BorgWarner Inc. (BWA) Q4 2019 Earnings Report, Transcript and Summary

Good morning, my name is Sharon and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2019 Fourth Quarter and Full-year Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Sharon. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning. It is posted on our website borgwarner.com, on our homepage and on our Investor Relations homepage. 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 homepage 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 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 non-comparable items. When you hear us say, "Adjusted", that means excluding non-comparable items. When you hear us say, "Organic", that means excluding the impact of FX and net M&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 production we did for our geographic exposure. Our growth is defined as our organic revenue change versus the market. Please note that we have posted our earnings call presentation to the IR page of our website. We encourage you to follow along with the slides during our discussion. With that, I'm happy to turn the call over to Fred. Frédéric Lissalde: Thank you, Pat, and good morning, everyone. We are very pleased to share our results for 2019 this morning and provide an overall company update. Let me start with the highlights of the quarter on Slide 5. I am pleased with our stronger than expected top-line and margin performance for the year, driven by the fourth quarter performance. With approximately $10.2 billion in sales, we are up about 0.7% organically. This compares to our market being down approximately 4.6%. So, our outgrowth was 530 basis points for the year, which was ahead of our expectations going into the fourth quarter, driven by stronger than expected revenue trends in China and Europe. For the full-year, we saw our growth in all major regions. We delivered high single-digit outgrowth in Europe and China. Our North American outgrowth was in the mid-single digit range. 2019 earnings per share came at $4.13, ahead of our guidance, driven by the fourth quarter upside. We delivered strong free cash of about $700 million for the year and we expect this strong free cash to continue in 2020. Our near-term cost actions are supporting our incremental margin and we have identified additional cost saving opportunities that we believe will sustain our strong margin profile. As Kevin will discuss in detail later, we believe our backlog supports our targeted mid-single digit outgrowth going forward. And lastly, our planned acquisition of Delphi Technologies, we strengthened our propulsion leadership while supporting our long-term growth outlook. Let's now turn to Slide 6, which highlights the additional cost restructuring steps that we have announced today. As you will recall, on our Q2 call, we highlighted our intention to find additional ways to adjust our cost structure without compromising our longer-term aspirations. Over the last six months, the team has identified additional restructuring opportunities in all major regions. These actions will include the restructuring, closure or consolidation of both manufacturing and technical centers. We have also made the decision to consolidate our turbo and emissions businesses in order to create product differentiation with our turbo and EGR under one roof, as well as consolidating overhead costs. These actions are expected to generate incremental annual cost savings in the range of $90 million to $100 million by 2023. Combined with our previously announced restructuring plan, we plan to achieve gross cost savings of $135 million to $145 million per year by 2023. Cost improvement is a continuous focus for BorgWarner. We view these actions as proactive steps that we believe will position the company to sustain its strong margin profile and overall long-term competitiveness. While we must adjust our cost to the challenging global market environment, we continue to focus on pursuing new businesses and new technology. Our Q4 product announcements highlight this focus and they are summarized on Slide 7. First, we disclosed that we will be launching our Triple Clutch P2 Hybrid Module and hydraulic control unit with ChangAn this year. This module gave us cost effective hybridization and is compatible with existing vehicle platforms. Next, we disclose our first award for our eTurbo. Though this program launches with the European OEM in 2022. It is a great example of combining our mechanical, rotating electric, electronics and software expertise. Lastly, we secured another High-Voltage Coolant Heater Program with a major European premium OEM. This program launches in 2023 for both hybrid and battery electric vehicle applications. These three programs are great examples of revenue that supports our strong backlog through 2023. On Slide 8, I would like to summarize the key points of our planned acquisition of Delphi Technologies. First and foremost, it will strengthen our leadership position in electrified propulsion systems, as we gain scale, expertise and capabilities in electronics at a time when the industry is moving toward electrification. At the same time, it would enhance our combustion, commercial vehicle and aftermarket businesses, driving an even better market balance for us. The combined company would offer a comprehensive portfolio of industry-leading products and systems across propulsion types. As we bring our offering together, I know we will be better positioned than ever before to meet our customers' evolving needs it is not just the strategic fit we are excited about, we believe the financial benefits are also compelling as we expect this transaction to have significant synergies and to be meaningfully accretive. We are confident that this transaction will deliver enhanced returns for stockholders, both in the near term and long into the future. I would like to highlight a sampling of the mid-term revenue synergies opportunities from the Delphi Technologies acquisitions on Slide 9. As part of our due diligence work, the sales and engineering teams from both BorgWarner and Delphi Technologies focused on identifying the key customers where we expect to pursue modular solutions for various hybrid and electric programs. Within this customer list, we then drilled down to hybrid and electric programs that are likely to be awarded by these customers over the next 18 to 24 months. What you see on the Slides are the top-15 programs that we identified as our priority pursuits post-closing. A vast majority of these programs are expected to launch in the 2024 to 2025 timeframe. There are three takeaways from this slide that I would like to highlight. First, the size of the list reinforces our view that the opportunities in electrification are accelerating. We believe the revenue opportunities are significant, with these programs alone representing $0.7 billion in potential additional revenue by 2025 and growing to $1.3 billion by 2027. It is this size and acceleration of these opportunities that supports our view that the acquisition of Delphi Technologies is not only supportive but accretive to our long-term growth outlook. Before I turn it over to Kevin, let me summarize our 2019 results and long-term outlook. We exceeded our expectations for revenue growth and margins. We delivered strong free cash flow. We are taking the necessary cost actions to maintain our margin profile and overall competitiveness. We continue to see strong demand for our products, as evidenced by our new program wins and strong net new business backlog. It is the operational and financial strength of this company that allows us to execute a transaction like the planned acquisition of Delphi Technologies that will help support our long-term revenue outgrowth. Now, over to you, Kevin.

