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 2020 First Quarter Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Sharon. 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 homepage and on our Investor Relations homepage. Before we begin, I need to inform you that during this call we may make forward-looking statements, which involves risks and uncertainties detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll 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 weighted for our geographic exposure. Our outgrowth 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're very pleased to share our results for the first quarter and provide an overall company update. Let me start with the highlights of the first quarter on Slide 5. While the industry production rates were clearly volatile during the quarter, we performed strongly on a relative basis with approximately $2.3 billion in sales, we were down about 8.1%…

Thank you, Fred. And good morning everyone. Before I review the financials in detail, I'd like to highlight two overarching themes you'll see in our year-to-date results. First, our financials have been quite resilient in the face of this challenging environment. During the first quarter, we delivered strong revenue outgrowth in all regions, sustained double-digit operating margins, and generated meaningfully positive free cash flow. Second, our liquidity remains strong and has actually gotten stronger over the course of the first four months of this year. Let's turn to Slide 12. As we look at our year-over-year revenue walk for Q1, 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 down 8.1% compared to the 19.6% decline in industry production. That means we delivered revenue outgrowth of 1,150 basis points in the quarter. And importantly, that outgrowth occurred in all of the major light vehicle markets around the globe. In Europe, our light vehicle organic revenue was down mid-single digits compared to the market decline of approximately 19%. The outgrowth was driven by better than expected diesel related revenue, as well as strong new programs. In North America, we were close to flat year-over-year versus the 10% industry decline driven by new programs and strong mix. And in China, we outperformed the market by more than 20% due to the year-over-year growth in our DCT business and other new business. Overall, we're pleased that we continue to deliver revenue growth even in this challenging end-market environment. Now let's look at our adjusted operating income performance, which can be found on Slide 13. Q1 adjusted operating income was $234 million compared to…

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

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

Good morning, guys. It's great to hear from you and thank you for all the detail and the stab at the outlook for this year, it's very helpful. Just really, first, simple question. As we look at Slide 6, there's some variability that you're indicating around the second quarter, but we're in the second quarter. So I'm just trying to understand, Fred, when you were mentioning mid-May restart versus mid-June restart, sort of as some of the scenarios you're looking at. We're hearing early May, which is what we're in right now for Europe and mid-May for North America. So that information should be reasonably available to you from your customers. I'm just curious on scheduled releases, what kind of information and lead time you're getting from your customers that hopefully can eliminate some of that variability in scenario planning, how much lead time you'd expect from them because it just seems like some of the stuff should be reasonably well communicated to you at this moment for the restart. Frédéric Lissalde: John, there is a wide range of a restart date and restart scenario. I think we have to not think about just the date of restart, but at what level of capacity we restart. And it is changing daily both from a restart date and ramp up production. So I think it's still -- it still varies and we'd -- we still have a lot of uncertainty in Q2 from a volume perspective.

Okay. But it would be fair to say that you're getting some communication on restart dates, but obviously the uncertainty is still flowing down from the customer. So there's still tremendous uncertainty on what the level is going to be starting you need at this point. Is that a fair assessment? Frédéric Lissalde: I think the fair assessment is that we are in constant communication with our customers and, yes, we're following that very, very closely. And yes, things change, things do change.

Okay. Then maybe just a quick follow-up. I mean, the 26% detrimentals on the lower volumes towards the end of the third, I mean end of first quarter. It's very impressive as we think about sort of the pressure in the second quarter and throughout the year, I mean, is that the kind of number we should be thinking? Are there any actions that might make that better or because you're lower in the U curve maybe be a bit worse? I mean, how should we think about sort of bracketing around that 26% which was very good performance in the first quarter?

Yes, I think we were pleased with that 26% as well. And that's really a function of the lot of the cost restructuring actions that we were executing on about last year that we announced back in April and it allowed us to manage the decrementals now and we're seeing the benefit of that. And that's even while we were investing additional dollars in R&D and the drivetrain segment. So a good result all in -- all things considered in this environment. I think -- with the pace at which production is coming down on a year-over-year basis, I think it's still challenging to manage decrementals that are something less than 30% range in this type of an environment. I think that's a reasonable directional proxy to think of how to think about our decrementals going forward.

Next question comes from David Leiker with Baird.

