BorgWarner inc (BWA) Q2 2021 Earnings Call Transcript

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BorgWarner inc (BWA 0.88%)
Q2 2021 Earnings Call
Aug 6, 2021, 8:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 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.

Patrick Nolan -- Vice President of Investor Relations

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 our home page and on 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 just 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 performed 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 growth compared to our market. When you hear us say market, that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. 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.

Frederic B. Lissalde -- President and Chief Executive Officer

Thank you, Pat, and good day, everyone. First, on slide five, I'm very proud of our strong performance in the quarter despite the ongoing component supply headwinds. With just under $3.8 billion in sales, our second quarter revenue increased over 72% organically, with strong incremental margins and free cash flow.

As Kevin will discuss, we are increasing our full year guidance as we believe higher outgrowth and synergies are offsetting commodity and other headwinds. That's for the short-term execution. Now going forward, I'm very proud of our sustainability strategy highlighted in our report that our team just published. The acquisition of AKASOL was completed in early June, and I'm very positive about what I see: great technology, great entrepreneurial spirit and mindset. Welcome, AKASOL, to BorgWarner. And we secured multiple new product awards for electrified vehicles, which I'll speak about in a few moments. Starting with our overarching sustainability topic and our vision to a cleaner and more energy-efficient world, I would like to highlight some key takeaways from our global sustainability report called Evolving for All on slide six. Evolving for All compiles into one document what is possible when nearly 50,000 people resolve to do the right things. It is a testament to our commitment to create an enterprise that is shaping the future of sustainable mobility. We are accelerating our clean mobility technologies, we're reducing our carbon footprint and are well on our way to achieving our stated goal of carbon neutrality by 2035. The report also includes Scope three emissions data to illustrate how our products are improving the world in which we all live. We're fostering a diverse and safe workplace and giving back to our communities, and our pay equity analysis shows parity results. I'm extremely proud of our sustainability focus. Moving on to another pillar of CHARGING FORWARD, we have completed the takeover offer of AKASOL early June, as detailed on slide seven.

Since then, we have increased our ownership stake to approximately 93% through additional share purchases. We have informed AKASOL of our intention to progress toward a squeeze-out process to achieve 100% ownership. To put in perspective, we expect AKASOL to represent 20% to 25% of the M&A portion of our CHARGING FORWARD project announced just four months ago. AKASOL also continues to secure additional new business awards. Last month, they announced an agreement to supply their battery systems to a major bus and commercial vehicle manufacturer from Belgium. AKASOL will supply the second and third generation of their high-energy battery systems for the customer's new all-electric city bus starting in 2021.

Now let's go to China and look at other recently announced new product awards for electrified vehicles on slide eight. First, we announced new contracts to supply dual inverters for Great Wall Motor and another major Chinese OEM. The dual inverters will be features on both hybrid electric vehicles and plug-in electric vehicles for these customers. By combining different power electronic technologies into one compact package, our dual inverter provides unrivaled functionality. A single unit can control and drive two electric motors while delivering cost and weight reductions. These advanced inverter awards showcase not only the product leadership we have in these domains, but also the trust and confidence we have built in our electrified applications with multiple OEMs globally. In addition to their midterm revenue opportunities, advanced hybrid programs such as these allow us to drive additional scale and product capabilities that help improve our overall competitiveness in the world of battery electric vehicles. Also, downstream the battery, I would like to highlight another iDM award. This new 3-in-1 has a bigger size and output functionalities than the one already announced a few months ago with Hyundai. This one is also all BorgWarner-made, mechanical, motors, vertically integrated electronics and software. We're partnering with a leading luxury new energy vehicle maker in China, with SOP in 2023. Designed, developed and manufactured by BorgWarner, this iDM features our electric motor, our gearbox and our integrated power electronics. It operates at 400 volts and has a peak power of 250 kilowatts.

Now adjacent to the battery packs, I would like to shed some light today on our high-voltage coolant heaters on slide nine. This product line is a great example of a best product developed organically by BorgWarner and now commercialized and manufactured at scale. It helps improve the battery-operated range of our customer battery electric vehicles by controlling the battery temperature at an optimal level while also increasing passenger comfort through the delivery of an ideal interior climate. We recently expanded our existing business with the launch of a new program with Geely. And as you can see by the chart on the slide, the business is expected to grow rapidly from 600,000 units in 2021 to four million units by 2025. That's a 60% CAGR, 6-0. With multiple customer awards, we expect the high-voltage coolant heaters to already account for $400 million in revenue by 2025. Or to put it another way, we expect this product to account for close to 10% of our planned EV revenue by 2025 under CHARGING FORWARD. This product line does not get as much attention as the more high-profile product lines like iDM, inverters or motors but still contributes meaningfully to our EV content. So let me summarize our second quarter results and our outlook.

