'm just curious what this means For the Wolfspeed deal, or is this really just dual sourcing that might even go to triple sourcing over Time, is this sort of just standard course? Or is there something specifically you're getting out of On Semi, you wouldn't get out of Wolfspeed? Or does it put the Wolfspeed deal at risk?

Speaker 5

I mean, how should we interpret all of this?

Speaker 4

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

Speaker 5

Okay, great. Thank you very much, guys.

Speaker 4

Thank you, John.

Operator

Your next Question will come from Noah Kaye with Oppenheimer.

Speaker 6

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

Speaker 3

Yes. I mean, What I'd say is, you can see some of the metrics we have as of quarter end, but the one thing that doesn't get reflected in the quarter end numbers When we executed the spin off, there was an inflow of cash to Board Warner. So effectively on July 3 of about $450,000,000 And that was because Finia issued $800,000,000 of debt and then retained about $350,000,000 for its cash balances and remitted the rest back to Board Warner. So when you look at Warner. You can see what the balance sheet looks like and you have to think there's another $450,000,000 out there.

Speaker 3

From our perspective, the way we think about our leverage profile We'll continue to manage that in a way that we drive toward keeping below 2 times on a gross debt to EBITDA basis. And we'll look at whatever actions we might need to take over the coming quarters to get there. But I think overall, what it means is Warner. It doesn't slow down our ability to execute from an M and A perspective opportunistically as we think see it, the opportunities that might be able to help

Speaker 6

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

Speaker 4

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

Speaker 6

Okay. Maybe just one more. You mentioned The pace of battery production ramp, which I mean, again, very high growth, so Not necessarily getting to the full level you expected, but can you help us characterize that? I don't believe Seneca Expansion was factored in that, right? I mean, that's not until next year.

Speaker 6

So what are the gating factors? Is it labor? Is it Process equipment, is it cathode or other materials? Just trying to understand the gating factors on production.

Speaker 4

It is equipment. It is related to manufacturing equipment. It's going to take us about 18 to 24 months to get To the 2027 capacity that is required, we announced about $1,300,000,000 of revenue in battery packs in 2027 And we're working on ramping that up as fast as we can for all our customers, especially in the Western world.

Speaker 6

Very clear. Thanks, Fred.

Speaker 4

Thank you, Mel.

Operator

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

Speaker 7

Thank you very much.

Speaker 5

My first question is on

Speaker 3

the e Propulsion margin progression.

Speaker 5

So good to see the sequential improvement as well as Your confidence in getting to slight positive margins in the Q1. But will that benefit from Timing or recovery in the Q4? Or can we think about it as sort of

Speaker 4

like a solid exit rate on which to build

Speaker 3

Warner. Yes. I mean, the way we're looking at it is achieving that breakeven, actually positive margin at the end of the 4th quarter is a solid jump off into 2024. I mean, you might remember we talked about Warner. Before, if you look at our quarter end Q4 2022, e Propulsion was actually slightly positive, but we know it was on the back largely of Increased recoveries from an R and D perspective.

Speaker 3

And so at that moment, it wasn't really a sustained positive margin profile. As we get to the end of this year and achieve that positive margin profile. It's more because of the scale that we're generating in the business and the conversion on that incremental revenue. So I think it positions us to have a 2024 that's also positive and growing from there. That's very clear.

Speaker 5

And then one follow-up on the small change in the full year guidance. So the organic growth as

Speaker 1

Warner.

Speaker 6

Warner. What kind of sort

Speaker 4

of like some of the puts and takes with demand?

Speaker 3

Yes, I mean, we didn't move the Warner. Upper end of the range. Obviously, we kept the $14,600,000,000 of revenue. So we didn't really move much there. We do have a little bit of incremental conversion coming on the increase at the bottom end of the range.

Speaker 3

But there's not a significant amount of movement to really comment on. So our 9.2 Warner. I mean, if you're looking at it from a pure operating income perspective, you got a little bit of incremental conversion And then you have a little bit of FX headwind that's impacting us as well. Understood. Thank you.

