This is Patrick Nolan. I apologize about the technical difficulties we've had this morning, but we're in a kickoff today's call. So we have issued our press release earlier this morning. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations home page.

Before we begin, I to inform in joining this call, we may make forward-looking statements which involves risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today.

During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior period. When you hear us say on a comparable basis, that is excluding the impact of FX, net M&A and other noncomparable items.

And here say adjusted that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We also refer to our growth compared to on market. when he say market, that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure.

Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred..

Thank you, Pat, and good morning, everyone. I have a bit of an allergic reaction this morning impacting my speech. So Kevin will cover the prepared remarks. I'll stay with you and answer the questions.

Kevin?.

the improvement in operating income, the timing of collection of a meaningful amount of inflationary price recoveries from our customers and the nonrecurrence of a onetime $130 million warranty payment to a customer last year. Let's now turn to Slide 12, where you can see our perspective on global industry production for 2023.

When you look at this slide, you can see that our market assumptions continue to contemplate the types of macro uncertainty we've been experiencing over the last few years. With that background in mind, we expect our global weighted light and commercial vehicle markets to be flat to up 3% this year.

Looking at this by region, we're planning for our weighted North American markets to be up about 2% to 5%. In Europe, we expect our blended market to be up 1% to down 2% year-over-year. And in China, we expect the overall market to be roughly flat to up 3%. Now let's take a look at our full year outlook on Slide 13.

First, it's important to note that our guidance assumes an expected full year headwind from weaker foreign currencies of $285 million. Second, 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.

But more important than that slight growth in end markets, we expect our revenue to continue to grow well in excess of industry production driven by new business launches and higher electric vehicle revenue.

In fact, in 2023, we're expecting to deliver between $1.5 billion and $1.8 billion in EV revenue which is up significantly from the $870 million we generated in 2022. Finally, the Santroll and Rhombus acquisitions are expected to add approximately $35 million to 2023 revenue.

Based on these assumptions, we're projecting total 2023 revenue in the range of $16.7 billion to $17.5 billion, which equates to organic growth of approximately 7% to 12%. Switching to margin. We expect our full year adjusted operating margin to be in the range of 10.0% to 10.4% compared to our 2022 margin of 10.1%.

We do expect some variation in the margin level across the quarters in 2023. Specifically, we believe that Q1 is likely to be the weakest reported margin during the year. as we work with our customers and suppliers on finalizing the extent to which inflationary pricing actions negotiated in 2022 carry over into 2023.

In the end, our current expectations are that the year-over-year impact of inflationary pressures on full year margins is likely to be negligible. However, we could see some negative impact in Q1. As it relates to R&D, our full year 2023 guidance anticipates a $60 million to $70 million increase in e products-related R&D investment.

With our continued success securing new electrified business wins, we're continuing to lean forward and invest more in R&D to support our eProducts portfolio. But importantly, as you see on the slide, the year-over-year increase in 2023 is expected to be lower than the year-over-year increase in 2022.

Excluding the impact of this increase in eProducts related to R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid-teens, which we view as a solid conversion given the amount of product launches and ramp-ups occurring this year.

Based on this revenue and margin outlook, we're expecting full year adjusted EPS of $4.50 to $5 per diluted share. This EPS guidance contemplates two slight headwinds relative to 2022. First, we expect an effective tax rate of approximately 25%, up a couple of percentage points relative to last year.

However, that rate remains far lower than what we've experienced in recent years, and we think it's a rate that's likely to be sustainable on a go-forward basis. Second, our EPS guidance assumes a $0.13 per share negative impact coming from higher net pension expense as a result of higher discount rates. Turning to free cash flow.

We expect it will deliver free cash flow in the range of $550 million to $650 million for the full year.

This cash flow outlook includes a onetime cash cost of approximately $150 million related to the intended spin-off of our Fuel Systems and Aftermarket businesses, arising from outside adviser fees, cash tax payments to facilitate the separation and IT costs to create a stand-alone IT environment for NewCo.