The second quarter results were strong, particularly considering the supply challenges currently impacting the industry. We delivered strong top line growth, and we believe we're tracking well toward our full year margin and free cash flow objectives. We're increasing our full year revenue and adjusted earnings per share guidance. As we look beyond these near-term results, I'm extremely excited about our long-term positioning. We are continuing to secure new business for electric vehicles to support our long-term revenue targets, and I'm pleased to see awards both on the component and on the system level. BorgWarner continues to develop clean and energy-efficient solutions like our iDM family of products. And lastly, we're focusing on a disciplined, inorganic investment approach like the acquisition of AKASOL that add great technology and additional scale to our portfolio while supplementing our growth profile.

With that, I'll turn the call over to Kevin.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Thank you, Fred, and good morning, everyone. Given the number of financial topics we have to get through this morning, I'm going to dive right into the details.

So let's turn to slide 10. As we look at our year-over-year revenue walk for Q2, we begin with pro forma 2020 revenue of just under $2.1 billion, which includes $628 million of revenue from Delphi Technologies. Foreign currencies increased revenue by about 11% from a year ago. Then our organic growth year-over-year was more than 72% compared to a 64% increase in weighted average market production. The significant year-over-year changes in industry production and the varying levels of supply disruptions among our customers make it difficult to draw conclusions from the quarterly outgrowth figures. Nonetheless, we were pleased with our performance in the quarter. Looking at our regional performance. In Europe, we outperformed by double digits, driven by growth in small gasoline turbochargers, VCT and fuel injection. In China, we also outperformed the market by double digits, driven by growth in DCT, all-wheel drive and fuel injection. And in North America, we underperformed the market primarily due to customer exposure. The sum of all this was just under $3.8 billion of revenue in Q2.

Now let's look at our earnings and cash flow performance on slide 11. Our second quarter adjusted operating income was $401 million compared to a pro forma loss of $52 million in the second quarter of 2020. This yielded an adjusted operating margin of 10.7%. On a comparable basis, excluding the impact of foreign exchange, adjusted operating income increased $423 million on about $1.5 billion of higher sales. That translates to a strong incremental margin of over 28%, driven by conversion on higher volumes, restructuring savings and Delphi-related synergies in excess of purchase price amortization. We were particularly pleased with this performance given elevated supplier and commodity costs that we experienced during the quarter. Moving on to cash flow. We're proud of the fact that we generated $133 million of positive free cash flow during the second quarter, which was achieved despite an investment in inventory to help us better manage the challenging production environment.

Let's now turn to slide 12, where you can see our perspective on global industry production for 2021. As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 8.5% to 11%, which is down from our previous assumption of a 9% to 12% increase. This reduction from our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production, which is reducing our expectations for North American and European industry growth. We do expect light vehicle industry production to improve sequentially in the third and fourth quarters relative to Q2 as we believe the impact of the semiconductor shortages will be lower in the second half of the year than what we saw last quarter. However, given lower commercial vehicle production in the second half and the varying impact of ongoing supply constraints on our mix of customers, we're not expecting Q3 and Q4 revenues to return to Q1 levels.

Now let's talk about our full year financial outlook on slide 13. You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $965 million to $1.2 billion. Next, we expect to drive market outgrowth for the full year of approximately 500 to 600 basis points, which is a meaningful step-up from our previous guidance of 300 to 500 basis points. Based on these assumptions, we expect our 2021 organic revenue to increase about 14% to 17% relative to 2020 pro forma revenue. Then adding a $520 million benefit from stronger foreign currencies and $75 million of revenue related to the acquisition of AKASOL, we're projecting total 2021 revenue to be in the range of $15.2 billion to $15.6 billion. From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.2% to 10.5% compared to a pro forma 2020 margin of 8.3%. This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi-related cost synergies and purchase price accounting. From a cost synergy perspective, our margin guidance includes $100 million to $105 million of incremental benefit in 2021, which is higher than our previous guidance of $70 million to $80 million.

As I'll discuss in more detail momentarily, the cost synergies are simply being realized faster than we previously expected. Partially offsetting this favorability are two things: first, the acquisition of AKASOL is expected to reduce full year margins by 10 basis points; and second, we're anticipating a net negative impact from commodities in the range of $70 million to $90 million, which is worse than we previously expected. But even with these two headwinds, we're holding our margin roughly in line with our prior guidance. Based on this revenue and margin outlook, we're now expecting full year adjusted EPS of $4.15 to $4.40 per diluted share, which is an increase from our prior guidance of $4 to $4.35 per diluted share. And finally, we continue to expect that we'll deliver free cash flow in the $800 million to $900 million range for the full year. This is flat with our prior guidance as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income. This would still represent record free cash flow generation for the company. That's our 2021 outlook.