Good morning. This is actually Erin Welcenbach on for David. So my first question is just about if you can kind of walk us through what you're assuming in terms of the Q3, Q4 production scenarios that you put on your slide? What that means in terms of kind of the pacing the cadence of OEM ramp ups in the back of the year? Any color on that? Frédéric Lissalde: So we are looking at -- your question is very broad, but let me give you some color here. So on the high scenario we're looking at 25% down for the full year. We're looking at 53% down in Q2, 16ish in Q3, and about 10% in Q4. And the low scenario would be a little bit lower than that, especially in Q2 as you've seen in the charts on the page that John alluded to. So what matters is really when customer restart and how fast they restart. And I'm certainly not going to go customer-by-customer, but on an aggregate standpoint this is where we are quarter-by-quarter.

Okay. That's helpful. And then just my second question is if you can talk about kind of the drivers of outgrowth in Q1? I mean, obviously, you mentioned a number of factors by region, but was there any impact on kind of stocking or timing benefits in terms of what you're shipping to OEM plants? And could there be a bit of a delay I got from what you're shipping in early Q2 as that production ramps back up? Thank you. Frédéric Lissalde: We don't think it's stocking. And we add in Europe our Engine Group of stronger with -- with actually stronger diesel demand and stronger new small gas engine demand. China DCT was strong and also strong from an emissions business standpoint. And our turbo business was pretty strong in North America. So that's pretty much what drove the significant outgrowth in Q1.

Next question comes from Dan Galves with Wolfe Research.

Hoping you could talk a little bit about how headcount might have changed from year-end to be...

Dan, I think we lost you.

Can you repeat your question, Dan? We lost you.

Move on to next question. And the next question is from Brian Johnson with Barclays. Please go ahead.

Yes. Good morning or good afternoon as some of you are in Europe. Couple of questions. First, could you comment a bit more on the decremental performance? Not only was it different between engine and drivetrain, when we think of the real production impact in the quarter it was kind of the month of February in your China operations and then second half of March in North America and Europe. So if you could give a little bit more color on the decremental margins, maybe ideally by geography, by division. If you don't want to go that far, at least kind of geographically? So if you begin to think through Q2.

I think I would give it more directly by the segments, the way we disclosed publicly. And it's -- I mean in the Engine segment you can see that the simple math says that our decrementals were around 20%, that's because the bulk of the cost restructuring actions that we've taken over the past year have been in that segment and they're getting the benefit of that even as they manage the decremental margins on lower revenue. And then if you could see in the drivetrain segment there, their decrementals came in in the low 30s, say, for the quarter on a year-over-year basis, but the bulk of that was because of the increase in the R&D spend on a year-over-year basis in that segment to support our electrification program. So if you were to strip out that increase in the R&D they would have had the decrementals that are in the low 20s.

Okay. I guess what I was getting at is can we expect worse decrementals in 2Q because of your European and North American cost structure perhaps being less flexible than that in China? Frédéric Lissalde: Yes. I think the decrementals are really driven by the pace at which the revenue is down as opposed to something unique about the geography. So I wouldn't expect that to be the driver of the change in decrementals, I think just the challenge of operating with significantly lower production, the magnitude of that decline is really the driver of a decremental that's probably at a higher rate just like we experienced the point in time last year. I think this year it's even under more pressure. So something in that 30% ZIP code is probably the right way to think about us.

so for: Frédéric Lissalde: Brian, safety is where BorgWarner excels. We have extraordinary safety results from a PR and high perspective and we're using exactly the same excellence that we have built in this company over the past decades to restart production with safety and COVID-19. So we have done a tremendous amount of work to figure out how we would restart plant-by-plant including exactly what you said social distancing, which is possible but not always and PPE, but also it goes way beyond the production area. Also, it impacts the way people breakout, the way people do poses and so on and all that has been looked at. And our plant managers have done a terrific job, wonderful job in getting our plants ready to restart.

And I just add to that, Brian, I think that part of the reason, when we talk about the 30% decremental, it's a directional guide at this point, that's part of the reason we're not giving specific earnings guidance. I think there's a lot of variables when you have a revenue range that's from low-to-high $750 million wide, some of it can be what is the operational efficiency in the plan. It can be what are commodity prices doing, what's happening in the supply base, are there struggles there? What additional cost actions might we take? So there's a whole host of things that I think we're going to be learning over the coming months that will ultimately impact what those decrementals are and how efficient we operate.

Next question comes from Noah Kaye with Oppenheimer.

Yes. Okay. Great. Thanks. Sorry about that. Two part question as you prepare to reramp. First, how would you assess the stability of the supply base? And two, how are...? Frédéric Lissalde: I think we've lost Noah too.