Excluding these onetime costs, our cash flow guidance would be $700 million to $800 million which is only slightly lower than the record free cash flow of $846 million we generated in 2022. That's our 2023 outlook. So let me summarize this morning's remarks.

Overall, we delivered strong performance in 2022 despite a volatile end market environment and significant inflation headwinds. In the face of this environment, we outgrew the market significantly.

We maintained our adjusted operating margins above 10% by delivering incremental margins on our higher sales and successfully completing commercial negotiations with our customers. while also investing $150 million more in R&D to support the future growth of our e-business. And finally, we delivered a record year of free cash flow.

As we continue to successfully manage the present, we were also continuing to successfully deliver on the future by making significant progress on our charging forward plan.

Now as we look ahead to 2023, we'll be keenly focused on continuing to manage the present by sustaining strong high single-digit revenue outperformance compared to industry volumes and driving conversion on this revenue growth, successfully executing the intended spin-off of our Fuel Systems and Aftermarket businesses, and continuing to make disciplined investments, both organic and inorganic, that will help secure our growth and financial strength long into the future.

With that, I'd like to turn the call back over to Pat..

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

[Operator Instructions] And we'll take our first question from Colin Langan with Wells Fargo. Your line is open..

Just a little follow-up on the comments on inflationary costs. I think you said the guidance implies a negligible impact. I mean so far, it seems like other suppliers have kind of guided to pretty large headwinds. And particularly around labor.

Any color on the underlying growth impact that you're expecting that you'll need to get price concessions to offset? And any color why you're not seeing as big of a factor are the suppliers is just the business structure or some other benefits?.

Yes. I think our expectation right now is that we're going to continue to manage inflationary levels at the way we exited 2022. So to the extent that we continue to see elevated levels of inflation from the supply base, we would expect to continue to maintain the pricing in place with our customers on a go-forward basis to mitigate that.

So that's really what's underlying the guidance..

And based on your comments, it sounds like you're really just renegotiating what you've gotten last year? Or are you seeing more increases in the [indiscernible] these costs this year too or no?.

I think we're expecting that we're going to enter the year and the focus of the negotiations last year was really about how we are 2022, and then we essentially align with the customer base that we would look ahead to 2023 as we were entering the new year and see what types of pricing levels were appropriate to continue to mitigate those impacts.

And so as you can imagine, we'll have those discussions here as we enter the new year about the pricing and cost environment..

Got it. And your outlook based on your market guidance, it looks like it's about 8% over market. And I believe you used to historically talk about more 4% to 5%.

So what's driving the strong growth over market this year? Is that sustainable? How should we think about it going forward?.

Yes, Colin, the outgrowth next year is -- you're right around midpoint of 8%, and we're very proud of that. About 2/3 of it is be products and other products for plug-in hybrids. So next year, we'll be between $1.5 billion to $1.8 billion of fuel BEV revenue which is approaching 10% of our revenue. I'm very proud about this acceleration..

And is there anything onetime in nature in the growth for this year?.

Not at all. This confirms that we are on track, marching towards our target of $4.5 billion of fuel BEV revenue in 2025. And you see a 2x increase this year versus prior year, and that's pretty much part of the plan..

We'll take our next question from Emmanuel Rosner with Deutsche Bank..

I was hoping you could give us a little bit more color around the year-over-year walk and puts and takes in terms of your margin outlook. And as you mentioned yourself, the at midpoint, it's basically just slightly better than flat sort of like operating margin despite what seems to be incredibly strong organic growth and I guess growth overall.

I understand the R&D, so that going up a bit, but anything else going on? And then can you just maybe talk about R&D overall? Like are you offsetting some of that R&D increase by cutting back on R&D? Or is that sort of like how much the full R&D will be going up by?.

Yes. The walk going from 2022 to 2023 is fairly simple. It's really -- as we look at that organic net sales change, we're converting on that effectively in the mid-teens, call it in that 15%, 16% range.

But then we're also investing incrementally in eProducts-related R&D of about $60 million to $70 million on a year-over-year basis, which is what brings the overall conversion down and shows only then a slight improvement in our margin profile on a year-over-year basis.