Let's turn to slide 14 for an update on the financial impact of the Delphi Technologies acquisition. As I alluded to earlier, the cost synergies related to the transaction are being realized more quickly than we previously expected. The primary driver is faster execution of headcount reductions related to our planned SG&A cost synergies. In fact, at this point, we've completed more than 95% of the headcount reductions associated with our synergy plan. As a result, we now expect 2021 cost synergies to be $100 million to $105 million, which means that cumulatively, we expect to have achieved synergies of $115 million to $120 million by the end of the year. But to be clear, this is an acceleration of the timing of our synergies as opposed to an overall increase in our performance. Therefore, our total cost synergy target of $175 million is unchanged. In addition to higher cost synergies, Delphi's revenue contribution in 2021 is also tracking ahead of our original expectations. As a result of these two factors, the accretion to 2021 adjusted EPS from the Delphi acquisition is now expected to be positive $0.20 to $0.30 versus our expectation at closing of a dilutive impact of approximately $0.15. This is a great result and a testament to the work being done by the integration teams across the company.

And as we look beyond 2021, it's important to note that the revenue synergies associated with the transaction are also progressing very well. We're pleased with the systems awards that we've generated through combining our electric vehicle capabilities, including the iDM award in China that Fred mentioned earlier. We've been able to secure these and other components awards as a result of leveraging Delphi's technology leadership, with BorgWarner's commercial relationships, operational capabilities and financial strength.

Let's turn to slide 15 for a summary of the financial impact of the AKASOL acquisition. As you can see, we expect AKASOL to contribute 2021 sales of $75 million to BorgWarner's second half results. Then we would expect those sales to grow significantly over the next few years, with 2024 sales still expected to be in the $0.5 billion range. This growth is supported by AKASOL's previously reported backlog. From an EPS perspective, we expect AKASOL to have a roughly breakeven impact on the total company in 2021, excluding the impact of purchase price amortization. Then as the business grows sequentially each year, we do expect to see conversion on the incremental revenue, which we expect to drive accretion of $0.12 by 2024, also excluding the impact of purchase price amortization. We're pleased with the transaction and the medium to long-term benefits it's expected to deliver. So let me summarize my financial remarks.

Overall, we had another solid quarter despite the industry challenges. We meaningfully outperformed the market, delivered a 10.7% operating margin and generated $133 million of free cash flow. And then coming off that Q2 performance, we've increased our full year revenue and earnings guidance even while moderating our industry production assumptions and considering higher commodity costs. Looking beyond our near-term results, we believe the faster accretion from the Delphi Technologies acquisition and the completion of the AKASOL acquisition illustrate our ability to execute the inorganic actions that are part of our Project CHARGING FORWARD initiative. The electrification wins discussed by Fred also highlight some of our progress toward the organic portion of our plan. Ultimately, it's the pillars of near-term execution, securing future profitable growth and disciplined inorganic investments that will drive the success of our strategy and thus drive value creation for our shareholders.

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

Patrick Nolan -- Vice President of Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Chris McNally with Evercore. Your line is open.

Chris McNally -- Evercore -- Analyst

Wanted to maybe talk a little bit about the second half assumption. Just based on your guidance, you had a very strong first half, $850 million of EBITDA. The guidance in the second half implies something lower in the $750 million to $800 million range, which would obviously be down sequentially, but also down year-over-year versus the pro forma that you provided on up revenue. So if you could just provide some of the puts and takes there, that would be really helpful.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I think maybe to make it simpler, why don't I speak relative to the midpoint of the range. But as you think first half to second half, I think when you exclude the impact of AKASOL, which is $75 million, revenue sequentially, first half to second half, is down a couple of hundred million dollars. So obviously, we have loss conversion on that revenue. But then on top of that, as you're going first half to second half, you've got the net commodity headwinds, which are an incremental $20 million to $40 million in the second half. Our R&D on a net basis is stepping up in the second half, another $25 million to $30 million, and those things are being partially offset by about $20 million to $25 million of incremental synergies. So that's kind of the walk as you look first half to second half.

I think the thing -- if you look year-over-year, if you're talking second half of this year versus our pro forma second half of last year, I think one of the things you have to keep in mind is part of the revenue walk is AKASOL of $75 million and foreign exchange, which is a little bit over $100 million. So $200 million of our revenue improvement comes with virtually no margin because FX converts it basically our operating income. And AKASOL actually, because of purchase price amortization, is dilutive this year, about $10 million. The net is no conversion on that incremental $200 million. Which means what? It means then on the revenue that's left, there's actually the downside conversion at the midpoint of our guide, plus those other things I spoke of, the commodity costs, R&D being up, but synergies being a little bit of an offset. So hopefully, that helps.

Chris McNally -- Evercore -- Analyst

No. That's great detail. And then if we go talk to the secular side of the business, and you announced several EV wins in the quarter. Of note, the three on high-voltage that obviously are of more significant value, the two inverters and the one iDM, could you talk about just relative -- I mean, you can give a hard number, but the relative side to the window? Are we talking about hundreds of million in the backlog addition where it's either 100,000 per year type vehicles? Or is it something that you expect that's a little bit smaller?

Frederic B. Lissalde -- President and Chief Executive Officer

I think the volumes are meaningful. And what we've seen also is each time we book a business in this field, volume is -- expectation is going up and up. So those are two great programs for us. And from an iDM perspective, as you've seen, it's -- we're building a modular portfolio. It's a different power output, different power level. And so very happy about that and hitting the market with great products.

