Good morning. My name is Jerome, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2021 Fourth Quarter and Full Year Results Conference Call. 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, Jerome. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website, borgwarner.com, on both our home page and our Investor Relations home page. 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 Investor Relations home page for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performs and for comparison purposes with prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items. When you hear us 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 will also refer to our market growth. When we say market, this means the change in light and commercial vehicle production weighted for our geographic exposure. Please note that we posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good day, everyone. We're very pleased to share our results for 2021 and provide an overall company update, starting on Slide 5. I am very proud of our strong top line performance relative to the industry declines. With approximately $14.8 billion in sales, we were up about 12% organically and we outperformed in all major regions. I'm also pleased with our margin performance despite the significant production volatility we faced during 2021. This was achieved while continuing to significantly increase our R&D investment to support our e-products growth. These investments will continue and accelerate. We also delivered solid cash flow performance despite the impact of a one-time warranty payment for combustion-based products during the fourth quarter. We also have seen progress on all 3 pillars underlying our Charging Forward plan. We secured multiple new EV program awards during the fourth quarter, which I will discuss in a moment, and we are already beating our booking target. We completed the acquisition of AKASOL earlier this month. And today, we announced the acquisition of Santroll's Light Vehicle eMotor business. We also completed the first step in the combustion disposition goals with the sale of the Water Valley, Mississippi facility to Atar Capital. Now let's discuss some of our recent new business awards starting on Slide 6. I'm happy to highlight 2 new product awards for the commercial vehicle market. First, I'm excited to announce our first win for our hydrogen injection system. This is a product that we've been discussing with our customers for quite some time. Hydrogen internal combustion is a quick-to-market powertrain solution that requires only slight adjustments to the traditional ICEs. This is our first award, and the program is with a top global manufacturer of construction equipment that is expected to launch in 2024. BorgWarner will be providing the full system, including injectors, rails, ECUs, system integration and calibration. Next we announced that BorgWarner has secured its first high-voltage eFan system with a global commercial vehicle OEM. Fully electric-powered heavy-duty trucks will require dedicated high-voltage thermal management solutions like the eFan systems for cooling components such as the e-motor, batteries and electronics. BorgWarner has specifically optimized its fan design for performance and efficiency. The high-voltage eFan is driven by a robust e-motor, which is powered from the vehicle's electrical system via an inverter. This is another application of the 3-in-1 concept with mechanical, motor and inverter. The system will be utilized in a battery electric heavy-duty long-haul truck expected to launch in 2024. Both the hydrogen injection system and the eFan are great examples of us continuing to organically develop new products to drive profitable growth in innovative powertrain systems. On Slide 7, I'm happy to highlight 2 more wins in North America: First, BorgWarner has been awarded the Generator Inverter for an innovative electrified architecture. The North American program is anticipated to launch in 2024. Our product will be used in a range of extension systems to charge the main battery. This win highlights our technical capabilities in managing continuous high currents. Next I would like to highlight a new battery system award for the North American electric commercial vehicle market that we expect to launch in 2023. BorgWarner will supply GILLIG, a leading manufacturer of heavy-duty transit buses in North America, with a third generation of our ultra-high energy battery system. The battery