Operator

Your next question will come from Luke Yunck with Baird.

Speaker 8

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

Speaker 4

Look, we're all what we're doing with inverters, with onboard chargers, with DC convert DC DC converters and Also, from a challenging perspective is power conversion. We can convert DC to AC, DC to DC, DC to DC, but at the end of the day, the core is power conversion. So the synergies from An engineering perspective, a purchasing perspective and a product similarity perspective is fairly high.

Speaker 8

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

Speaker 4

Yes, I

Speaker 3

would say what we're really seeing is particularly as you look at that $450,000,000 to $550,000,000 of ramp up going first half to second half in e products. An important piece of that ramp up is really coming in the e Propulsion segment, which is really being driven by product launches and ramp up in China. So we have a healthy mix of e product revenue across the globe, but as we ramp up here in the back half Warner. 2023, China is a big piece of that ramp up.

Speaker 8

Got it. Thank you.

Operator

Your next question will come from Dan Levy with Barclays.

Speaker 3

Hi, good morning. Thank you for taking the questions. I wanted to first Start with a question on your growth dynamics. And I know you have walked away from providing an explicit growth over market Warner target, but the implied number for the year is 9% to 12%. You just did 7% in the second quarter.

Speaker 3

So if

Speaker 5

you could maybe just give us

Speaker 3

a sense of what's Driving acceleration into the back half of the year. It sounds like part of it is the products, but to what extent is it also that you're seeing

Speaker 4

Warner Dan, you're right. At the midpoint, our growth is 1,000 basis points or 10.50 basis points. It's driven by e product. It's a significant driver for this talent growth and actually second half It's even higher than the first half. 2021 was also above 1,000 basis points outgrowth and it's It's difficult to time it.

Speaker 4

Customer pricing plays also a role on a full year basis without any 70 basis points. So This is what I would tell you and e products play a significant role in this and you will see that also

Speaker 3

So just ask the second half. And the foundational business, is that playing any role here or this is purely driven IC product. I mean, the foundational business is continuing to outperform overall as well. But the biggest driver of why the second Warner. So much stronger than the first half, if you do the math of what's underlying outgrowth, it's that $450,000,000 to 5 $50,000,000 increase sequentially first half to second half in e products revenue.

Speaker 3

I mean, keep in mind, we're making that that's what we're expecting When sequentially, if you're looking at it that way, markets are actually down globally during that period, but revenue in e products is up 4.50 to 5.50. So it's a big driver of outgrowth. Okay, great. Thank you. And then as a follow-up relatedly, I was wondering if you could just talk about your hybrid business Warner.

Speaker 3

Within the foundational piece, we heard last week from one of your large Warner. They're taking efforts to accelerate hybrids outside of the plug in hybrid. So maybe you can give us a sense for The latest that you're hearing on hybrids within the foundational piece, how accretive that is to CPV? How accretive is margins? And maybe if you could just frame within foundational how large it is today?

Speaker 4

I don't think we've disclosed that. But yes, you what we've disclosed is $1,300,000,000 of hybrid in 2025 on the e side. And on the foundational side, that would come on top. Most of the next generation or current generation high voltage Plug in hybrids that make a difference from meeting the regulatory environment, especially in Europe and in China, Do carry turbos, do carry EGR and other products that we're making. So It is an important part and we've always told you that the products that we retain play a key role into the mode of hybrids, especially high voltage plug in hybrids, which are part of the NAV environment in China Also.

Speaker 3

In the extended range EVs, is that somewhere where you play, Meaning

Speaker 4

the non plug ins? We play in all kinds of hybrids. We play more in high voltage plug in hybrids, which are Making a bigger difference from a fuel efficiency overall fuel efficiency standpoint. But we do play into What we can call range extenders, whatever you call those types of powertrain.

Speaker 3

Thank you.

Operator

And your next question will come from Rod Lache with Wolfe Research.