But we're pretty pleased with that mid-teens conversion given that the bulk of the revenue growth we're seeing in 2023 is really related to product launches and ramp up, not recovery in end markets. And so with some of the start-up costs you see there, we're pretty pleased with that performance.

Fred, do you want to comment on the R&D?.

R&D side, as Kevin mentioned, we expect to be up again this year year-over-year. We're also looking at a lot of R&D efficiency on the combustion side.

And I think we expect that long -- midterm the R&D is going to stay between 5% and 5.5% of revenue, working in not constraining the growth but also making sure that we're doing the right thing on the foundation and products..

Okay. And then following up on this then. So is this year within this range as well the total R&D 5% to 5.5%.

And I guess in the past, you've sort of spoken about the tail end of 2023 is sort of like being this turning point where sort of like your EV business is essentially breakeven or getting profitable is fully loaded as you have enough revenue scale to sort of like match the size of this R&D.

Is that still the case? Or will these additional investment, does that push out the time line a bit?.

A couple of things on the on the question about R&D, they were really only guiding at the moment to the eProducts-elated R&D, which we are seeing an increase in investment that we're choosing to make of $60 million to $70 million.

the overall R&D budget, I'll say, the foundational R&D is just being managed in totality with the way that we manage the profitability of those foundational businesses. As it relates to EV, the trajectory of profitability.

As you see the growth that we're generating this year and the incremental margin that we're generating on that revenue growth this year, 2/3 of which comes from our eProduct portfolio you can see that the growth in contribution margin is effectively outpacing the growth in the eProducts related to R&D, which means that 2023, we are seeing improving profitability coming from that portfolio in totality, and continue to believe that we're on track that as we exit 23 and added to the beginning of '24, that portfolio is approaching breakeven..

And our next question will come from James Picariello with BNP Paribas..

Good morning, everyone. Just back to the growth over market, I thought in 2022, there was almost like a 4-point benefit from commodity recovery bedded within your revenue growth.

So I do just want to clarify that the 2023 high single-digit 8 points of outgrowth, that, that does not include any ongoing commodity recovery, cost recovery type benefit?.

That's correct. I mean pricing is not a net tailwind in that -- effectively that organic growth number as you look at the 2023 guide..

Okay. Understood. And then just back to the EV profitability time frame. Any -- given the $60 million to $70 million R&D step-up, I think previously, you guys have talked about maybe late '23, early '24 in terms of achieving breakeven for the business.

What does that time frame look like now given better visibility on the R&D commitments you have?.

I think as I was just mentioning to Emmanuel, it's essentially unchanged. I mean we think last year and heading into the beginning of this year was really the inflection point of the business from an electrification standpoint. We leaned forward pretty significantly last year with a $150-plus million step-up in eProducts related to R&D.

And now as we head into 2023 and you're seeing all that EV-related revenue growth coming through and the contribution coming on that revenue growth that contribution margin growth this year is outpacing the growth in eProducts R&D and continues to put us on pace, as I mentioned, to Emmanuel for us to be approaching breakeven as we exit '23 and enter the beginning of 2024..

Got it. And just any clarity on what the SpinCo's targeted net leverage could be? I know you've previously communicated a lot have a healthy cap structure. Just curious if there's a finer point on that..

I'm not going to provide any more color on that at this point. And we're still on target to execute the spin in late 2023.

And as we approach the spin-off date, get closer to that, you should expect that both companies are going to hold investor days, at which point in time we'll provide more clarity around the financial outlook and capital structures of both businesses.

But the overall concept is as it relates to both NewCo and BorgWarner on a go-forward basis that we're going to continue to maintain moderate levels of leverage in a way that supports the ability of both companies to execute their respective strategies..

And your next question comes from Rod Lache with Wolfe Research..

Good morning, everybody. Fred, you feel better. Kevin, I think I have a few questions for you.

First of all, is it correct that already a significant amount of additional inflation 2023, but you are not assuming any real recovery in terms of incremental pricing on that? And that if you do achieve incremental recovery, that would actually be accretive to your revenue forecast and your earnings forecast.