system was developed for long-distance application and can be scaled for the customer needs. It can offer close to 700 kilowatt-hours of available energy. This is the largest capacity in the North American transit bus. The system will be produced in our Hazel Park manufacturing facility here in Michigan. On Slide 8, we highlight 2 additional 800-volt awards in China. First, I'm glad to announce that we have secured an 800-volt silicon carbide inverter with a leading Chinese OEM for an electric vehicle anticipated to launch in 2023. The award includes inverters for front and rear drive modules. Our 800-volt silicon carbide technology offers enhanced power density, proven performance and long-term reliability. And our leadership in this area continues to be recognized by our customers globally. We're also partnering with a leading luxury new energy vehicle maker in China to supply an 800-volt iDM, expected to launch in 2023. Designed, developed and manufactured by BorgWarner, the 800-volt iDM includes our electric motor, inverter and gearbox. It features our exclusive and compact Viper power module, which is the core of the silicon carbide inverter. This is BorgWarner's first 800-volt iDM project worldwide, opening a new chapter in the company's global electric drive business. We're pleased to continue our long-standing partnership with this leading domestic manufacturer of luxury electric vehicle. As you can clearly recognize, we're seeing a strong pool for our new e-products. We are increasing our e-R&D investment by $130 million to $160 million this year to support this growth. Now on Slide 9, I would like to expand on our announced acquisition of Santroll's Light Vehicle eMotor business. eMotor is a key element of BorgWarner's electric vehicle growth strategy. The acquisition of Santroll's business is expected to have multiple benefits for us. First, we expect this acquisition to improve both our eMotor product leadership and our manufacturing capabilities, adding state-of-the-art equipment design and proven automation expertise. This acquisition will also expand our eMotor portfolio breadth and scale. Post this transaction, BorgWarner expects to produce more than 3.5 million units in 2026 for a wide range of customers and regions. With Santroll, BorgWarner now has a full suite of e-motor product at scale with application in small and larger passenger vehicles as well as for commercial vehicles. And we obviously see potential for significant revenue synergies over time globally. The acquisition will be funded with existing cash balances and is expected to close late in the first quarter 2022. As you can see, on Slide 10, we've made significant progress towards our Charging Forward plan, starting first with the organic electric vehicle revenue growth. With the awards secured as of this call, we now have electric vehicle programs that we expect will generate about $2.7 billion of booked revenue in 2025. This is an amazing achievement by the BorgWarner team. Turning to M&A, which includes the complete acquisition of AKASOL and the planned acquisition of Santroll's eMotor business. We've secured additional businesses that we expect to generate more than $600 million to $700 million of additional EV-related revenue for 2025, and we expect to take additional M&A steps and are actively engaged with a number of potential targets, which will impact multiple parts of our EV portfolio. Related to disposition, we completed the sale of our Water Valley, Mississippi facility to Atar Capital during the fourth quarter. With just under $200 million of revenue in 2021, this transaction represents 20% of the dispositions that we plan to complete by late 2022. With less than a year since the announcement of Charging Forward, I am pleased that we've made significant progress across all pillars of this plan. The takeaway from today is this: BorgWarner successfully managed a volatile production environment during 2021. Our revenue growth outperformed the industry, and we delivered strong margins and free cash flow. We're seeing strong demand for our product as evidenced by the numerous awards that we have secured throughout the course of the year. We're making the necessary organic and inorganic investment to support this significant growth in EV. In short, we are successfully executing on our long-term strategy, Charging Forward, which will deliver value to our shareholders long into the future. With that, I turn the call over to Kevin.