Chris McNally -- Evercore -- Analyst

Great, thanks so much.

Operator

Your next question comes from Luke Junk with Baird. Your line is open.

Luke Junk -- Baird -- Analyst

Yes, Good morning. First question I want to ask, if there's any additional color that you could share in the scope of the iDM award that you disclosed today. Should we think about this as an award on the single vehicle? Or could it potentially cut cross-platform at the customer?

Frederic B. Lissalde -- President and Chief Executive Officer

So right now, the iDM -- the iDM is a power level. So within that power level, it cuts across the vehicles that the customer wants to tailor for that power level. So that's the color I can give you. It starts with the platform and will cut across at the 250-kilowatt power level.

Luke Junk -- Baird -- Analyst

Okay. That's helpful. And then bigger picture, one of the focus areas that you'd highlighted at your Investor Day in March was iDMs in Asia in general. The thing here, five, six months later, you've now booked a couple of these awards, and we're still not even a year out from the close of the Delphi deal. Is it fair to say that the level of interest in Asia is consistent with or maybe even a little better than you had anticipated in March?

Frederic B. Lissalde -- President and Chief Executive Officer

It's in line with what we expected. And this is currently where the music is played the loudest from an EV acceleration standpoint. This is where we're going to gain scale early, very happy about that. And the technologies that we're bringing to the market and the competitiveness that we're bringing to the market with in-house transmission motor electronic software is very, very well received.

Operator

Your next question comes from Brian Johnson with Barclays. Your line is open.

Brian Johnson -- Barclays -- Analyst

[Indecipherable] I have a question on [Indecipherable] market.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Brian, are you there?

Brian Johnson -- Barclays -- Analyst

[Indecipherable] coming from [Indecipherable] program versus...

Patrick Nolan -- Vice President of Investor Relations

Jerome, I think we can go to the next question.

Operator

Your next question comes from Joseph Spak with RBC Capital Markets. Your line is open.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you very much. Thanks for that first half or second half walk. That was helpful. I guess just on the commodities, if I'm following along, it seems like on a year-over-year basis, you're talking about another $55-or-so million headwind in the back half. I just want to confirm that. And also if you could just sort of remind us of your policy here because I thought, over time, you tend to get some recoveries there. So as we begin to think about the bridge into '22, does this sort of headwind remain? Or do you start to get some of those recoveries on the raw materials?

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I think you've got the number right. As you look at the second half of the year on a year-over-year basis, it's in the $45 million to $65 million range. So you've hit the midpoint exactly right. And that is a net number, net of our recoveries. Now obviously, there are some timing lags as it relates to recoveries, but the bulk of those recoveries are expected to be in our results as we progress through the year. And so that number that we're talking about, the $45 million to $65 million, in the back half of the year on a year-over-year basis is net of the recoveries already, but there might be a little bit of a tailwind heading into the first quarter of next year.

Joseph Spak -- RBC Capital Markets -- Analyst

So I mean if we -- so if these commodity levels hold, then it's fair to assume at an absolute level, there's still a headwind in the first half of next year even if -- maybe it's mitigated somewhat by some of the recovery timing?

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes, a little bit. So certainly, because the headwinds, as we go first half to second half, are definitely more negative, call it, $20 million to $40 million and as that carries over -- to the extent it carries over into Q1 of next year, that would be an incremental headwind on a year-over-year basis relative to Q1 of this year. But of course, there's lots of moving pieces as we head into the beginning of the year. We know next year, in '23, we got another $55 million to $60 million of synergies to recoup from the Delphi transaction. We've got the legacy BorgWarner restructuring actions we announced eighteen months ago. And you remember, we said those actions were to mitigate unknown risks. These are the types of risks exactly than it was geared toward, things that were unforeseen at the time. And that's another $25 plus million of tailwind next year. There's the legacy Delphi restructuring actions, Project Pioneer, which is incremental tailwind next year, and then any conversion on our continued outgrowth. So there's lots of puts and takes as we head toward next year. But incrementally, if commodity levels held, there would be an incremental headwind heading into next Q1 versus this year's Q1.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And then the second question is just, Fred, maybe -- this is a question we've been getting a lot from investors, right? So at your Analyst Day earlier this year, I think you sort of put up a slide that showed that thought 80% of inverters would be outsourced. It seems like during the quarter, whether it was Renault or Ford or some others, like there's been more and more announcements of automakers trying to do power electronics themselves. And so it seems like -- it would seem like maybe that figure is incrementally more challenged. I'm curious whether your view has changed there. Or is this just a definitional issue, meaning like by in-sourcing, you mean like the OEMs actually make it, but in reality, in some of these cases, like the OEMs might help with design, but they won't necessarily build?

Frederic B. Lissalde -- President and Chief Executive Officer

Yes. I think in inverter, we -- I believe we are in a very, very strong position. And we've already announced more than 1.1 million units by 2025 in Europe. If you do the math, it's a significant share of the overall European inverter volume for BEVs. And since then, more booking has happened. We don't see too much change. I think -- and it's due to three reasons. We're successful in this field for three reasons. First, it's our product leadership. The different voltage, 400, 800, the silicon carbide, we continue to innovate with cost and weight reduction with more efficiencies.