Thank you, Fred, and good morning, everyone. Before I review the financials in detail, I would like to provide a quick overview of the two key drivers of our fourth quarter results. First, our revenue outgrowth was ahead of our expectations at 850 basis points in the quarter. This was driven primarily by higher volumes of new programs in China and stronger than expected diesel related revenue in Europe. Second, our margin performance was ahead of our guidance, driven by better than expected sales and our focus on cost management actions. Let's turn to Slide 10. As we look at our Q4 year-over-year revenue walk, you can see the impact from the thermostat divestiture we executed in early 2019. Additionally, you can see that the stronger U.S. dollar reduced revenue by about 2% from a year ago. Excluding these items, our organic sales were up 2.6% despite the 5.9% decline in industry production. This is the 850 basis points of market outgrowth, and importantly, this outgrowth occurred in all of the major light vehicle markets around the globe. In Europe, our light vehicle organic revenue was up low-single digits on strong new programs, as well as better-than-expected diesel-related revenue. And in China, we grew high teens over the market. Partially offsetting the strength in our light vehicle outgrowth, our commercial vehicle and off-highway businesses declined relative to last year, resulting in 100 basis point drag on growth. But that is already netted in our reported 850 basis points of outgrowth. Overall, we are pleased that we continue to deliver revenue outgrowth even in this challenging market environment. Now, let's look at our adjusted operating income performance, which can be found on Slide 11. Q4 adjusted operating income was $340 million compared to $323 million in the fourth quarter of 2018. Our adjusted operating margin was 13.3%, up compared to 12.5% in the fourth quarter of 2018. On a comparable basis, adjusted operating income increased $27 million on $67 million of higher sales, which translates to an incremental margin of 40%. The result was ahead of our guidance and our typical conversion rate of 15% due to our cost management actions and lower R&D spending compared to the same quarter in 2018. Adjusted earnings per share was $1.15 for the quarter. The $0.06 decline in adjusted earnings per share compared to the fourth quarter of 2018 was driven by lower equity and affiliates earnings, higher corporate costs and a higher tax rate. Moving to cash flow. We are proud of the fact that we delivered a strong result for the fourth quarter. In the fourth quarter, we generated $221 million of free cash flow, which drove our full-year free cash flow of $699 million. This was well ahead of our guidance and a great result as we continue to focus on cash generation as a management team. Let's turn to Slide 12, where you can see our perspective on industry production for 2020. Overall, we expect that the challenging industry conditions will continue into the new calendar year. On a full-year basis, we expect the market to decline, to be in the minus 2% to minus 4% range. By region, we are planning for China to be down anywhere from 1% to 5% on a full-year basis, as we expect customer demand to remain under pressure. Europe is expected to be down 2% to 5% as our customers maneuver through 2020 CO2 emissions targets. And in North America, we expect a modest 1% to 2% decline. However, as you'll see in a moment, we expect to continue to outgrow the market in 2020, based on continued strong demand for our products. So, let's discuss our full-year guidance on Slide 13, which excludes the potential impact of the pending Delphi Technologies acquisition. Our guidance is based on the end market assumptions that I just reviewed with global production being down 2% to 4%. Despite that, we expect organic revenue to be in the range of down only 2.5% to up 0.5%. That is because we continue to expect to drive total market outgrowth of 150 to 250 basis points. Embedded in that our growth range is 100 basis point headwind from declining commercial vehicle volumes, which means that our light vehicle outgrowth is expected to be 250 to 350 basis points. With these organic growth assumptions, we expect 2020 revenue to be in the range of $9.75 billion to $10.075 billion. Our adjusted operating margin is expected to be in the range of 11.6% to 12%. The 10 to 50 basis point decrease in our margin outlook relative to 2019, reflects normal detrimental margins on declining sales and a year-over-year increase in R&D spending, which is expected to largely offset the benefit of any restructuring savings in the year. For the full-year adjusted EPS, our guidance range is $3.85 to $4.15 per diluted share. And finally, we are targeting free cash flow of $675 million to $725 million, which at the midpoint is flat year-over-year despite lower earnings and an expected increase in capital spending to support our future growth. That is because of the cash savings related to the elimination of our asbestos liabilities back in October and lower working capital given the lower revenue outlook. That is our 2020 outlook. Let's now look at our longer-term view of revenue with a snapshot of our updated multi-year backlog on Slide 14. As you can see, we expect to deliver revenue outgrowth across combustion, hybrid and electric vehicles. More specifically, we see an increased content on electrified vehicles accounting for more than 100% of our light vehicle net new business backlog over the coming years. Within this, we expect over 20% of our net backlog will be related to vehicles with electric propulsion systems, and we expect our hybrid related revenue to continue to be supported by hybrid system solutions, as well as increased penetration of our combustion products on hybrid vehicles. And from a regional perspective, we see outgrowth in all of our major markets. On a cumulative basis, our 2020 to 2023 backlog is expected to be within a range of roughly $2.5 billion to $2.6 billion. Now, you'll notice that the 2020 backlog is down about $350 million from last year's disclosure. This is primarily due to two main factors. First, expected industry volumes adjusted for the regional exposure of our backlog are more than 15% lower than our expectations from a year ago. That lowered the backlog by approximately $125 million. Second, the pull forward of volume into 2019, which drove our outsized light vehicle outgrowth of 950 basis points in Q4, is creating a $140 million year-over-year headwind. When you then look ahead to 2021 to 2023, we expect the combined net new business backlog of $2.1 billion. Importantly, we believe this backlog supports an average outgrowth of roughly 500 basis points during this timeframe, which we feel very confident in. Let me summarize our financial results. Overall, we had a really solid year and finished with the results that exceeded the top end of our previous guidance range across the board, 12.1% adjusted operating margin, 530 basis points of market outgrowth, $4.13 of adjusted EPS and $699 million of free cash flow. As a management team, we are taking the necessary actions to maintain our company's historically strong margin profile and to strengthen our free cash flow generation. We will continue to do this while balancing the need to manage a very difficult near-term market environment with the need to continue taking the necessary steps to solidify the company's future profitable growth. With that, I would like to turn the call back over to Pat.