Thank you, Fred, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our fourth quarter results. First, our revenue came in higher than we were expecting going into the quarter due to better-than-expected industry volume. Second, our margin performance in the quarter was strong, driven by better-than-expected revenue and cost synergy performance. Additionally, our net R&D investment was lower than our guidance due entirely to higher customer reimbursements of engineering expense than we had anticipated. And finally, our cash flow performance in the quarter was strong despite the impact of a one-time cash warranty settlement payment. Let's turn to Slide 11 for a look at our year-over-year revenue walk for Q4. We start that walk with last year's revenue, which was just over $3.9 billion. Currencies had a very small impact when comparing Q4 of last year to Q4 of this year. Then you can see the decrease in our organic revenue, about 7% year-over-year. That compares to a 15% decrease in weighted average market production. So we delivered another quarter of strong outperformance in the face of challenging end market environment. And we're pleased with the fact that this outperformance occurred in all 3 major markets. On top of that, what's particularly exciting to see in our outgrowth is that we're seeing a portion of it coming from our electronics and electrification products, especially in China and North America. And finally, you add to that the $34 million of Q4 battery pack revenue coming from AKASOL. The sum of all this was just under $3.7 billion of revenue in Q4. Now let's look at our earnings and cash flow performance on Slide 12. Our fourth quarter adjusted operating income was $375 million or 10.3%, which compares to adjusted operating income of $448 million or 11.4% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of AKASOL, adjusted operating income decreased $60 million on $256 million of lower sales. That translates to a decremental margin of approximately 23%. That's not a bad decremental for such a volatile environment, especially considering the roughly $16 million of net commodity cost headwinds that we experienced in the quarter. Excluding these higher commodity costs, our year-over-year decremental margin was approximately 17%, which we view as a sign that we're effectively managing our operating cost performance. Moving on to free cash flow, we generated $370 million during the fourth. Our free cash flow included a $130 million payment to a customer, which was related to a warranty claim that we settled in the quarter for an engine-related component. Based on the agreement with our customer, this one-time payment fully resolved the claim. Let's now turn to Slide 13, where you can see our perspective on global industry production for 2022. When you look at this slide, you can see that our market assumptions incorporate a wide range of potential outcomes. That's primarily a result of the semiconductor supply challenges that we think will continue to impact the industry during 2022. With that background in mind, we expect our global weighted light and commercial vehicle markets to increase in the range of 6% to 9% this year. Looking at this by region, we're planning for our weighted North American markets to be up 13% to 15%. In Europe, we expect a blended market increase of 12% to 15%. And in China, we expect the overall market to be down 2% to 5%, mainly due to a mid-teens decline in commercial vehicle volumes. Before moving to our financial outlook, I wanted to highlight a change we're implementing in 2022 with respect to how we report our adjusted operating income and margin. You can see this summarized on Slide 14. As you know, M&A is expected to play a significant role in project Charging Forward. And given the nature of the likely acquisitions, we anticipate the potential for significant goodwill and intangibles associated with these transactions. Importantly, intangible asset amortization expense flows through our adjusted operating income line. Now sitting here today, we don't know the magnitude of the intangible amortization expense that may come from future potential acquisitions. But what we do know is that it's likely to make true underlying operating performance as measured in our operating margin, less comparable to previous periods. Therefore, we believe that excluding intangible asset amortization expense from adjusted operating income will improve year-over-year earnings comparability and provide a clearer picture of the real performance of our ongoing operations. But it's important to also note that the impact of intangible amortization expense will continue to be included in our adjusted earnings per share. Now let's talk about our full year financial outlook on Slide 15. As I mentioned earlier, we expect our end markets to be up 6% to 9% for the year. Next, we expect our revenue growth to continue to exceed industry growth, driven by new business launches. Based on these assumptions, we expect our 2022 organic revenue to increase approximately 10% to 14% relative to 2021 pro forma revenue, which means that we expect to outgrow the market by 4% to 5%. Then subtracting an expected $220 million headwind from weaker foreign currencies, we're projecting total 2022 revenue to be in the range of $15.9 billion to $16.5 billion. From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.2% to 10.7% compared to a pro forma 2021 margin of 10.9% when adjusted for intangible asset amortization expense. This 2022 margin outlook contemplates the business delivering full year incrementals in the low to mid-teens on an all-in basis before the impact of a planned increase in R&D investment. Underlying those incrementals, we expect tailwinds from continued cost synergies and restructuring savings and headwinds from the continuing impact of higher commodity costs and the mounting pressure of other supply chain cost increases. As it relates to R&D investment, we're continuing to win new business. You saw it in the 6 new wins Fred profiled earlier, and you can see it in our 2025 EV business, which now stands at more than $3 billion. With this continued success, we are leaning forward and continuing to invest more in R&D for our e-products portfolio. In fact, our guidance anticipates a $130 million to $160 million increase in R&D investment in 2022, and that increase is 100% related to our e-products portfolio. This is higher than the $100 million increase we signaled on last quarter's call for 2 reasons. First, as I mentioned earlier, our 2021 net R&D expense came in lower than our expectations due to higher-than-anticipated engineering reimbursements from our customers. Second, and more importantly, the larger increase is a reflection of our bullishness on the prospects for securing additional EV wins in the coming quarters. Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $4.15 to $4.60 per diluted share. This EPS guidance contemplates our effective tax rate coming down to 28%, which is declining from the peak of more than 30% that we experienced over the last couple of years. And finally, we expect that we'll deliver free cash flow in the range of $700 million to $800 million for the full year, despite a significant increase in capital spending year-over-year that supports the aggressive growth we're seeing, particularly in our EV portfolio. That's our 2022 outlook. So let me summarize my financial remarks. Overall, we had a solid year despite a really challenging end market environment, one where we saw significant volatility during the last 2 quarters. And remember, it was a year with only 76 million light vehicles produced globally. In the face of this environment, we outgrew the market. We drove 10% operating margins by executing on our cost synergies and restructuring savings while also investing more in R&D to support the future of our e-business, and we delivered another year of strong cash flow. And as we continue to successfully manage the present, we were delivering on the future by making significant progress on our Charging Forward plan. Now as we look ahead to 2022, we're keenly focused on continuing to manage the present by sustaining our strong margin and cash flow profile, maintaining the momentum and delivering new business wins on electric vehicle programs 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. Jerome, we’re ready to open up for questions.