Two is we have scale. And I absolutely believe that this continues to be a strength. And we are leveraging the whole electronics business that we have. And last but not least, I think we also have a high degree of vertical integration, enhanced capabilities, integrated circuit development, software power modules and maybe more in the future. I think this is a very competitive business. We -- you have to have the best efficiency at the best cost. You have to have scale. I'm very confident that we are in a very good position to grab a significant portion of what will be outsourced. And we're not seeing a change from about 80% of outsourced inverter volume to suppliers.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay, thank you.

Operator

Your next question comes from Colin Langan with Wells Fargo. Your line is open.

Colin Langan -- Wells Fargo -- Analyst

Great, thanks for taking my question. You've done a pretty good job here. You keep cutting your sort of production assumption and yet you keep raising your sales guidance. I mean what is driving that much better-than-expected growth over market? Does mix have anything to do with that, with commercial maybe holding in better?

Frederic B. Lissalde -- President and Chief Executive Officer

So I think we outgrew the market in Q2. We underperformed in North America due to customer exposures, and we overperformed Europe and China, double digit, driven pretty much by all products. There is not one product that drives more than the other.

Now in Q2, I must admit, there was a lot of moving pieces. And we're not looking at outgrowth per quarter. That is too finite. So -- but we're very happy with the way our top line is evolving this year and very happy to be able to beat and raise in the short term. Also very focused in the long term. We are investing R&D in order to -- in R&D in order to support the programs that have been booked and very happy with where we are, both short term on the margin and cash flow and also the activities from a long-term booking. And I want to take the example, people focus a lot on downstream the battery. But the example of that high-voltage coolant heater, I think, is a great example where BorgWarner can develop in-house and really solve a problem of battery electric vehicle. Battery electric vehicle require innovation solutions for two critical functions: battery thermal and cabin heating. And the solution that we gave to the market is taking a lot of traction. You won't be surprised, we have our own integrated electronics and software, and we are leveraging the heating technologies that we have from other BorgWarner product lines. So very happy about where we are, both organic and inorganic in the long term.

Colin Langan -- Wells Fargo -- Analyst

Got it. And any color on the commercial market? I kind of thought that was holding in better, but if I look at your guidance from Q1 to Q2, actually, your outlook is it's getting -- it actually came down. So did that actually hold up better in the quarter? Does it get a lot worse in the second half now? Because I know that's a pretty high-margin business. I think with the Delphi deal, it's a larger chunk of your business now.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I mean one of the big things is that China, we would expect to see headwinds as we look at the back half of the year from a year-over-year production perspective, and that obviously has an impact on us on our overall outlook.

Colin Langan -- Wells Fargo -- Analyst

Okay. And is that -- OK. So the second half is getting weaker. Okay, thanks for taking my question.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. Second half is weaker on a year-over-year basis, definitely, and China is a big driver of that.

Colin Langan -- Wells Fargo -- Analyst

Got it.

Operator

And your next question comes from Dan Levy with Credit Suisse. Your line is open.

Dan Levy -- Credit Suisse -- Analyst

Good morning. Thank you for taking questions. I just want to follow up on Colin's question there, just on the outgrowth. Can you maybe unpack some of the items that you saw in the second quarter that drove the outgrowth between the DCT and turbo and GDi? Just maybe a little more color on what exactly was driving that. And as we're thinking about, especially in Europe, the push to BEV, is there any shift in where GDi and turbo sits in automakers pushing toward their CO2 targets?

Frederic B. Lissalde -- President and Chief Executive Officer

Yes. And as I mentioned before, we outgrew Europe and China double digit, driven by a lot of factors. But you're right, gas turbos, VCTs and GDi in Europe, also all-wheel drives. And so this is driven by also -- don't forget that in any hybrid powertrain architecture, you've got a good gasoline engine with turbos and GDi and other elements. And don't forget that hybrid powertrain, especially in Europe, but also in China, and the business that we booked with that dual inverter is a good example, is ramping up very, very fast. And that is giving us on the E side scale and launch expertise that are translatable into the world of BEV. And on the combustion side, it just pulls our products that drive efficient combustion engines. So I think it's that particular reason. I don't have the color about how much is turbo versus VCT or GDi or all-wheel drive, but I'm pretty sure Pat can follow up off-line with you.

Dan Levy -- Credit Suisse -- Analyst

Okay. And then the line of sight for the remainder of the year as far as GDi and turbo in Europe, is that something that is still playing a role in driving CO2 targets?

Frederic B. Lissalde -- President and Chief Executive Officer

Absolutely, it does. Absolutely, it does. It does in reducing the CO2 and emissions of combustion engines, it does because it is an enabler of hybrid powertrains. And as you've seen, this is helping carmakers in Europe, especially to meet the CO2 target. So absolutely, it does help.