Am I understanding that right?.

I think -- I mean, the way to think about it, we exited 2022 at a level of pricing from the supply base and pricing with the customers that we think is likely going to continue at or around that level heading into 2023. And that's effectively what's underlying the guide..

Okay. So in other words, you already had this from the beginning of the year.

There's no like spillover effect from negotiations that you had benefited from over the course of the year or in the middle of the year last year?.

I think the spillover effect is what I mentioned with respect to my comments about the potential volatility in margins in Q1, as we exited -- as we negotiated with our customers in 2022, the focus was really on how we make sure that we're recovering a fair share of the inflationary impacts we were seeing in 2022.

And as we head into 2023, we would discuss with our customers and our suppliers, the extent to which some of those pricing increases need to continue to offset the inflationary environment. And so we could see a little bit of choppiness in Q1 as we go through some of those discussions.

But overall, our outlook for the full year is that we don't expect to see a material impact from the net pricing environment on a year-over-year basis relative to '22..

Understood. Can you maybe clarify what the magnitude of the inflationary burden is for you that is already embedded in your numbers and you're seemingly offsetting in part through additional productivity.

Is it correct that the scope of that inflationary burden is beyond parts and materials like it's extending to things like energy, labor and other factors at this point?.

Yes. That's fair to say, Rod. I mean, what we've disclosed to date is that the biggest impact we see is really on the material cost inflation side and the net impact on our P&L on material costs from last year, the cost net of recoveries from customers was about $90 million of headwind.

But obviously, we have other productivity issues that we're managing through from a labor, freight and other things..

And our next question comes from John Murphy with Bank of America..

I just wanted to follow up on something you had in your other investment banks outside of the response you showed here. I mean, it shows like the content per vehicle opportunity all on EVs through 2025 and what you've developed through your acquisitions. But I'm just curious, as we're looking at a big chunk of the business still being ICE.

Just curious if you had a view of how you think about the content provision on an ICE vehicle developing through 2025 and 2030 in million similar ways as you showed the EV content per vehicle?.

Yes. I would say if you look at 23, the ICE products, whether in pure combustion powertrain or in hybrid powertrain or our positive contributor to the outgrowth. So we see still a lot of pull from the market for our energy-efficient ICE types of products..

Okay. And also, I mean it looks like in the slides, you're kind of indicating the breakeven on an operating basis and EV's occurring sometime between '23 and '24, roughly just in the slide that you showed.

When do you think that the returns on that business start to become -- return on invested capital starts to become sort of adequate? is it looks like it's '24, '25, '26 that you kind of highlighting the margins might get closer to "normal".

I mean when do you think the return on invested capital is sort of an adequate level for you?.

So John, maybe I start and turn it over to Kevin. The EV products that we are booking announcing are going through the same ROIC threshold at appropriation request processes than any other products. And so the ROIC program by program use there. There's no doubt about that. Not from a timing standpoint, I'd turn it over to Kevin….

No. I think that's the key point.

We price all of these programs so that on a stand-alone basis, they're profitable, as we've mentioned in the past, that what makes the e-business a little bit different than some of our other businesses, our foundational businesses today is that to drive the revenue growth in these product categories, we have to invest a lot in upfront, eProducts-related R&D.

And so that provides an overhang to the in-year margins any given year. And you see that this year, even in our '23 guide. We have good levels of conversion that we're pretty happy with. But we're continuing to invest another $60 million to $70 million to support new business wins 3, 4 and 5 years out.

And so as long as we continue to see the prospects for growth in this business, we're going to continue to invest in the eProducts related to R&D to make sure that we have long-term viable business here.

And again, as long as those programs are all individually meeting our ROIC targets on a stand-alone basis, we're very happy to continue to invest in that R&D..