Your first question comes from the line of John Murphy with Bank of America.

I wanted to focus on Slide 10. And if we look at this, Fred, it seems like your awards are coming faster than we've traditionally seen. So it's from booking to actual launch. I'm just curious how much room you have or how much progress you think you're going to make on this first bar? And how much you're bidding on there? And then also, as we think about this, is there more of an opportunity on the commercial vehicle business in EVs because there's maybe less competition and implementation is coming faster. I'm just trying to understand, are we speeding things up here? And is there maybe even more of an opportunity on the commercial vehicle side near term?

John, yes. I think you're right, there are more opportunities on the organic side. We still have 9 to 12 months to go in order to book business that will see daylight in 2025. Our organic target was at $2.5 billion. We're at $2.7 billion and continuing to book business. Yes, you see opportunities in passenger car and commercial vehicles. Some of the products I alluded to are in our commercial vehicles. And on the M&A, I would say that we are engaged with a few targets. We have a healthy pipeline of M&A targets. And I'm pretty happy where we are on Charging Forward. I'm laser-focused on Charging Forward. We're winning. Target is $4.5 billion of BEV revenue in 2025, and we are absolutely on target.

Okay. And just a follow-up. As we look at the middle bar there, AKASOL and Santroll, I thought AKASOL was going to be about $500 million by 2024. So it seems like AKASOL plus Santroll should be closer to sort of an $800 million-ish number. Is there something changed in the AKASOL business? And then also just a follow-up on the reimbursements in the R&D for 2021. I mean why were those larger in 2021? Is that something that's changing in sort of relationship with automakers where there's greater R&D reimbursement? Or is that just timing?

I'll take that, John. On AKASOL, I think previously what we had disclosed was $0.5 billion of revenue in 2024. We've rolled this forward to 2025, which suggests we're probably more in that $600 million range. When you look at Santroll, which is in that number as well, Santroll's actually predominantly — at least the revenue that we see through 2025 — is more eMotor business in high-voltage hybrids. So the bulk of their revenue is not likely going to count toward our explicit battery electric vehicle goal. It actually doesn't add a lot to that particular bar, but it adds a lot to our capabilities, and that's what we're really excited about with Santroll. With respect to the R&D reimbursements, it's really just a function of what we were able to accomplish at the end of the year. Recoveries sometimes come in higher or lumpier in certain quarters, and that's exactly what we saw in Q4. Our recoveries were up about $20 million or so from what we were previously expecting. I wouldn't view that as a trend. I think that's just sometimes you get some lumpiness when you go quarter to quarter or year to year.

Your next question comes from the line of Rod Lache with Wolfe Research.

A couple of things I wanted to ask you about. The company today is something like 70% North America and Europe. And it looks like you have 13% to 15% upside in North America. 12% to 15% in Europe production, but you're only talking about 6% to 9% on a weighted basis. So I was hoping you can maybe address what you're anticipating in terms of mix headwinds presumably. And I wanted to also just check — on the year-over-year bridge, if I added back the amortization that you pointed out on 2021, am I correct that your incrementals on the $1.7 billion, $1.8 billion of organic growth at the midpoint is in the 12% range. And if that's right, what are some of the puts-and-takes I should be thinking about to bring that up to the normal high teens to 20% that you normally get?