Dan Levy -- Credit Suisse -- Analyst

Great. And then as a follow-up, I just wanted to follow up on last quarter's announcement, which we got a little more color in June, the iDM award with Hyundai. So you have an A segment car here, and it's putting in iDM content that's -- if I had to guess, it's $1,000, give or take. I mean if you can maybe comment on the content. But the question is usually, an A segment car is going to be a much tighter content cost, there's much lower budget for content. So what does that tell us about going into B or C segment platforms? Does that tell you that there's better potential to scale that up to B or C segment? Or is there something unique about an A segment vehicle that makes them more likely to approach you on an iDM as opposed to doing it in-house?

Frederic B. Lissalde -- President and Chief Executive Officer

So last quarter, we announced the iDM award on Class A, so small. Small doesn't mean simple, but small. This quarter, we're announcing a different type of iDM, bigger, with about twice the output power than the one from Hyundai. And as I mentioned in the last call, we're building iDM modular portfolio. And this is a great example of launching two different power levels, all BorgWarner-made, in Asia. Combined with the iDMs that we are currently producing as an integrator, you see that we are starting seeing a path of integrating with other motors or even other inverters, if the customer wishes to do that, a path for different power levels and different sizes of iDM, all-BorgWarner-made, transmission motor, power electronic software and vertically integrated on the ASICs and so on, and a path with components. And as we mentioned in past calls, we're very happy to sell inverters to customers who want to make iDM in-house. So you're seeing the strategy of developing and commercializing a portfolio of iDMs globally that is seeing daylight.

Dan Levy -- Credit Suisse -- Analyst

Great, thank you.

Frederic B. Lissalde -- President and Chief Executive Officer

Welcome.

Operator

Your next question comes from Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye -- Oppenheimer -- Analyst

Good morning. I appreciate you taking questions. I guess first, congrats on closing AKASOL. I just wanted to understand, what margins roughly are you assuming for AKASOL by 2024 in the accretion estimates you've provided, excluding amortization? And then more strategically, how do you see AKASOL maintaining competitive differentiation in battery packs over time?

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. With respect to the margins, we're not disclosing a margin outlook at this point in time, but I think you can probably do some math underlying our EPS and get a sense as to what the pre-tax assumptions are as it relates to the overall performance of that P&L relative to the $0.5 billion or so of revenue that we're expecting by the year 2024. But at this point, again, not going to disclose any margin profiles other than we think it's going to be a profitable business over time.

Frederic B. Lissalde -- President and Chief Executive Officer

As far as technological edge at AKASOL, a few things, Noah. First, they're currently producing their gen 2. They're launching their gen three later this year. And being able to launch generation and improve efficiency and power density regularly is key. Now they're part of -- soon, they'll be fully, fully part of BorgWarner. And you can imagine that we will be working with them and linking them with the battery management system and software that we have currently in production coming from ex-Delphi Technologies. We certainly are going to link them also to the high-voltage coolant heaters. Those elements are heating the coolant for the batteries. And I'm -- I expect that we're going to find innovation and products that are going to be generating value for our customers and for BorgWarner going forward.

Noah Kaye -- Oppenheimer -- Analyst

Very helpful. And then just around R&D, to clarify, the new guide is $725 million of spend. That compares to 5% previously. So I just understand, are you actually bumping up R&D levels from prior guidance? If so, is that driven by EV programs? Kind of where is the focus? Just help us understand.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I'll take that. A couple of things worth noting around the R&D guide. First thing is that when you look at our Q2 results and when you get a chance to go through our 10-Q, you'll see that our net R&D sequentially was down in the second quarter versus the first quarter. But it's because we actually had higher customer recoveries from engineering perspective than we had anticipated and than we had in Q1, by about $20 million. If you look at our gross R&D going from Q1 to Q2, it was actually up sequentially, but the net was down. And so what that means is it's actually had an impact. We've actually brought down our implied full year R&D from what was about $740 million implicitly at the beginning of the year to about $725 million as our current guide. And so that's really being driven by the higher-than-anticipated customer recoveries that we generated in the second quarter.

As you look at it as a percent -- the reason we gave a dollar guide as opposed to a percentage guide is the percentage is coming down. And the reason the percentage in 2021 is coming down is because revenue is going up. So it's not because we're cutting our R&D spend. We had better recoveries, but our R&D spend is actually still $725 million. But with revenue coming -- going up, the R&D as a percent of sales is actually now 4.6% to 4.8%, which just looks like a lower percentage, but it's implying lower spend, but it really isn't the case. So as we look to the full year, that's what the $725 million represents, about a $15 million reduction but really driven by the recoveries. And then as we think ahead to next year and beyond, we continue to expect that we're going to be driving R&D spend in that 5-plus percent range on a go-forward basis.

Noah Kaye -- Oppenheimer -- Analyst

That's a very helpful detail. Thanks Kevin. [Indecipherable]

Operator

Your next question comes from David Kelley with Jefferies. Your line is open.