Sharon, we are ready to open up for questions.

[Operator Instructions] First question comes from John Murphy with Bank of America.

Good morning, guys. I have got a bunch of questions, but I will try to keep it brief here. The growth over market discussion is one obviously is pretty favorable to you given where you are in the vehicle. But I'm just curious as, as you think about your backlog and where it is focusing in the powertrain, I mean, is it a potentially if the market falters on volumes a bit more, that your growth above market might expand just given the stickiness from a regulatory perspective as well as sort of a market demand perspective for what you are delivering to the market and your technology? I'm just trying to understand. Because it seems like that is what is happened more recently and it seems that that is very possible or likely going forward. Frédéric Lissalde: I think that this is the beauty of the strategy of being balanced across combustion, hybrid, electric, having the right portfolio and capitalizing from electrification acceleration, but also having great products on the combustion side that see additional take rate, within the combustion and also within hybrid.

Okay. But I mean, but it does seem like Fred, that this outgrowth may expand if volumes come down just because these aren't the kind of products that are discretionary or would get pushed out. Is that a reasonably fair statement? Frédéric Lissalde: You never know. For example, diesel, diesel surprised us in Q4. And even if we don't think that this is a trend, those outgrowth from a quarter-over-quarter look is very, very tricky. So, I'm very confident with us marching toward the 500 basis points outgrowth mid-term. We have done that last year. This year, if you exclude the pre-buy and if you look at light vehicle will be at 440, and it is not going to be 500 exactly every year. But we are within that range and the backlog supports that 500 basis points outgrowth.

Okay, great. And then maybe just one follow-up. Given that some time has passed since the acquisition of Delphi. So, I'm just curious if you have any incremental customer feedback? And if we think about what you are discussing on Slide 9 with the focus pursuit opportunities, is that sort of just early days in what you are identifying and that you are reasonably confident is a target? And how should we think about sort of win rates when you get into these very focused pursued opportunities? Are they similar to sort of typical win rates as you are going after programs or might be higher just given what you are delivering to the customers? Frédéric Lissalde: Yes, feedback from customers is firstly saying, Hey, we understand the product, we understand the technology." And when you look at Slide 9, those are real programs and its significant revenue opportunity for us. So, I think customers are really liking the technology fit and this unique positioning that we will be able to have having mechanical rotating electrics and electronics at scale. John, I think it is a bit early to talk about win rates. But we feel good about the number of programs and the size of those programs.

Okay. And then just one housekeeping real quick on Slide 6. I think this is all BorgWarner specific rationalization and restructuring, it has nothing to do with the combination at this point, is that correct? Frédéric Lissalde: It has nothing to do with the combination with Delphi Technologies, total independent.

Great. Thank you very much. Frédéric Lissalde: Thank you, John.

Next question comes from Joe Spak with RBC Capital Markets.