Speaker 7

Good morning, everybody. Good morning. I wanted to ask maybe just 2 strategic questions. One is, A week ago, we saw a platform sharing agreement between Volkswagen and Xiaoping. I know that Xiaoping is a significant customer of yours.

Speaker 7

Stellantis on their earnings call also talked about countering the Chinese invasion of Europe with better utilization of low cost countries sourcing. I was hoping you might just if it's relevant, just talk about whether this is significant For BorgWarner, whether you see this as a global or a local phenomenon, just the utilization of these Chinese lower cost Chinese platforms, whether that actually has implications for you.

Speaker 4

Rob, one of the key element of the strategy was to Scale up fast and I think we've done

Speaker 6

a pretty good job there.

Speaker 4

And we've done a pretty good job in China. You can see we're producing e products for the BYD, the Changan, the Cherries, Expand the Li Auto, the Great Wall, etcetera, this world. And this We also begin North America and Europe, and I'm not going to comment more. But this thing It's going to be, I think, beneficial for suppliers that have technology and scale, which I believe we are part of.

Speaker 7

So just to clarify that, Fred, these kinds of platform sharing agreements, Does that represent an expansion of your existing business or is it does it have no Warner. And is it kind of a global thing or is this more of a China local thing?

Speaker 4

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

Speaker 7

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

Speaker 4

Warner. Brad, I'm not going to comment on this topic.

Operator

Question will come from James Picariello with BNP Paribas.

Speaker 9

Hi, guys. Can you just confirm what the net commodities impact was in the quarter and what you're now baking into the full year? And then also with respect to the new slate of restructuring efforts that you outlined at the Analyst Day targeting Warner. $60,000,000 to $70,000,000 in savings by 2025, tied to your ICE operations. Is there anything hitting in the second half here?

Speaker 9

Thanks.

Speaker 3

Yes. With respect to the commodities impacting in Q2, net when you take pricing minus The net material inflation costs coming from the suppliers, it was a net positive of about $11,000,000 in the quarter. And remember that's because In Q2, we were recovering for Q1 as well because we had very little in the way of recoveries in Q1. So that's why it was a net positive number in Q2. And overall, the pricing element of that in Q2 was a little bit north of 2.5% of our revenue.

Speaker 3

Warner. Obviously, had a meaningful impact on the quarter and contributed about 10 basis points to margin when you cut through that math. When you look on a full year basis, Warner. We expect pricing, the pricing side of the equation to be somewhere between 1.5 to 2 points of pricing all in year over year. And we expect the net impact on our P and L to be a 10 to 20 basis point headwind all in year over year.

Speaker 3

So that's the way to think about net material inflation cost impacts for us. In terms of the restructuring, There's nothing unusual as you look in the back half of the year. We're progressing along the trajectory of what we laid out in the June Investor Day and generating some of the savings each Warner. This year associated with what we laid out on that slide.

Speaker 9

Got it. And then just a high level question. If automakers begin to Slow down their EV ambitions in some fashion over the coming years, whether it's demand related or production constrained. I don't imagine BorgWarner is seeing any change in OEM intentions as of now. But if this does play out, would the simple response be for the company to flex Warner.

Speaker 9

Could this entail complexities and inefficiencies down the road for Board Warner? Just curious on your high level thoughts

Speaker 4

Warner. James, the first thing I would tell you is that we play Warner. You've seen the impact that we have in China, in Europe and North America. So we look at the acceleration of EV And electrification overall on the global scale. And on the global scale, we see momentum.

Speaker 4

Again, If you think this is going to be a straight line, I think it's a wrong assumption, and we're ready to flex. We're also ready To maintain strong margin on our foundational business, which is absolutely part of One of the 3 simple pillars of charging forward and this is going to be important in our life.

Speaker 3

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

Speaker 2

With that, I'd like to thank you all for your great questions today. If you have any follow ups, feel free to reach out to me or my team. With that, Chelsea, you can go ahead and conclude today's call.

Operator

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

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