Noah, I think we lost you while -- Frédéric Lissalde: I can answer on the supply base. I would say that we are absolutely clearly seeing that the supply base is under some kind of undoubtedly some stress. And to-date we have not seen any disruption, but the key for those -- we have two suppliers -- will be their ability to fund a production restart. We are applying all the best practices that we developed when it is around managing supply de-stress over the past several years, but I would say no that -- yeah, potentially this is clearly a different scale.

Sharon, we're ready for the next question.

Next question comes from Chris McNally with Evercore.

Thanks so much, guys. I think we've had a couple of questions on the decremental this year. I know it's super, super early, but as we think about exiting the year, you guys used to give rule of thumb that essentially the incrementals could be in the high teen when production turns essentially flat to positive. Could you just maybe help us through? I think, well, a lot of us are trying to figure out the increased cost that comes when production restart. So even trying across model sequential, incremental margins, do you think we'll still be able to achieve high-teens into the low 20% when things get better sequentially Q3 and Q4?

I think that's how we think about it in terms of the way we manage our incrementals and decremental. Obviously, right now we're in the process of managing decrementals in the challenging Q1, as well as Q2 will still be under even more pressure as you can see from our revenue chart in terms of what we're expecting from a production standpoint. So right now we're in the process of managing decrementals, which means making sure we manage operational efficiency, supplier risk, and additional cost actions that we take to manage in that environment. And then that positions us as we start to see the rebound whether you're looking on an increment sequential basis or a year-over-year basis to be able to deliver at something consistent with our historic guidance of operating in that high teens basis on a ramp up.

Okay. Great. And then just -- really just a technical one. When we're trying to like back so often juxtapose it sort of and apply EBIT for the year, can you just talk a little bit about the working capital assumptions? Are you assuming that you'll have a working capital inflow, which we would sort of expect, given in the production decline?

That's exactly right, and that's some of the tailwind that we've seen already in Q1 as well as heading into Q2 because we do run positive working capital. If you look really receivables, payables inventory, we tend to run in the, called around 12.5ish%. So I think when you think about the decrementals, we obviously have real cash flow pressure coming from the decremental, but we also have an offset coming from free cash flow -- or I'm sorry, from working capital and we're experiencing that right now. I would say, in this type of an environment -- and we all saw this in 2008, 2009, inventory tends to come out of the system much more slowly. But that said, we still run positive working capital when you look receivables versus payables and that's the real benefit that we're seeing at the moment. Couple of other things that you should think about from a cash flow perspective as well is right now we're continuing in our planning assumptions, you can see at the high end, to maintain our capital investments at the levels that we operated with last year. And that's because with a company like us, one of our strengths is because of our liquidity and free cash flow profile we can continue to invest in programs in the long-term to support our customer needs, but obviously that's something we'll continue to monitor as the year goes on whether we need to do anything differently there. So I think those are some of the key puts and takes as you think about cash flow.

Next question comes from Joe Spak with RBC Capital.

Thanks. Good morning, everyone. Kevin, just to follow-up on that point and to be clear, is that what's in your free cash flow guidance for the year, working capital is still a source? Because I would expect there to be some use of working capital as you have to ramp back up in the back half.

Yes. I mean when you ramp back up but they use by net-net we're down on a full year basis and in each quarter of the year and so that all allows it to be a pickup when you look at each quarter as well as the entirety of the year. So, yes, working capital is going to be a positive for the year, that's our expectation.

Okay. Thank you. And then maybe just on the quarter. And I know this is all sort of prior guidance because it's thrown out the window here. But your backlog I think previously was $400 million to $430 million, we can mark that down obviously for sort of industry volumes. But in first quarter, really strong, I think over $300 million you guys showed. So did that come in better than you were initially planning, is some of that timing or maybe you could just talk a little bit more about how some of that backlog rolled in? Frédéric Lissalde: Joe, I think we're very happy with Q1. It was better than expected. We don't think that it's a pull forward of backlog, but we're not willing to assume that this outgrowth is going to continue at this point. We are watching, especially the diesel demand that was strong versus our assumption in Q1. And also, we're looking in great detail the China outgrowth.