Good morning, everyone. I wanted to dive in a little bit to the backlog and a greater than 100% of the growth coming from electric. So, sort of implies a declining ICE business even if you are sort of outgrowing, I guess, underlying ICE. But, and that is all sort of great and that sort of drives that outperformance on the top line. But how do you think about the margins over that time period? Because you have the high margin legacy business declining, the new electric business ramping. Like, does this restructuring savings of $90 million to $100 million, is that enough to sort of have you sort of hold core BorgWarner margins over that 2023 time period? Frédéric Lissalde: Yes, I would say that we run the business with return on invested capital. We don't see any differences, whether it is combustion, hybrid, electric. We are, as you have seen accelerating our restructuring program, and in order to be proactively mitigating risks that may happen. In this industry, things happen. And so, we are absolutely committed and confident that we can maintain the high level of margin that we have and the current margin profile. That is what we do in the restructuring program also.

Okay. I guess the second question and maybe sort of as an update. Like, do you have any refreshed views now that was for the year further into this on the electric traction motors, I think you have been saying you expect like 50% in-source and outsource. Is there any movement there? And I guess the reason I ask is, we have seen some other companies like [Nivac] (Ph) sort of really investing here. I think they had a comment, which said they are aiming for 35% share. I'm not sure exactly what they mean by that. But if only 50% are outsource, then they are talking like 70%. So, I don't know if you have sort of seen any change there on how the market develops, anything changing on the competitive front? And, I guess also, do you need to potentially partner with an automaker in a more structured fashion on the motor side? Frédéric Lissalde: We see movement going both ways from customers around the world. Some that wanted to make motors are actually outsourcing motors and vice versa. But we feel that the 50% in-source versus outsource is about right.

Okay. And is there a benefit to having a more formal structured program with potential customer? Frédéric Lissalde: I will say that we never say no, but this is not the path we are on.

Okay. Thank you very much.

Next question comes from Rod Lache with Wolfe Research.

Good morning, everybody. Just two things. One is, I would like to better understand how we should be thinking about this restructuring. You pointed out that it is there to sustain margin, it is not incremental. And I suspect that the Street is going to be speculating on the reasons why, which could include incremental price pressure, lower margins on new technologies, shrinking ICE, higher R&D or maybe some other assumptions. So, maybe just first, like, talk to us about what is different now in this environment that this additional restructuring doesn't accrete to the margins? And then also how much of the restructuring is cash? Frédéric Lissalde: Rod, I will answer then I will turn it over to Kevin for giving you more color on cash. We all have been in this business for a long time. I have been in this business more than 30 years and things happen. You have to be proactive in those restructuring efforts. You have to implement proactive risk mitigation. We talked a little bit about pricing pressure coming from the towable side of our business. We don't see it worsening, but it is still the case. We are maintaining a very, very strong return on invested capital discipline. But the need of being competitive and the need of maintaining an overall long-term competitiveness is necessary. And that is why we do those proactive action.

And I will comment on the last piece and maybe just to add to that. We as a company pride ourselves on the sustained strong margin profile we have had over a long period of time. I mean, 7 consecutive years of north of 12% operating margin. We take a lot of pride in being a top tier supplier from that perspective. And part of it is taking the proactive steps necessary to be able to sustain that margin over the long term. In terms of your question about cash, the amounts that we quoted on there, the $275 million to $300 million range that we provided is the potential restructuring cash cost.

Got you. And then just secondly, it is noteworthy that Europe, which appears to be the epicenter of CO2 regulation right now, only accounts for 10% of the company's backlog. And I was hoping you can give us a little bit more color on what you see going on there. What that backlog would look like if you sort of ignored the decline in diesel? And of these opportunities that you are outlining on Slide 9, any color on how that is kind of splits regionally?

Yes, sure. When you look at that backlog and you see Europe at 10%, keep in mind this is the net backlog. So, it is pluses and minuses in there. And one of the big minuses, clearly, that we continue to have in the European business is the impact of diesel. And so, we are overcoming that with this backlog because it is net of the diesel headwind. The diesel headwind, I think you should think into totality being about 20 points impact on the backlog. Now, if diesel we are sustaining itself there, there'd be some offset on the gas side, but not completely. But that is about a 20 point headwind purely associated with the diesel portfolio.

What does that mean, 20 points, Kevin?

In isolation, if I don't assume any offsets in gas or other things, if I just look at how much lower the backlog is as a result of diesel coming down, it is about 20 points.

Okay. The 20%, it would be 20% higher? Or 20 percentage points higher than that 10% if it wasn't for that you are saying?

Yes. I would say really focused on the turbo side in particular. But there would be offset on the gas side as well, not one for one, but there would be an offset. But that is the gross impact of diesel, correct.

Got you. All right, thank you.

Next question comes from Noah Kaye with Oppenheimer.

Thanks very much. I want to follow back on the color you provided around the opportunities, joint opportunities you could pursue with Delphi. I guess given your expectations for the closing to occur in the back half of the year, and first of all, still verifying that the case. If some of these programs are going to be awarded relatively soon, subsequently to that, how quickly do you feel you can move in collaboration to capitalize and actually close on some of those opportunities? And maybe if you could explain why you think the integration could be relatively fast? Frédéric Lissalde: I think, Noah, our ability to move quickly is certainly the goal. The key is that we have identified the focus pursuits and we'd be able to move very swiftly once we can. It is not going to be something that is going to take a long time. We are understanding what we need. The technology from a relative perspective is state-of-the-art and we will be able to move quickly. We both have world-class product that we marry very well which other.

