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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. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Fréd, and good morning, everyone. Here are the two key takeaways from our second quarter financial results. First, we reported double-digit organic revenue growth driven by higher industry production and outgrowth in Europe and China. Second, our margin performance was strong, driven by solid conversion on higher revenue and customer recoveries of material cost inflation more than offsetting higher input costs coming from our suppliers. Let's turn to Slide 10 for a look at our year-over-year revenue walk for Q2. Pro forma for the spin-off of PHINIA last year's Q2 revenue was just over $3 billion. You can see that the strengthening U.S. dollar drove a year-over-year decrease in revenue of approximately 1% or $33 million. Then you can see the increase in our organic revenue about 22% year-over-year. That compares to an approximately 15% increase in weighted average market production. Finally, the acquisitions of Santroll, Rhombus and SSE added $18 million to revenue year-over-year. The sum of all this was just under $3.7 billion of revenue in Q2. Turning to Slide 11. You can see our earnings and cash flow performance for the quarter. Our pro forma second quarter adjusted operating income was $369 million equating to a 10.1% margin. That compares to pro forma adjusted operating income of $258 million or 8.5% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of M&A, adjusted operating income increased $126 million on $667 million of higher sales. The biggest positive driver of this performance was that we converted approximately 18% on our additional sales. In addition, our customer recoveries in the second quarter, net of material cost inflation from our suppliers were an $11 million tailwind year-over-year. You'll recall that last quarter, we were incurring supplier cost inflation was 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. 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. Pro forma for the spin-off of PHINIA, 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 onetime costs, our free cash flow was a $42 million usage during the second quarter due to higher capital spending to support our growth in eProducts, 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. First, as Pat mentioned, our full year guidance now reflects the spin-off of PHINIA and treats the prior period results of those particular segments as discontinued operations, which importantly is not reflected in many of the external estimates within the Street consensus. Starting with foreign currencies. Our guidance now assumes an expected full year headwind from weaker currencies of $35 million. This is a headwind of $111 million in revenue versus our prior guidance with the Chinese yuan being the largest driver of the change in our outlook. Second, 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. However, our assumption for inflation cost recoveries from our customers has also increased modestly. As it relates to eProduct revenue, we're expecting to deliver between $2.3 billion and $2.4 billion in 2023, which is up from the approximately $1.5 billion we generated in 2022. As you can see, we've adjusted the high end of this outlook versus our prior guidance primarily related to two 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. However, our capacity installation to support that demand has progressed a little more slowly in 2023 than we planned. Second, we're currently seeing lower customer volumes on a North American EV program that is already in production. Finally, the Santroll, Rhombus and SSE acquisitions are expected to add approximately $75 million to 2023 revenue. Based on these expectations, we're projecting total 2023 revenue in the range of $14.2 billion to $14.6 billion, which compares to our prior guidance of $14.0 billion to $14.6 billion. 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%. Looking at the net impact of inflationary cost versus customer recoveries, 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 basis point to 20 basis point headwind. As it relates to R&D, our full year 2023 guidance continues to anticipate a $60 million to $70 million increase in eProduct-related R&D. With our ongoing success securing new electrified business wins, we're continuing to lean forward by investing more in R&D to support our eProduct portfolio. Excluding the impact of this planned increase in eProduct related R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid-teens. 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 million to $500 million for the full year, excluding approximately $150 million in onetime cash costs related to the spin-off of PHINIA. That's our 2023 outlook. Turning to Slide 13. You can see an update for our ePropulsion segment. We were pleased with the sequential improvement in second quarter revenue as compared to the first quarter. The improved margins you see on the slide benefited from that higher revenue, roughly flat eR&D sequentially and second quarter customer recovery of first half material cost inflation from suppliers. Despite a modestly lower full year revenue outlook for our ePropulsion segment, we continue to expect a slightly positive segment margin in Q4. ePropulsion second half revenue growth is heavily weighted towards program launches and volume ramp up in the Chinese NEV market. As you can see on the right side of the slide, our 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 will ultimately be successful in the world of electrification and it doesn't apply only to China. At BorgWarner, we currently have eProduct business with seven 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 second quarter financial results were strong. We achieved organic growth of approximately 22% year-over-year. We generated 10.1% 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 2023 and beyond, we continue to expect to deliver strong organic growth to drive improved profitability in our eProducts as we leverage our top line growth, and to continue to make the necessary investments to support the long-term profitable growth of our eProduct portfolio. With that, I'd like to turn the call back over to Pat.