Rod, a couple of things. First, on the growth in the market outlook. Remember, when we're quoting our 6% to 9%, we're also including commercial vehicles. So this is a weighted average of our markets, which includes light vehicle and commercial vehicle. You can see the blend in the backup slides that we provided. So we know China actually from a commercial vehicle standpoint is going to be a headwind in that market in the high teens. When you look at Europe, Europe light vehicle might be growing in the mid-teens, but the commercial vehicle side is single-digit growth. So when you factor all those growth elements in across light and commercial vehicle, the way we're weighted, it comes out to 6% to 9%. If you take a look at that backup slide in the appendix materials, that will help answer that question. On the conversion question you had — when you look at the conversion on an all-in basis, we're converting year-over-year in that, call it, low single-digit to low double-digit kind of range. But that includes the $130 million to $160 million of R&D. And so if you back out the increase, that $130 million to $160 million of R&D, we're actually converting year-over-year in the low to mid-teens, more in that 13% to 15% range. So what are the puts-and-takes on that? Well, on the negative side, we have commodity cost headwinds because remember, last year, that $65 million net impact that we experienced over the course of the year was predominantly in Q3 and Q4. And so as we come into the new year, we're going to continue to get that impact in the first couple of quarters. That's going to be about $50 million to $60 million in those first couple of quarters. On top of that, we are seeing some additional inflationary pressures coming from the supply base that are part of our guide as well, not as big as what's happening on the commodity side, but there is definitely inflationary cost pressure coming through that's factored in. And then those things are being offset by restructuring savings that we're continuing to drive as well as incremental cost synergies on a year-over-year basis. Those puts-and-takes — commodity costs, supplier inflation, restructuring synergies — are basically offsetting to get us to that low to mid-teens conversion year-over-year.

Okay. And just — maybe just a follow-up. Can you give us a sense of what the mechanisms are for recovering some of these inflationary pressures, whether it's commodities or what you're seeing from Tier 2 suppliers? It seems like it's a pervasive issue in the industry. Are you able to make adjustments to pricing or things along those lines with your OEM customers for that?

Yes. It's true that the situation is a bit unusual with commodity and other increases. Discussions are happening with our customers, and we expect everyone to pay their fair share in this situation. Logistics issues have also been impacted by customer schedule changes. We're talking to our customers and working to get to resolutions.

Your next question comes from the line of Noah Kaye with Oppenheimer.

I just wanted to go back and check past transcripts to confirm this, but I don't seem to even remember you talking about hydrogen combustion as a potential R&D opportunity development. And this quarter, you come out and actually announced a program award. We've heard a lot of folks in the powertrain space talking about prototyping development of hydrogen. It just seems like to go from kind of a stealth mode to announcing, this is pretty remarkable. So I was wondering if you could take us through the design cycle and development work for this award? And then what do you say about the company's approach to R&D going forward to kind of get this tied into market?

Thanks, Noah. So hydrogen can be used in two ways. First, you inject it into combustion. Second, you use it in a fuel cell as a range extender of a battery electric vehicle. This win is the first case: hydrogen as a means of combustion. We have been working with many customers on this. It's a pretty appealing technology — we've actually had engine test fires with hydrogen in our tech centers over the past few months. It's of particular interest in commercial vehicle, construction and agricultural opportunities at this point in time. One thing I would add: this is not a big part of the R&D increase at all. The entirety of the R&D increase is linked to BEV. If you compute the numbers, this year we will have about 45% of our total R&D focused on BEV, which validates the essence of Charging Forward. I'm very proud of where we are.

Great. Let me just follow up on the M&A question I asked earlier here. Are you seeing any kind of a reset on valuations for EV targets? I mean, clearly, some of the public names in the space have gone through a pretty hard reset to start the year. Execution has not been easy. There's been supply chain challenges. So just curious to know what that does to your pipeline and potential for closing something relatively near term?

I think that ultimately impacts the seller willingness to execute a transaction. When we go into a transaction, we look at a discounted cash flow analysis based on the long-term prospects for the business. If you have a relatively frothy public market, it influences the way sellers think about valuation, which can make it harder to bridge differences in perspectives. As those public market valuations come down, that can help in buy-side discussions. But for us, we're focused on the long-term intrinsic value of the business through discounted cash flow analysis.

Okay. And then, Kevin, sorry, I'll just sneak one more in. Just to clarify, the $50 million to $60 million of cost headwinds from commodities you talked about in the first half — is that a net number year-over-year?

Yes, that's net of the recovery mechanisms with our customers.

Your next question comes from the line of Chris McNally with Evercore.

So just two questions on the margin. I think you answered my first question during Rod’s. It seems like the core incrementals, if we go pro forma for the accounting change, it's about 13% to 15% year-over-year. Is that the number that was given?