Okay, that is helpful. Obviously, you provided some color in the prepared remarks around the reduction to the 2020 backlog and part of that is a pull forward. For the part of it that is just a pure reduction, the adjustment in volume down 15%, I'm just wondering within that, is any of that related to lower expectations for EV and Hybrid relative to the past? But I think in 2019, we did see a bit more softness than expected. Just wondering how you think about the impact of the EV and hybrid trajectory now relative to maybe where you saw it last year?

Yes, I will start with that and maybe I will ask Fred to comment on the hybrid and electric trajectory in total. But the number we quoted there in terms of the 15% down is purely markets. So, if you look at what our 2020 expectations were a year ago at this time versus where we are sitting today, I mean, based on what is happened in 2019 and then in 2020, China is down 25% from those expectations, North America is down about 6% and Europe is down about 10%. So, the blended impact of purely production on the backlog and our mix of the backlog relative to those production levels coming down is about 15%. And that has nothing to do with how we see combustion hybrid over electric. Frédéric Lissalde: Yes. We see, as I mentioned, we see an acceleration in electrified propulsion architecture. Not only that, but our hybrid programs that we are targeting as we speak. But those programs won't impact the backlog. It will start after.

Okay, great. And just if I could sneak one more in. You provided color on the cadence of benefit from restructuring. Can you give any color on the cadence of the actual cash outlays for the restructuring program?

Yes. I think, I mean, we still haven't finalized all those plans. We are still working through the - taking the appropriate steps that we need to before we actually firm up some of these plants. So, there is a little bit of potential timing uncertainty, I will say, in terms of when the cash comes in. But I think you should think in our cash flow planning guidance for this year, we are probably in the $50 million to $100 million range from a cash restructuring perspective.

Okay. Very helpful. Thank you.

Next question comes from Brian Johnson with Barclays.

Yes, thank you very much. I want to drill in a few things around the backlog. First, and I think I know the answer, but just given the record. [indiscernible] I think you made that distinction in the past. Is there anything around CV we should know? Second, I'm just trying to get my head around the pull forward of backlog into 2019. Was it launch schedules, launch volume, can you explain that? And also, is there any split between Drivetrain and Engine we have to be aware of? Frédéric Lissalde: Okay. So, last year, the backlog [indiscernible] that CV was going to be flat. I missed the second part of your question, Brian. I apologize.

The pull forward effect, could you explain just mechanically how that worked?

Well, I think what we are saying about the pull forward is - remember, when we are looking at the backlog measure like this, we are looking at a year-over-year basis. And so, the fact that we saw 950 basis points of light vehicle outgrowth in the fourth quarter is something we weren't anticipating. And so, if you look at the annual effect of that on 2020 as you are doing a year-over-year comparison, that creates probably about $140 million impact on the backlog.

Okay. Was that meaning some programs are partially launched in 2019 and also continuing their launch into 2020 had higher 2019 volumes, so that is a headwind for 2020, if you will?

Effectively and get our backlog and revenue outgrowth in the year-over-year. So, the jump off point for the comparative period is that much higher, which we didn't anticipate as we entered 2019, it came in a lot stronger. So, for the full-year, we delivered 530 basis points of outgrowth, 580 on a light vehicle basis, and that was well above what we were guiding to throughout the year. Now, as we head into 2020, that is a year-over-year headwind as you do a comparison of your backlog in 2020 versus 2019.

Okay. And then the Drivetrain segment margins hit an all-time high. How sustainable is that likely or are there kind of one time meant to be true-ups that we need to be aware of?

Yes. I mean, I think, both segment saw pretty strong margins in the fourth quarter. I don't view fourth quarter margins is necessarily something you should expect quarter-to-quarter. We typically have strong results in the fourth quarter driven by certain things with respect to supply chain recoveries that oftentimes come in later in the year, performance initiatives, as well as we had quite a bit in the way of R&D customer recoveries, which came in the fourth quarter across both segments, which is part of the reason you saw net R&D down. And those tend to be lumpier toward the back half of the year than the front half. So as we jump into the new year, we are very focused on sustaining our strong margin profile. But I don't think you should think of that margin in Q4 as the jump off point for 2020.

Okay, thanks.

Next question comes from David Leiker with Baird.

Good morning. This is Erin Welcenbach on for David. So, my first question relates to the backlog. I'm just wondering if you could kind of bridge the gap in terms of how you presented backlog in the past versus kind of this new presentation? So, I guess, said another way, how much of the three year backlog of the $2.1 billion from 2021 to 2023 is coming into 2023? I guess how would that compare to the kind of the $2.2 billion that you had last year for kind of the three year backlog figure? Frédéric Lissalde: I would say that this is consistent with the 500 basis-point average outgrowth year-over-year. I wouldn't see any change in the way we are presenting things. I'm not sure -.