Gavin Kennedy -- Jefferies -- Analyst

This is Gavin Kennedy on for David. Two from my end. First, you mentioned that North America customer mix was a headwind in 2Q. Just was curious what BorgWarner is seeing as far as visibility to customer schedules in North America through year-end.

Frederic B. Lissalde -- President and Chief Executive Officer

What we're seeing is a better mix and recovery coming into Q3 and Q4 from the Q2 level and still very volatile, especially because of the semiconductor supply issues. That's what we're currently seeing, Gavin.

Gavin Kennedy -- Jefferies -- Analyst

Okay. That's helpful. And then switching gears. At your Investor Day, you mentioned $3 billion to $4 billion in targeted legacy [ICE] dispositions by '25 and about, call it, $1 billion in the next year or so. Can you comment on how disposition conversations are going, particularly given the volatile current environment? And any additional commentary you can give us on what products you might be focused on these dispositions? That would be helpful.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I mean it's in progress. Just as you noted, the $1 billion or so, we expect it to execute over a 12- to 18-month time frame from what we announced at Investor Day, which means as we get to the end of Q3, we'd expect to complete that full $1 billion or so. And we're in progress right now. And as we talked about, we're really focused on disposing product lines or businesses that don't meet the long-term financial objectives of our portfolio, which means they lack one of three things: they either lack product leadership, they lack medium to long-term growth prospects or they lack strong margin and cash flow generating ability. And so if a product line or a business doesn't tick all three of those boxes, it's a candidate for disposition.

So at this point, we're actively moving forward in line with what we talked about at our Investor Day. And we think we're on track to deliver that $1 billion or so of dispositions, I call it mid- to late 2022, consistent with the time frame that we laid out back at Investor Day. And then we continue to expect $3 billion to $4 billion by the end of 2025.

Gavin Kennedy -- Jefferies -- Analyst

Great. Thank you, everyone.

Operator

Your next question comes from Brian Johnson with Barclays. Your line is open.

Brian Johnson -- Barclays -- Analyst

Thank you. Apologize if this was covered in the opening, but I kind of doubt it. When I -- when you look at the 800-volt market, I was struck at the Chicago Auto Show by the Hyundai 800-volt systems and, of course, the advantages. A small question is, can you confirm if you're on that or not? But the bigger question is 800 volts started in the high-performance performance market with the Porsche. Now we see it in Hyundai's. I know your new high -- your new EV motor runs on 800 volts for commercial. So my question is, do you see 800 volt as a big trend, one. Two, is the inverter product line you got from Delphi Tech uniquely positioned in that market relative to competitors? And three, are there synergies then between your 800-volt converter capability, your e-motor capability and where AKASOL could go? And is AKASOL capable of doing 800-volt packs?

Frederic B. Lissalde -- President and Chief Executive Officer

So the answer to your first question, is 800 volt a big trend and is it going down in vehicle sales, the answer is yes. Why? Because it increases the power density and decreases the charging time. Are we well-equipped? Absolutely. The answer is absolutely, yes. We are going to be one of the first one launching very soon, 800-volt silicon carbide at high volume. This is a competitive advantage that we have to master, high-voltage silicon carbide, and also master 800 volts, made in-house, power module, which is the heart of the inverter. Synergies, absolutely. I was talking about high-voltage coolant heaters. We will start in 2024, an 800-volt high-voltage coolant heater. And yes, there are synergies across the different product portfolio that we have running at 800 volts, Brian.

Brian Johnson -- Barclays -- Analyst

And could AKASOL do 800-volt packs?

Frederic B. Lissalde -- President and Chief Executive Officer

I need to check that. My answer is yes, but I have -- I need to go back to you on this one particularly.

Brian Johnson -- Barclays -- Analyst

Okay, thank you.

Operator

And your next question comes from Emmanuel Rosner from Deutsche Bank. Your line is open.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Yes, thank you. Good morning everybody. First question is about your gross over market outlook. It's good to see you boosting the outlook for the full year. Can you talk in a little bit more detail around what you're expecting for the second half of the year? Obviously, you mentioned mix, improving and customer mix, in particular. But then obviously, you had pretty solid growth over market already in the second quarter.

And then for the full year, you had 500 to 600 basis points. How would you see this play out in the second half? And then just looking a little bit more forward, how should we think about the mix going forward? Does this then represent a headwind in 2022? Does this acceleration in growth over market make you rethink your framework for growth over market?

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Yes. I mean a couple of things. When you look at the first half, year-to-date, we're somewhere between 650, 700 basis points of cumulative outgrowth for the first half. And so as we look at the second half of the year, we don't think we'll be operating at quite that pace. We think we're probably in the 400 to 550 basis points for that second half. The first half, we benefited from some mix. We probably benefited from some production of vehicles that weren't ultimately in the production numbers of the OE. So there's probably some level of giveback that's implied in our numbers in the second half, which is why you see it lower year-over-year and implicitly a step-down sequentially going from the first half to second half. But overall, I feel good about our ability to deliver 500 to 600 basis points for the full year. In terms of what that translates to for future years, not prepared to give any update on that. I mean we feel good about the backlog we've disclosed previously, looking at '22 to '24. And we'll probably give an update on that as we get into the beginning of next year.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Okay. And then second question on iDM. Can you just -- so just diving a little bit deeper here, can you just give us a sense of how you think about the range of content per vehicle? And how would you see your either volume or revenue and margin profile of that line of business evolve over the next few years? So sort of like a mid-term outlook on how you would see iDM go from here.