Excluding the incremental R&D, that's exactly right.

Excluding R&D, perfect. So then the R&D and leverage question. When we think about the step-up of that $145 million midpoint year-over-year, should I think about that as sort of R&D and engineering expense associated with launching these platforms? Or is it more about R&D to work on new platforms? Then should we expect similar increases in the future, or is this more of a onetime elevated step-up?

Chris, R&D is more development and application engineering than pure early-stage research. We're not starting from zero on product definitions. This increase is related to both launches and high-confidence pursuits.

Perfect. Yes, that's exactly my question. Okay. So it then becomes more of a onetime step-up. And then if the business continues to grow, the opportunities are more than the $2.7 billion, and it could grow. But for now, this is largely a relatively sizable onetime step-up.

That's correct. And remember, when we talked about this as part of Charging Forward even, we talked about our expectation that R&D would step up to the low to mid-5% range on a go-forward basis. That stepped up here as part of our 2022 guide. With high-confidence pursuits as well as the wins that we've generated and that we're working on launching, it's driving that, and it's in line with our prior expectations of being in that 5% to 5.5% range on R&D.

Perfect. And then the only small one on margin: AKASOL is about 30 to 40 basis points dilutive to margin now. Could you help us think about when we could expect breakeven on an EBIT basis?

If you exclude purchase price amortization, we expect AKASOL will be a little bit negative this year just based on where we're jumping into it. We only gained full control last Thursday when we completed the merger squeeze-out process. We're excited to run day-to-day operations and drive revenue growth as well as profitability and cash generation in line with BorgWarner expectations. But a little bit of a margin headwind this year because it will be slightly less than breakeven before PPA.

Your next question comes from the line of Colin Langan with Wells Fargo.

Just a follow-up on the walk from '21 to '22. You mentioned last quarter there were cost synergies of $40 million to $45 million and restructuring of $40 million to $50 million. Are those still the right numbers? That would imply there's another additional $30 million to $35 million of other inflationary pressures that are offsetting those synergies with the commodity costs.

Good question. Synergies actually ended up coming in stronger towards the end of the year than we anticipated, and some of the things we executed benefited us in Q4. Cumulatively, through the end of 2021, we're at about $140 million which included $125 million year-over-year last year. To get to our ultimate $175 million objective, there's only about $35 million of synergies left to achieve. So a little bit lighter remaining in 2022 relative to what we signaled last quarter, only because of the acceleration into 2021. On restructuring, we had guided $30 million to $35 million last quarter. We should be at least at that level, if not slightly higher, as we come out of 2022.

Okay. And then going back to earlier questions about growth over market. It's kind of hard this year, since there's such a product mix tailwind last year. How are you thinking about it? It looks like your weighted average market outlook implies about 300 basis points of geographic mix tailwind, but then there's another 400–500 basis points of pure new business. How much is backlog of pure new business versus platform mix being positive or negative?

The geographic mix for us isn't a separate tailwind because we report on a weighted average market basis, which is already factored into our 6% to 9% blended market guide. For 2022, we're guiding toward outgrowing the market by about 4% to 5% year-over-year, continuing the mid-single-digit outgrowth on a go-forward basis. Our focus is less on outgrowth each year and more about executing relative to Charging Forward in 2025, where our target is 25% EV mix corresponding to roughly $4.5 billion of EV-related revenue. That's how we're measuring success, and underlying that is the expectation we'll continue mid-single-digit outgrowth.

Yes. Just a follow-up. The 4% to 5% — is that all just brand-new business wins, or are you factoring any tailwinds or headwinds from platform mix? Other suppliers have said last year had a rich luxury SUV mix that unwinds. Is that incorporated here or is it neutral?

It's not really driven by any sort of a mix benefit as we look ahead into 2022. It's driven by product launches and particular programs that are still ramping up. There's nothing unusual from a pure mix perspective about that outgrowth.

Your next question comes from the line of Brian Johnson with Barclays.

I have a couple of questions around the evolution of the portfolio. With regard to the acquisition in China, you had already won that Hyundai A-class China iDM business. So what does the acquisition bring you that you hadn't had before? And when you think about the Chinese marketplace, what range of vehicle price points would this get you into that perhaps you weren't in before?