I guess you have, call it, $475 million in backlog hitting in 2020 and then another $2.1 billion over the three year period after that. So I guess I'm wondering kind of the 2020 to 2022 rate would be if there is any acceleration in 2023 if that is essentially consistent in terms of the cadence of outgrowth?

No, I mean I think we are expecting that we are going to deliver 500 basis points on average over that three year period. Some years might be a little higher, a little lower. There is not dramatic differences between any one of those given years in the backlog period. But right now, we are looking at sustaining that 500 basis points each year over the three year horizon.

Okay. And then my second question is just related to the Corona Virus in China. So, I'm wondering if you are seeing any disruption in your supply chain that could potentially spread into operations in Europe and North America as well as just your Asian operation? Frédéric Lissalde: Yes. I will start by saying that on this we are focusing on our people and making sure that this is the first and foremost focus that we have. And from an operation standpoint, Kevin, do you want to say a few words?

Yes. And just so you understand what is in our guidance, I mean, our guidance effectively reflects the production disruptions we have seen to date both through end of January and first couple of weeks of February. As you look beyond that, there is obviously still a lot of uncertainty in terms of how that plays out. We have some of our production facilities running and some are not right now. Our China business is about $1 billion annually in revenue, which means it is about $35 million a week. So, if production disruptions continue through the back end of February and into March, there could be additional pressure on our China revenue. But I think you touched on an important point, how could that spillover to Europe and North America? I think that is a big unknown. And the longer there is production disruption in China, the more risk it poses on OE production across the globe. So, there is a lot of uncertainty around that at the moment. We will continue to monitor this day-to-day and week-to-week. But that type of production disruption, because of the uncertainty is not embedded in our guidance at the moment, just the disruptions we have seen to-date.

Great. Thanks for taking my question.

Next question comes from Chris McNally with Evercore.

Thanks so much guys. Maybe just a variance of some of the questions that have already been asked. I guess, Fred, what people are trying to figure out is for maybe 2021 compared to 2020 on the backlog growth, the way that you used to guide, should we think about 2021 backlog being better than 2020? And if we can, could we just maybe go through some of the areas of outgrowth taking commercial vehicles? And I'm putting it on the side for now. Frédéric Lissalde: I would say that the average 500 basis points is a good way to get it. Maybe some color I can give you is some product breakdown from the backlog. So, 30% of the backlog is transmission products including DCTs and PX modules for hybrids. So, another 30% is all-wheel drive and couplings on combustion and hybrid, 20% is rotating electric component, which I think is very important, 5% is high voltage cabin and battery heaters, and 5% is turbos for gas and hybrid. Now, the big diesel impact. So, that is maybe some color that we have for you.

And Chris, let me just clarify to 2020, because I know a lot of us are focused on the headline number we have talked about a 150 to 250 basis points of revenue outgrowth. I mean, keep in mind in that is a 100 basis points of headwind associated with commercial vehicle, just with markets and from our perspective being down about 7% year-over-year. So, the light vehicle outgrowth embedded in our 2020 guide is 250 to 350 basis points. But that, again, as I was talking about in response to Brian's question, that is being impacted by the pull forward we saw in the Q4, the significant outgrowth in Q4 which is creating year-over-year headwind. Without that Q4 pull forward, our light vehicle outgrowth in 2020 would be between 400 and 500 basis points. A little bit lower than the 500 we are guiding to as being on average over 2021 to 2023, but not significantly different. So, I think you have to walk that 150 to 250 we are guiding to in totality and adjust for those two effects to understand how to really think about 2020 and put it in the context of the 2023 guide.

Absolutely, guys. I think that makes sense. So, the 400 to 530 for 2020 becomes something like 700 on average for specifically light vehicle 2021 to 2023. And Fred, I think it is fair to say that - I appreciate the bucketed color. That is very, very helpful. But one of the things that we should think about is that there is an assumption that particularly for China that the NEV market will have a better 2021 than 2020, as you mentioned sort of estimates have been revised significantly over the last 6 to 9 months? Frédéric Lissalde: I don't think you should think about anything north of 500 basis points year-over-year past 2020. So, I'm not sure how you are computing 700 plus basis points that you mentioned.

No, that 700 is just $700 million. The $2.1 billion divided by -. Frédéric Lissalde: Yes, I'm sorry. Yes, you said [Technical Difficulty] yes. And so in this backlog we have no CV growth. We have no growth embedded into the backlog. After 2020 we can see the CV flat.

Okay, perfect. And it is quite clear. And then just another quick one on Q1. I totally understand you are sort of somewhat driving in the dark given where we are in the quarter and low visibility. But how should we think about - is this the type of thing we are not going to get an update until Q1 reports, then the full-year guide would have to incorporate the situation in China? Just any rule of thumb for how long if facilities stay down or any rule of thumb for sensitivity on China? Because I guess investors are all dealing with the same thing. And it is the same for every supplier, company, but we are all watching the week-to-week in China with sort of bated breath.