Frederic B. Lissalde -- President and Chief Executive Officer

Average content per vehicle is going to range from about $1,000 for the smaller versions and times three or four for much higher sizes. I'm not going to comment on volumes. I'm not allowed to comment on volumes. Only -- I think that gives you some color on the content per vehicle.

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

And then on the margin side of the equation, I think as we've talked about before, any new product programs, whether they're a combustion-based product or an EV product like an iDM, we look at on a return on invested capital basis. And given that we're predominantly from a manufacturing perspective in the assembly business, what that means is the capital intensity of our programs, including the iDM, tend to be similar to our other product lines. And so as we drive to deliver consistent ROIC across our product portfolio and we have relatively consistent capital intensity, it means the margin profile on any discrete program looks substantially similar to the margin programs of other business that we approve throughout the company, whether it's EV or not.

Emmanuel Rosner -- Deutsche Bank -- Analyst

And that would be from day one? Or is there a target data on this?

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Well, that's the life of a program. So when you look at our EV programs, generally speaking, they tend to have much more R&D intensity, which tends to be upfront. So as we're growing in EVs, what happens is we have a lot more R&D hitting the P&L upfront, and then you generate the contribution margins over time. And the blend of all that hits our ROIC targets over the life of the program. But what that means as you're in ramp-up mode across EV, your R&D is much higher proportionally relative to the conversion you're generating on the incremental revenue because the revenue is still coming in the future. So the EV portfolio in total has a more depressed margin while you're in growth mode. But that's not because of the underlying fundamentals of the business. It's because we're growing and investing in R&D to support the contribution margins that we'll generate over the coming years as we start to generate the revenue.

Frederic B. Lissalde -- President and Chief Executive Officer

Two things I would add, Emmanuel. First is that everything that Kevin has said -- is the additional R&D that we do for EV is already in our margin profile, right? And two, currently spending 30% of R&D in EV when our revenue is 3% to 5%, like -- where like the market is, quite frankly. So that shows you how deliberate we are in accelerating the path toward electrification.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Yes, definitely. I appreciate it, thanks.

Operator

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

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good morning and thank you very much for taking the questions. First, I wanted to talk on Delphi. And reflecting back when that was announced, part of the industrial logic was that Delphi would give the company a broader set of technologies, including for EVs. I know some of that's with iDM, but more holistically. So now that you've had that asset for a longer period of time, you have a few wins with iDM, can you give more clarity on your win rates and to what extent you're converting on that broader set of solutions to the extent that you had been anticipating?

Frederic B. Lissalde -- President and Chief Executive Officer

So yes, we -- it's only six months after the close we booked iDMs, which is very important, but it's not limited to those systems. We also booked a lot of inverters that we think could be booked only with that combination. We are also accelerating on battery management systems, the software battery management system. So from a top line synergy perspective, we're absolutely on track with what we expected coming into the Delphi acquisition.

Mark Delaney -- Goldman Sachs -- Analyst

Got it. That's helpful. And then you talked already a little bit about the supply chain situation and your views on the second half versus the first half. But maybe you can talk a little bit more on the longer-term implications from the supply shortages. Some of the OEMs have said that they want to change how they're going to procure supply and work more directly with some of the semiconductor companies. And how do you think that may impact a Tier one like BorgWarner in terms of how you may partner both with your customers and suppliers and some of the implications around margins and working capital? Thanks.

Frederic B. Lissalde -- President and Chief Executive Officer

So we are not seeing that trend, at least in the products that we focus on. But what I think is -- what that semiconductor issue has told us is that it is extremely important to partner upstream and downstream, upstream with our customers and downstream with our semiconductor suppliers. And the second thing that it has taught us, I think, is that scale matters. And it's easier to get going when you have scaled a notch. And I think those two lessons, we're going to keep very close to our mind when we move forward in the next years.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Patrick Nolan -- Vice President of Investor Relations

Thank you all for your great questions today. If you have any other follow-up questions, feel free to reach out to me directly. Jerome, you can go ahead and close up the call.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Patrick Nolan -- Vice President of Investor Relations

Frederic B. Lissalde -- President and Chief Executive Officer

Kevin A. Nowlan -- Executive Vice President and Chief Financial Officer

Chris McNally -- Evercore -- Analyst

Luke Junk -- Baird -- Analyst

Brian Johnson -- Barclays -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Colin Langan -- Wells Fargo -- Analyst

Dan Levy -- Credit Suisse -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

Gavin Kennedy -- Jefferies -- Analyst

Brian Johnson -- Barclays -- Analyst

Emmanuel Rosner -- Deutsche Bank -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

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