And maybe just lastly, I mean to kind of put this all together, I mean, it looks like the margins on the ICE business in '23 will be 12% to 13%, maybe even there as we think about the aggregate margins being in the 10% range, do you think we're at a point where those ICE margins may improve even a bit over time and that this transition is kind of hitting sort of a low point on margins and returns in '23? Or do you think that's still in front of us? Because I mean, you match part that we show on the EV business getting a breakeven sometime between '23 and '24 roughly, kind of indicates that we may be hitting the low point and that as we get through '24, things may actually sort of on an average basis far to improve.

I know we're kind of looking far out, but people are just trying to really understand what this transition between EV to return?.

John, our product leadership and scale in the foundational product is very, very strong. And I would say the margin will remain top quartile and strong as you've seen in the past.

Also, don't forget that the foundational products that we have an impact on our EV growth and one of the announcements that we made this morning around the battery cooling plates is a great example of that. We're leveraging product foundational know-how with cooler applications in the world of combustion.

We are leveraging processes, know-how around brazing around leakage control from our proving technology into the battery cooling plate. So this is a great example of losing foundational know-how to create a new organically developed product for the EV world..

Okay. But, is it fair to say, I mean, given the volatility that's going into the markets right now and this transition and just kind of being the last year where you might be using money based on what you're showing on an operating basis that we may be looking at a sort of a point in time or '23.

I know it's hard to say, but just in the transition conceptually may mark one of the -- it may mark a low water mark in margins that's going through this transition all else equal?.

John, we are approaching breakeven. Is it end of '23? Is it beginning '24? I mean it's tough to say. But it is absolutely clear that now the turning point both from a revenue and a path to breakeven, that's absolutely pretty visible..

[Operator Instructions] And we'll take our next question from Luke Junk with Baird..

Fred or Kevin, it'd be great to just get your perspective on what you're seeing industry-wide in terms of the push and pull between 400-volt and 800-volt architectures.

Do you think the consensus, if you will, is moving more towards 800-volt? And just curious with what happened with the customer award that you mentioned today? Does that animate this industry-wide dynamic at all?.

Look, the two voltages will leave and have a space in the market. 800 volts leads to a few efficiency improvements, but also comes with additional features and cost and we believe that depending on the end application, the vehicle type and the price point that OE wants to set the vehicle and both technologies will remain active.

And what we're doing at BorgWarner is really focusing on the module design of those inverters so that we have building blocks depending on level of voltages or silicon, silicon carbide level of output necessary so that we are using a modular approach that will be pretty agnostic to the voltages..

Good. Appreciate that.

And then for my follow-up, I was just hoping you could comment on the Wolfspeed partnership that you announced in November, specifically around your ability compete incrementally and ensure supply for and after that partnership? And most importantly, to what extent you think your supply chain position now could be advantaged versus peers in silicon carbide?.

So very, I think with the fact that we've secured a corridor of supply that is pretty significant and can meet our expectations going forward and our fast growth, 2 points.

One, this supply agreement is not exclusive meaning we can work with other silicon carbide supplier should we want, but also if our OEM want us to work with other silicon carbide suppliers, the door is absolutely open, too.

So I think we secured a significant capacity corridor, but we also have the ability to be flexible to decide who we work with down the road..

And our next question will come from Adam Jonas with Morgan Stanley..

Fred, I hope you're feeling better. Buddy, I hope you feel better. I noticed on Slide 8, the cooling plates is kind of so beautifully nesting that 4680 cylindrical cell.

I'm curious what you're thinking about pouch and prismatic versus cylindrical because it seems like given some reports around GM, maybe not doing their fourth plan or possibly changing form factor and Tesla ramping up 4680 and getting others to make it that, that might be -- become more of an industry standard, even though there's still a lot of form factors? I was curious whether you're witnessing a bit of a gravitational shift or momentum, not just from Tesla to 4680, but others as well.

Is that possibly what's going on? Because I thought that the argument was pouch and prismatic was more energy dense but are some of your products like your cooling plate able to get around that with the cylinders and get the better energy density with the cylinder and versus pouch?.

Yes. So first, what I would say that, first, in the commercial vehicle side, where we are really active from a battery pack manufacturer standpoint, we see cylindrical as the mainstream. In pass car, where we won that business with a major German OEM, we have different technologies that will be in the marketplace.