Yes, with respect to that, because I think it just depends on how this plays out over the coming weeks. I think, as you think about our China business, remember, it is about $1.08 billion in revenue on an annualized basis, which is about $35 million a week in revenue. And so, as we look ahead, we actually have eight or nine production facilities there, some of them are open, some of them aren't right now. If the production disruption continues through the end of the month, there is that risk to the China revenue. But the bigger risk could be longer term if this extends into end of February and into March, does it spill over and have effects on OE production around the globe. Because the OEs undoubtedly rely on China production, not just from us, but from other suppliers as well. And I think that is where we continue to watch it day-to-day, week-to-week. And we will have more to update once we get through the end of the quarter.

Okay, great. Thanks so much guys.

Next question comes from Armintas Sinkevicius with Morgan Stanley.

Great. Good morning. Thank you for taking the question. When I look at the reported results you have for 2019 and I look at the pre-announced results from Delphi, and then I add those two up to get plus the $125 million of synergies that you are looking for with the deal, the $120 million $130 million of incremental cost savings beyond 2019 that you have outlined in the slides, and then $150 million program that they are engaged with. As a pro forma taking the 2019 pro forma, I get about 13.4% margins for 2019. And, yes, you are guiding to 11% margins with the combined company. So, there is a bit of a gap there. And I was hoping you could talk through, is this conservatism or are there some headwinds that you are thinking through that would drive the combined margin to 11%?

Yes, I will take that. The first thing I think you have to also remember is there is amortization of purchase price amortization of intangibles, that is a piece of the equation as well, which I think we guided to be about $65 million to $75 million on a pre-tax basis. That number obviously would be finalized once we get the closing. But I think you also have to realize that flows through operating margin. And so, that is a headwind to margin. When you look at Delphi Technologies and what they have talked about from a restructuring perspective, our perspective on that was they have a good program in place in terms of addressing some of the margin issues in the business, but our belief is that they are going to meet some of those restructuring actions to be able to sustain their margin profile as opposed to being purely additive to their margin profile. And then as you look at our restructuring initiatives, as Fred mentioned, we view those as proactive measures to address risks that could pop up in the business. Couldn't tell you even sitting here today what those might be. But then, we are taking proactive measures opportunistically today to make sure we sustain our strong margin profile long into the future. So, that is why we are not looking at it and saying, we will just add that to our current margin performance. We view that it is potentially going to be something that we need to do to sustain that strong margin profile we have had for a long period of time.

Okay. And then, so essentially what you are saying is there is nothing embedded with regards to product transitions going from combustion, where you have higher scale to electric, where the scale would be building up over time?

No, I would say there is nothing I would say from a product mix perspective that stands out that causes us to say: "Wow, this is $90 million to $100 million of profit improvement, we need to offset that. But we just know there is risk inherent in this industry that Fred has been managing a lot longer than I have. But we thought it was the right time in this challenging end market environment to take actions prudently and proactively to position ourselves for long-term competitiveness.

Okay. Appreciate it.

Next question comes from Ryan Brinkman with JPMorgan.

Hi, guys. Thanks for taking my questions, which are really around China backlog, given that it is now 50% of the total. So, firstly, have you broken out the China split for 2020 specifically, or could you? And secondly, is China backlog still largely driven by DCT etc.? Or do you see electrification starting to become the bigger driver, including with the iDM win in 2021? And then just lastly, to the extent there is downside risk to China backlog, that is simply because there is just the market could be lower, or are you seeing any signs that automakers in the current environment could maybe delay new program launches like they have done sometimes before when the market was softer? Frédéric Lissalde: So, within the China backlog we are actually having nice backlog across combustion, hybrid and electric. If the backlog would go down, we will be more to market. And we don't see announced delays at this point in time.

Okay, great. Thanks. And then just a follow-up on that earlier question about Europe backlog and it being so much lower than the current revenue in terms of share. The diesel explanation was there. I just wanted to understand that you feel like you are getting your share of electrification content over the near and medium term in Europe, and how that is looking given - it seems like the market is accelerating in that direction over there. Frédéric Lissalde: Yes, I would say that the majority of our Europe acceleration is going to be post 2023, with less represented in the full-year results, slight hybrid and will be way more represented in [indiscernible] and high voltage hybrid systems.

Very helpful. Thank you.

Next question comes from Dan Levy with Credit Suisse.

Hi, good morning. Thank you. Had a couple of questions on restructuring, please. One, the first one is, one of the points that we see in the restructuring related to turbos, you mentioned here that you'll be closing technical centers, which probably means reduced R&D. So does the reduced R&D in any way threaten the turbo penetration opportunity? Or really is the view that there is still more than enough engineering footprint in place to drive continued gas turbo penetration? And how much of that footprint reduction simply relates to diesel which just isn't necessary anymore? Frédéric Lissalde: I think we are taking a companywide approach on the restructuring. The consolidation of R&D centers or closure or continuation is doesn't mean that we are going to obviously and automatically reduce R&D in those fields. We feel good about our 4% to 4.5% of R&D as a percentage of sales. Some product lines have more than others, which is I think a good way to manage the portfolio, good way to manage the business. So again, it is companywide and it is not focused in one region in particular.