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

[Operator Instructions] Your first question comes from Colin Langan with Wells Fargo.

Any color how should we think -- what does the second half seems to imply based on guidance a bit of moderation in margin? I think you're sort of running at 9.6% in the first half. And think to get to the midpoint of guidance should be more like 9.2% in the second half on which should be slightly higher sales. Any factors that are driving that weakness? Are you including some risk from the UAW strike in second half? Any color there?

Yes. I think you have the numbers right there, Colin. 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 this half of the year. Our eProducts revenue is ramping up in our guide about $450 million to $550 million 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 up and incurring the costs that you normally expect for a 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. 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&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.

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

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. as we supply them. Our production runs about a little less than $250 million 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 strikes.

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

Your next question will come from Noah Kaye with Oppenheimer.

I appreciate all the reconciliation details for the PHINIA spin. Can you just update us on where net leverage actually sits post-spin and how much dry powder you have in your view for M&A?

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 is that when we executed the spin-off there was an inflow of cash to BorgWarner, so effectively on July 3 of about $450 million. And that was because PHINIA issued $800 million of debt and then retained about $350 million for its cash balances and remitted to the rest back to BorgWarner. So when you look at our balance sheet, you can see what the balance sheet looks like, and you have to think there's another $450 million out there. From our perspective, the way we think about our leverage profile is we'll continue to manage that in a way that we drive toward keeping below 2x 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 it doesn't slow down our ability to execute from an M&A perspective opportunistically as we think see the opportunities that might be able to help strengthen our product leadership position in electrification.

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

My first question is on the ePropulsion margin progression. It's good to see the sequential improvement as well as you've got confidence in getting to slight positive margins in the first quarter. But will that benefit either from timing or recovery in the fourth quarter? Or can we think about it as sort of like solid exit rate on which to build further progress in 2024.

Yes. I mean the way we're looking at it is achieving that breakeven actually positive margin at the end of the fourth quarter is a solid jump off into 2024. I mean you might remember, we talked about it before. If you look at our quarter end Q4 2022, ePropulsion was actually slightly positive. But we know it was on the back largely of increased recoveries from an R&D perspective. 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. And then 1 follow-up on the small change in the full year guidance. So the organic growth as outlook is somewhat better, thanks to better production. But then you left your operating margin range essentially unchanged. What are sort of like some of the puts and takes in that?

Yes. I mean we didn't move the upper end of the range. Obviously, we kept the $14.6 billion 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. But there's not a significant amount of movement to really comment on. So our 9.2% margin at the bottom end of the range held. 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.

Your next question will come from Luke Junk with Baird.

Okay. And then for my follow-up, just wondering if you've commented or could comment on what the geographic mix of eProduct revenue looks like sitting here in 2023, I guess, I'm thinking of the downside risk, say, customer delays in North America, which showed up in the revision 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 eProduct?

Yes. I would say what we're really seeing is, particularly as you look at that $450 million to $550 million of ramp-up going first half to second half in eProducts, an important piece of that ramp-up is really coming in the ePropulsion segment, which is really being driven by product launches and ramp up in China. So we have a healthy mix of product revenue across the globe. But as we ramp up here in the back half of 2023, China is a big piece of that ramp-up.

Your next question will come from Dan Levy with Barclays.

And the foundational business, is that playing any role here? Or this is purely driven by eProduct?

I mean the foundational business is continuing to outperform overall as well. But the biggest driver of why the second half is so much stronger than the first half, if you do the math of what's underlying outgrowth, it's that $450 million to $550 million increase sequentially first half to second half and eProducts revenue. 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 eProducts is up $450 million to $550 million. So it's a big driver of outgrowth.

[Operator Instructions] And your next question will come from Rod Lache with Wolfe Research.

Our last question will come from James Picariello with BNP Paribas.

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

Yes. With respect to the commodities impact 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 million 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 revenues. So 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, we expect pricing -- the pricing side of the equation to be somewhere between 1.5 points to 2 points of pricing all in year-over-year. And we expect the net impact on our P&L to be a 10 basis point to 20 basis point headwind in all in year-over-year. 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 quarter this year associated with what we laid out on that slide

And maybe the last thing I would add to that, James, it'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-markets growing 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 and drives operating income performance that we think is relatively comparable under lots of different outcomes like that. So that's why the portfolio is constructed the way it is.

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.