What we've created here is focused on cylindrical. I've got to comment on the applicability to other technologies. But to answer your question simply on CV, which is cylindrical cooling mainstream and on the different views. Again, different technologies will be hitting the market, and they all have their pros and cons..

Okay. Fred, appreciate that. And just....

The only thing that I would add, I mean, those battery cooling plates for those types of battery architecture, are generating a pretty significant market opportunity, and we estimate that market opportunity to be around $3.5 billion in 2028 already. So it's not as significant..

Got it, Fred. Just a follow-up. The world really changed, continues to change in terms of cost of capital, interest rates consumer slowing Tesla's dramatic price cuts, et cetera. And your electrification portfolio gives you a really long-dated view into the forward.

Are you seeing any hesitation or maybe pushing out of the commitment from OEMs on EV investment at the margin. I know they're still committed, but I didn't know if there was a rate of change that might have -- you might have picked up on in your forward over the last quarter or so..

No. I would say to the contrary, I see accelerate program, a tremendous focus on management, both sides, OE and Tier 1 to launch. And also, as I mentioned in prior calls, when we book a program a few months after, we're talking about capacity increase.

What we see, though, is that also from the customer side, what we see is that they want partner with someone who can be impactful on the east side but also on the foundational side so that we pivot together..

Our next question comes from Noah Kaye with Oppenheimer..

I'll stick with the battery theme for a minute here. So just given BEV is driving the majority of the organic growth outlook for this year, you mentioned battery is a significant contributor this quarter.

And then you also called out higher growth expectations at Akasol, I guess, over the medium term? And just help us understand what's driving your increased expectations for your own battery business? Is it just higher sell-through on the commercial EV side? Or are you picking up share gains in new platforms?.

No. It's simple. We have multiple customer awards for us higher volume from our core customers, and that's leading to Akasol moving slightly -- from under slightly $300 million last year to about $1 billion in 2025. And the impact that you see this year is part of that glide path.

And we're very pleased with our inverted role too and also very pleased on our motor or other wins across the portfolio. But on cases, about $1 billion already in 2025..

Okay. And then just a follow-up. I'm curious how much of your 2023 CapEx might be allocated to battery manufacturing in the U.S. And how the 45x production tax price that might benefit you if you're making any investments..

Yes, because of the acceleration we're seeing in the revenue in Akasol, as Fred mentioned, even up through '25, we are accelerating some of the investments that we're making both in Europe and North America related to that business.

And then we're also seeing part of the increase in capital expenditure on a year-over-year basis related to our other electrification businesses on the light vehicle side. So definitely a contributor.

And as it relates to North America, we're looking at the tax credits and how those might apply to us from a production standpoint as we go through '23 and beyond..

Just waiting for treasury guidance to get full clarification?.

I mean there's some of that, making sure that we understand any clarifications that need to be had, but we're pursuing the credits that we think were -- that are available to us based on the production that we are executing here in the United States..

We have time for one final question, and that question comes from Mark Delaney with Goldman Sachs..

When you speak to your auto OEM customers, what do you think the gating factor is to light vehicle production volumes in 2023? And to what extent is volume gated by supply as opposed to demand?.

The semiconductor availability is still alive, unfortunately. And I would say, to answer your question, it's more capped from a supply availability standpoint and from a demand standpoint in 2023..

And second question was just in terms of how customers have responded to the announced separation of the business. You spoke about all the great momentum Werner is having on the product side.

I'm wondering though, have you seen any change in customer engagement to design in NewCo products with the announced separation?.

No, we've obviously talk to almost all our customers, and they understand. And we're actually happy to see those two strong companies being able to execute their own respective strategy and be happy with all with the announced spin-off. There's no noise from that are nil..

Now I'd like to thank you all for your questions today. Again, we apologize for the technical difficulties earlier in the call. If you have additional follow-ups, if few reach out directly to me and my team. With that, operator, you can conclude today's call..

That does conclude the BorgWarner 2022 fourth quarter results conference call. You may now disconnect..