Okay. And Fred, lastly just on back to the supply or stress comment. I mean -- and maybe you could sort of remind us what Borg has done in the past. But how would you support your supply base to sort of ensure your supply, if needed? I mean is that just payment terms, would it be sort of potentially take demand or are you hoping that some of those businesses will be able to rely on some government assistance? Frédéric Lissalde: Well, we're using the same tools that we've used over the past. I would say about two years when we started talking about the distress of some of the supply base in Europe, we know how to do it. We have risk management departments and we understand all those, all the levers that we can pull up. You're right, what's a bit different now is that you might have some government, state help, and we would put these inputs in consideration when we decide how we -- what we do and how we do it. One of the key thing is really to stay close to the supply base, close to the customers to understand ramp ups and link it.

Next question comes from James Picariello with KeyBanc Capital Markets.

Just curious, does the current environment affect the timing of your SG&A and COGS, your restructuring savings at all, relative to the cadence you outlined last quarter? Is there a delay or possible acceleration in what you can achieve?

I don't think there is a significant movement one way or the other. We're going to continue to support funding of the restructuring actions that we identified and talked about back on the January call. In this environment, there can be some modest movements, just some timing movements pull forward or even pushed out a little bit, but that's -- I'd say overall directionally there's not a material change in what we guided to from the January outlook. We're still proceeding on that path. And t good is -- I mean that -- remember what we talked about when we announced that restructuring and set up restructuring initiatives, we were trying to be proactive to manage unforeseen risks to offset potential unforeseen risks to manage our margin profile. We didn't anticipate COVID-19 necessarily, but here it is, is one of those unforeseen risks, and the good news is we were out in front of trying to make sure that we have an ability to sustain our long-term margin profile by taking those types of actions.

Got it. That's helpful. And just based on what you're willing to share, can you just walk through the rationale on the acquisition amendment, the 5% reduction on the conversion rate? Just curious what led you to that number maybe from a valuation standpoint? I mean clearly compared to the original timing of the announcement, the world has changed pretty dramatically beyond just 5%, let's say. So any color there would be helpful.

Yes. I guess -- and the first thing I'd say about that is we remain confident in the strategic merits of this transaction, and so all of us see the long-term prospects of combining these two companies. And so remember what the nature of this consent agreement is that we signed up to this morning, is to resolve an issue with an operating covenant. And we view the amendment, that is a way to provide Delphi with the flexibility and needs to execute on its financial plan in this environment while protecting us from further unanticipated downside risk. The reduction in the equity exchange ratio that we agreed to is intended to compensate us, for that additional risk we're taking by providing that covenant relief. And remember, the financials of all companies in this environment BorgWarner included, BorgWarner, Delphi, others in the sector have all been under pressure and our stock prices reflect that. And since this is an all equity transaction, the effect of equity purchase price has already been impacted as a result of the environment we're in. So that's really the totality of how we think about this.

Okay. Well, fair enough. That's helpful. And just last one, on the strong diesel demand in Europe. This is a follow on to the uptick in demand that you saw in the fourth quarter, which I don't think you expected to continue, so just what's your take on that on the carryover there? Frédéric Lissalde: Yes. And we're looking at that in great detail. I would not call it a trend. And we're doing that study with a lot of granularity, but we haven't seen this in registration. So I think it might be also due to the different element of diesel sizes and we're more and more into the big diesels and -- but I would say that this is something that -- this is not a trend that we're ready to bet on yet. Actually, if you look at the penetration rate for diesel, it's still in Q1 2020 about 5% lower than Q1 '19. So it has happened, but not ready to bet on the fact that this could be a trend.

Next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Hi, good morning. First question are in the clarification around the backlog outlook. So is it close to $350 million in the first quarter. Is the right way to look at the full year outlook, the outgrowths market is essentially the backlog in which case is left as $400 million to $500 million or so? So are you assuming no limited amount of new business over the rest of the year and if that is the case, is that a result of delays or things that you're seeing? Or Is there an element of conservatism in there?

We don't see major delays. I would say that two to two to four are in line with the prior guide, and which is 150 to 250 basis points of our growth.

Okay. But what was my math, I don't know if that one is to chime in. Was my math right? Is the front or the $397 million through $487 million in the 2020 outlook, is that comparable with the $333 million did in Q1 or was that a different thing?

Emmanuel, I'll take you through the backlog math offline, but just mathematically their way to think about is the outgrowth through the remaining three quarters, the average will be that 1.5% to 2.5 % that Fred referenced but it's in line with the prior guideline.