HMC was for the A-class iDM as you mentioned. With Santroll, we are bringing a broader portfolio of motors across a whole suite of power levels. This acquisition is not linked to that Hyundai iDM since that was a motor we were already doing in-house. The logic is vertical integration: Santroll brings strong manufacturing capabilities and expands the eMotor portfolio at scale from A-class passenger cars to larger commercial vehicle power levels. Those are the highlights of the logic for the acquisition from a portfolio standpoint.

Okay. And second question. You still have a lot of acquisition budget left. In the commercial vehicle market some competitors highlight the advantages of e-axle that integrates the motor into the axle, whereas your historical applications were more DM1 motors with separate drivetrain components. Are you thinking about tuck-in acquisitions around the e-axle space?

Our e-components can be utilized in light vehicle or commercial vehicle. As we think about e-axle, it's an important piece of the market in commercial vehicles, but it's not the entirety. Our ability to supply components — e-motors, inverters and other systems — into that market is there, and we've been generating wins. You can see what we talked about today with the eFan win as well as the GILLIG battery pack announcements. There's definitely opportunity for us in commercial vehicles, and e-axles aren't the only path to be successful.

Okay. Final question on the disposition of ICE. You completed one deal but it's relatively small relative to your goals. What does the pipeline of dispositions look like? To the extent that things have happened slower, is it buyer uncertainty over the production environment and not wanting to buy and leverage if it's private equity with choppy production? Or is it general hesitation about taking on even profitable ICE assets regarding terminal value?

We're pleased we accomplished the first step, the sale of about $200 million of revenue toward that $1 billion goal. Current market conditions with volatility and supply chain uncertainties have impacted buyers' willingness to engage in some discussions over the last couple of quarters. But we do have a pipeline we're pursuing to drive toward the $1 billion of dispositions later this year. It will be helpful to see a more stable market environment because appetite tends to improve when markets are more stable and certain.

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

First question is on the margin outlook and trajectory beyond this year. As part of your 2022 outlook, you're essentially guiding on a comparable basis for margins taking a small step down despite meaningful revenue growth in the double digits. How should we think about normalized margins? Is there a trade-off between investment in growth and the ability to maintain margins? Or do you feel that once you've had this step-up in R&D, the percentage of revenue will be fairly stable and you can show better operating leverage going forward?

As we look ahead after 2022, our expectation is we will continue to deliver the cost performance we've been generating, driving restructuring savings and completing the remaining cost synergies. A key driver of margin performance into the next few years will be end markets: higher vehicle production volumes will improve margins. Our guide is based on roughly an 80 million light vehicle market, so markets returning to more normalized levels would help. Regarding the trade-off between growth and margin, we're willing to make investments when the new business wins justify it. The step-up in R&D in 2022 is meaningful and aligned with our longer-term objectives. We think the trajectory of margin growth will continue over the coming years.

Understood. Following up, the pipeline of EV opportunity will grow as penetration increases. When would you want to start seeing this investment translate into margin expansion? How long would you be willing to accept margin compression as you invest in EV growth?

We saw the big step-up this year and had previously guided that R&D would step up to the low to mid-5% range on a go-forward basis. We would expect to operate around that range as a steady-state run rate. Importantly, EV revenue is starting to come into the P&L and will provide contribution margins. We indicated EV revenue north of $800 million in 2022 embedded in our guidance, more than double what it was last year. That contribution will help fund the increased R&D. So over time, it should be less of a headwind as EV revenue scales and R&D normalizes as a percent of sales.

And a quick final one: you broke out EV revenues for 2022 versus 2021. How much of the revenue growth still comes from combustion products? When over the next few years would you expect the ratio to flip so that more revenue growth comes from EV than combustion?

We're targeting $4.5 billion in EV revenue in 2025. Under Charging Forward, we see roughly half and half by 2030 in terms of portfolio evolution. The inflection point around 2024–2025 will be key for us. As of this call, we have $3.3 billion of booked EV business and time to book more organic business plus M&A. The jump-off point of 2025 is critical: having the right portfolio, product leadership, customer relationships and a multibillion-dollar BEV revenue base in 2025 will be key to our success.