Got it. And then the second question just on managing the deal alongside the Delphi - managing the restructuring alongside Delphi. You have your own restructuring plan, Delphi has its own restructuring plan. Could you just talk about the ability to concurrently manage your restructuring plan alongside the Delphi plan once it is closed? Are two restructuring processes twice as challenging or are there synergies, so to speak, in concurrently running two restructuring processes concurrently? Frédéric Lissalde: They are pretty comp optimized. We have our own and they have their own and it does not interfere with each other. Project Pioneer is more focused into tech center consolidation from the Delphi technology standpoint. We have done our own from an SG&A standpoint that we announced back in April. And the one that we are talking about is more looking at cost of goods sold in some areas of the business. And so, it is, one way to look at it is really looking at it that they are disjointed.

Great, thank you.

Next question comes from Emmanuel Rosner with Deutsche Bank.

Hi, good morning. First question is on the potential revenue synergies highlighted on Slide 9. Can you just conceptually explain for us again where do the revenue synergies come from? My understanding was that before your acquisition of Delphi, you guys were already bidding for complete drive module on electrification side, you are already winning some. And then similarly, obviously, Delphi has been winning some very good business on the power electronics side. So, when you think about these revenue synergies, what is that you are actually able to accomplish in addition to that? Or was there like specific technology that you needed to take you to the next level? Frédéric Lissalde: No, Emmanuel, I think it is fairly clear that the combination of Delphi Technologies and us from a mechanical motor, power electronics, puts us in a position that we can sort of - customers around the globe who won system. And on that Page 9, we are talking about customers who won system. So, with their world-class motor control and our world-class motor on transmission, it puts us in a position to accelerate those systems in a system revenue synergies. This just makes our product offering better, faster and at scale.

Understood. And then a follow-up question on the backlog and its potential impact of its mix on margin. When I look at the breakdown that you gave by product, it feels like an overwhelming portion of the backlog would come from drivetrain versus Engine, which obviously is intuitive since it is electrification. Obviously, these have been businesses that have a considerably lower margin profile than what is going on in the powertrain. So, as you launch this, do you have sort of a natural a pressure on margin from launching businesses that have lower margin than the stuff that is actually rolling off? And I'm interested, in particular, on your earlier answer around focusing on ROIC. Are you essentially saying that even though those businesses may have a lower reported margin, the ROIC is still comparable? So, we may see margin compression, but not return compression?

I wouldn't think about it that way. I mean, I think you are right. The backlog is disproportionate to the Drivetrain business, that is absolutely the case and that is by design of how we have been growing the company, particularly in the H&E products. But I think the incrementals, as you think about the two businesses are fairly comparable. I think we have just started from a lower base, especially as we have been investing in the Drivetrain product portfolio. So, I think as we increment on the incremental revenue, I think you should expect that it is going to have similar types of incrementals that you would expect for the company in total. And from an ROIC perspective, yes, we manage the business the same way we drive for similar levels of ROIC. We are pretty disciplined about that in all the appropriation request that Fred and I review, whether it is a Drivetrain program or an Engine program.

Great. Thanks for the color.

We have time for one final question and that question comes from James Picariello with KeyBanc Capital.

Hi, just asking about this revenue funnel. Could you just give a sense like what portion of these 15 OEs would represent a true Greenfield opportunities in terms of the relationship potential for BorgWarner? Frédéric Lissalde: Greenfield, meaning that it would not be a customer we currently work with?

Or the relationship would just be dramatically enhanced, I would consider that Greenfield as well. Frédéric Lissalde: There is not too many customers we don't work with around the globe. But due to maybe the size, that would certainly enhance the relationship of the customer we would do business with. First of all, the product offering would certainly enhance the relationship and so winning.

Okay. That is fair. And regarding the restructuring plan outlined here today, is any of this earmarked for the engineering and development spend that you'll likely need to put forth as you win future electrified propulsion awards?

I mean I guess you can see already in 2020, we are anticipating an increase in R&D investment in the year, up $30 plus million, if you look at the midpoint of our guidance. And that is using some of the savings or basically offsetting some of the savings that we are anticipating in 2020 coming from restructuring. But that doesn't mean we are anticipating permanent step-ups from there even in R&D. I think when we look at the restructuring initiatives in the savings, we are simply being proactive to guard against the risk, whether it is increased R&D over time, whether it was something else that popped up in the business that we didn't anticipate. But I would say sitting here today, we continue to expect that we will manage R&D in that low to mid 4% range going forward. And that is the right way to think about the business.

Okay. Thanks guys.

I would like to thank you all for your great questions today. With that, Sharon, you can close the call.

That does conclude BorgWarner’s 2019 fourth quarter and full-year results conference call. You my now disconnect.