Okay. And okay. Understood. And then I get just and then more intermittent basis, it's encouraging to see no, you're not seeing any delays as well to see the strongest growth in the first quarter. So from a high level point of view of using they could be any structural changes in the pace of adoption of various powertrain technologies post COVID, could there be some automakers pulling back in the electrification and if they're not under mandate, let's say North America or vice versa? Could there be an acceleration of some other technology there? Do you see anything changing the midterm midst of powertrain as a result of the COVID? Frédéric Lissalde: So the first thing I would say, Manuel, is that our strategy of being balanced across CH&E makes it like, it doesn't really matter for us. What I can tell you is that in China, we -- I'm not saying any slow down on electrification programs. We see things moving very fast from an electrification standpoint. In Europe, we see that the 2025 and 2030 are regulatory on CO2 and emission leading to more electrification is not questions. Actually, if you look at it in detail, in some countries, some programs related to electrification were deemed essential. In the U.S., it might take a little bit more time. But the U.S. will benefit from our great technology in the combustion standpoint, making engine cleaner and leaner, and wherever we are around the world, we will see electrification accelerating growth for BorgWarner and also a great product in combustion making customers happy when they decide to go and have a longer tail in combustion.

Next question comes in from Armintas Sinkevicius with Morgan Stanley.

Great. Thank you for taking the question. Looking at the exchange ratio here with Delphi, I understand that it compensates for the additional relief that Delphi is looking for. But on the other hand, you mentioned that you don't expect to be executing on the share repurchase program in the near term, and part of that transaction was adding some additional share buyback. So just trying to think through, the implications for share buyback and why you didn't try to take that into account with the exchange ratio?

I mean with respect to the share, by that, we remain committed to the billion-dollar program we announced back in the end of January. I think all we're saying is that in the near term in this environment with all the uncertainty that we have, we don't think it's the prudent decision to be deploying liquidity at this moment to start executing on that program. We're subject to a number of blackouts anyway and the environment we're operating in as a result of where we stand and the transaction with Delphi, but nonetheless I think just in the coming months, we don't think it's prudent to be executing on that. That said, we remain committed to the billion-dollar program.

I think we have time.

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

First, we've seen others got their own share buybacks and dividends to preserve cash. What's the rationale for why you maintained your dividend, I mean I saw you had zero buyback in the quarter but, you had the dividend in place, so why keep that?

Yesh, I mean ultimately the dividend is the decision of the board of directors, but I think the way, we as the management team think about it is the dividend is the commitment that we make to returning free cash flow to our shareholders and generating $146 million of free cash flow in the first quarter with an outlook that suggested even under these difficult revenue scenarios that were going to generate positive free cash flow for the full year I think the Board undoubtedly took that into consideration and thought it was good to continue to live up to its commitments to returning that cash over to shareholders. Undoubtedly, that's a decision the Board will continue to monitor each quarter as it looks at the environment and sees how things might be changing. But I'm sure that was the calculus that went into it. I think with respect to the buybacks, buybacks, we remain committed, as I mentioned to Armintas, to the billion-dollar program, but the timing of the execution of those tends to be more discretionary and so we're going to be prudent with the liquidity in this environment and look at the right timing to start redeploying the cash towards that buyback program, but we don't think now is the moment to do that.

Great, thanks. And just a follow up on the deal with Delphi. You're -- assuming everything goes forward, you'll close the deal in a different world than what we saw at the time to deal with in housing. Delphi is probably going to be coming in with higher leverage though. How does it the higher leverage ratio change the way that you think you will operate the go forward an entity? Is there maybe where you're going to have to be more aggressive on the restructuring or would you have to adjust spend in different areas? So how does leverage change the tie in for how you think you may need to operate to go forward entity?

Keep in mind when Fred talked to the slide what we agreed to with Delphi as part of this consent agreement is to put a limitation on the amount of debt that can be outstanding at the closing. And in the grand scheme of things when you think about that potential for incremental indebtedness, we don't think it materially alters our view on the expected leverage ratio or the financial prospects of the combined company.

Okay. So still the entire entity as a whole is still intact with this new requirement in place?

You may remember Delphi had called it a $1.5 billion or so that we have $2 billion of debt and we'd talked about the potential, not the requirement, but the potential that there could be additional net debt at closing of $115 million according to the consent agreement we signed up before. So in the grand scheme of an entity that has $3 billion plus in debt, that's not a huge number that really swings the overall leverage prospects of the company in a way that causes us to want to operate it any differently post-closing.

With that, I'd like to thank you-all for your time and your good questions today. With that, we're going to wrap up the call, and stay safe. Sharon, you can close the call.

That does conclude the BorgWarner 2020 First Quarter Results Conference Call. You may now disconnect.