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Congrats on now having fully booked your targeted 2025 electrification revenue. Given the very strong expected top line growth at Santroll, it looks like from de minimis revenue in 2021 to $300 million in 2025. Are you able to say how much of that growth has already been booked versus requiring more bookings?

We're not going to comment on the detailed breakout right now. We'll give more clarity around the outlook when we close the transaction.

Okay. And then a question on multiples and the valuation environment. Might you benefit from both ends because of a rotation from growth to value, where slower-growth, profitable disposal candidates gain relative value while high-growth unprofitable targets decline in valuation? How are you thinking about the value of some of these businesses now versus a year from now after the industry stabilizes?

It will depend on a more stable end market environment. The end markets inform buyers and sellers on valuation. Right now, with choppiness and volatility in the market and only about an 80 million global light vehicle market in our projection, it makes dispositions a bit more challenging. We'll see how things progress; ultimately, our focus is executing our strategic plans and making sure we get good value for assets we dispose of.

Your next question comes from the line of Luke Junk with Baird.

Fred, hoping we could start with a big picture question. Looking back on when you first outlined the company's current strategy about a year ago, how does where the company stands today compare to your initial expectations on all three major fronts: organic bookings, M&A and asset dispositions? Where are you ahead of expectations, and is there anywhere you're not? What's driving that?

I think we are on track. I'm fully focused on Charging Forward and the broader team is too. We are ahead on organic bookings, and I'm very proud of that. Our decentralized operating model allows us to spend time on Charging Forward. Increasing R&D to have 45% focused on EV next year validates our approach of reinvesting cash generation into the business given the traction we have across e-products. I'm happy with where we are less than a year after announcing Charging Forward.

And can you remind us now that the squeeze-out process is completed at AKASOL, what the initial steps are as you're able to take more control?

We see good prospects and a strong pipeline of growth at AKASOL. We're not shy about investing for the future of battery pack technologies and product leadership. We completed control last Thursday, and we're putting in place steps to run the company consistent with how we operate at BorgWarner. I'm very impressed by the talent, technology leadership and bookings AKASOL has generated in Europe and the U.S. They will be among the few with high-volume commercial vehicle battery pack production facilities on both sides of the Atlantic. There's a lot of work to do, but we're excited to work with the AKASOL team.

We have time for one final question, and that question comes from Dan Levy with Credit Suisse.

I wanted to revisit assumptions on the combustion set. If you're saying you'll grow EV by about $400 million this year, that implies the combustion-related outgrowth might be around 1 percentage point rather than 3–3.5 points from EV. That's a deceleration versus 2021, which was more driven by ICE outgrowth. Can you give a sense of the underlying outgrowth dynamics from your combustion products? And can you talk through the underlying margins if you strip out elevated R&D and the margin impact from EV products — what would combustion margins look like?

A good chunk of outgrowth this year is being driven by EV and we're excited about that. But we're continuing to see organic growth from the combustion business as well. The combustion portfolio has held up well and actually outperformed the market. We feel combustion is performing solidly, and the e-business is starting to gain traction and come through in the P&L.

Are you seeing increased penetration of turbos and gasoline direct injection (GDI)?

We're definitely seeing that in hybrids. Advanced hybrid technologies lead to more efficiency and engine downsizing, so adoption rates of products like turbos, VCT and GDI are increasing in the hybrid world. That is a tailwind for the coming years and supports underlying growth in our combustion portfolio.

And on your longer-term planning assumptions: some would argue that a 30% BEV penetration by 2030 is conservative given recent acceleration. To the extent penetration accelerates, what does that do to your plans on acquisitions, dispositions or organic initiatives?

You're right that EV adoption appears to be accelerating based on OEM comments and customer conversations. What's most important is our positioning in 2025, which is key to our long-term success target of $4.5 billion of BEV revenue in 2025. We're at $3.3 billion booked and have time to book more organic business and pursue M&A. The 2025 jump-off point is crucial: having the right portfolio, product leadership, customer intimacy and a significant multibillion-dollar BEV revenue base in 2025 will be key to our success.

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, Jerome, you can go ahead and conclude the call.

That does conclude the BorgWarner 2021 Fourth Quarter and Full Year Results Conference Call. You may now disconnect.