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 2020 Third 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, Jerome, and good morning, everyone. 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. 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 had to inform you that during this call, we may make forward-looking statements, which involves risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed for comparison purposes with prior periods. When you hear us say at 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 production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat, and good morning, everyone. We are very pleased to share our results for Q3 today and provide an overall company update, starting on Slide 5. The industry production rates steadily improved throughout the quarter as volumes in China and North America exceeded our expectation. Importantly, we continued to outperform on a relative basis. With approximately $2.5 billion in sales, we were up about 1% organically, and this compares to a market being down about 2%. This means we saw continued outgrowth in the quarter. We saw a significant outgrowth in China, driven by DCT and commercial vehicle business. We also outperformed in North America, driven by new programs and beneficial mix. Our incremental margin performance was very strong as revenue trends exceeded our expectations, and we benefited from our restructuring savings and temporary wage reductions. We also delivered significant positive free cash flow. And we completed the acquisition of Delphi Technologies shortly after the close of the quarter. We're excited to move forward as one company and capitalize on our product leadership. Let's now turn to Slide 6, where you can see our perspectives on the global industry production. As you can see by the chart on the slide, the industry backdrop in the second half has significantly improved from the environment that we experienced during the first half. It's important to note that the market environment is still volatile, with the risk of future disruptions arising from COVID-19. As you've seen the latest lockdowns announcement in Europe announced last night, the risk level of these potential disruptions has elevated, and we're monitoring the situation very closely. With that important caveats in mind, on a full year basis, overall, our industry production expectations for the full year have improved. We expect the market decline to be in…

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 11. As we look at our year-over-year revenue walk for Q3, you can see that modestly stronger foreign currencies increased revenue by about 0.8% from a year ago. Excluding this impact, our organic sales were up almost 1% compared to a roughly 2% decline in weighted average market production. That means we delivered 280 basis points of outgrowth in the quarter. In China, we outperformed the market by about 17%. Strong DCT demand was the biggest contributor of the sizable outgrowth in the quarter. But our China commercial vehicle business also outperformed, although the CV good news in China was largely offset by commercial vehicle declines in other regions. In North America, we outperformed the relatively flat market by approximately 2%, driven by strong mix and new programs. From a mix perspective, our slightly overweight position in SUVs and pickup trucks continues to bode well for our ability to deliver outgrowth in the region. And in Europe, our light vehicle organic revenue was down 12% compared to the market decline of approximately 8%. As we've discussed for several quarters, we've been outperforming light vehicle diesel in Europe since the third quarter of last year. However, we've now started to lap this market outperformance, which simply means that diesel will start to become a bit of a headwind again. Nonetheless, even with this headwind, we delivered another quarter of meaningful outgrowth. Now let's look at our earnings and cash flow performance, which can be found on Slide 12. Our third quarter adjusted operating income was $317 million compared to $294 million in the third quarter of 2019. This…

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

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

I just want to ask a first question around the fourth quarter and then into 2021 on trucks in North America. The F-150, I think they were talking about being down about 100,000 units in the fourth quarter. I'm just curious what kind of impact, Kevin, you think that has. But then we're going through this sort of new truck boom, right? It's been going on for a while, but it seems like it's strengthening as we go into 2021 and beyond with some product launches. And that's very good for your business. Just curious how you think about that going forward, Fred, and what kind of opportunity there is in your backlog and what you might be able to win. I know it's a little less sexy than EVs, maybe, but it's still pretty sexy on the profit side.

John, it's Kevin. I'll start with that. On the Ford F-150, obviously, we are seeing the changeover, and that is having an impact on our outgrowth, both a little bit in Q3, but a little bit more so in Q4. I'd say, from a revenue perspective, it's about a $30 million impact for us in Q4 from a revenue perspective. But then as you alluded to, the truck mix has been a benefit for us. So when we talk about North American mix benefits that we're seeing, part of it is the benefit of having a mix that's skewed a little bit more towards truck than car than what we've seen in the past. So that is what we're seeing right now, and we're reaping the benefits of that in our outgrowth.

Yes. And John, I just want to highlight the fact that this is exactly why we are executing a balanced strategy across combustion, hybrid, electric, with great portfolio to capitalize on the growth of electrification. If you take your question at the high level, if you look at the vehicles that are going to be produced between now and 2030, it's about 1 billion vehicle. IHS is saying 17% electrification. Let's round it to 20%. Out of that 1 billion vehicle, 900 million vehicle will have a combustion engine, either as a combustion architecture or together with a hybrid. And we believe that it would be a mistake to ignore that profitable cash-generating revenue as well as the environmental opportunity to be supplying products on those 900 million vehicles. And I think your question is a good example.

Okay. That's incredibly helpful. And then just a second and a follow-up question to the diesel headwind. In Europe, and just, Kevin, if you can -- I mean, I understand the comps. I mean there's some recovery and then the comps get -- are getting a little bit tougher. But diesel headwind will still persist, presumably, in your business, but also in Delphi's business. So just curious if you think we're through the worst of this mix shift. And how should we think about that going forward?

So John, you're right, the diesel is going down. The take rate is going down and actually pretty significantly down from Q2 to Q3. We are going to -- we outgrew that diesel market last year. And since Q3 last year, so we're starting lapping this outgrowth. And it's tough to figure out where it stops. Certainly, we are more heavily weighted on bigger diesels. And the drop is essentially touching the smaller ones. But yes, it's going to be a bit of a headwind for us. Now you may remember that, for some of our product lines, the growth on gasoline is compensating that loss of element in diesel. And overall, this headwind will moderate in the future.

Your next question comes from James Picariello with KeyBanc Capital Markets.

Just on the timing of the Delphi cost-out synergies, is anything baked into the fourth quarter outlook? Or should the synergy capture strictly take place next year?

Yes. In our fourth quarter, we're expecting already $10 million of synergies in those numbers that we showed on the slide in the deck. So that includes $10 million of synergies coming through in Q4.

Got it. Okay. And then the drivers behind drivetrain's strong quarterly performance, I mean, we've seen three quarters now of, call it, double-digit market outperformance. The margins clearly came through this quarter. I mean does your guidance factor in sustainable momentum run rate around this business? And could you provide some color on the drivers from a product and regional standpoint for that segment in particular?

So in Q3, the key drivers were a strong outgrowth on dual-clutch transmissions in China and North American mix product profile. So -- and this certainly, that DCT growth in China was above our expectation going into 2020 and going into the second half of 2020, and we converted well on those programs.

Got it. And just one last one for me. Is there any change in your expectations for next year's incremental margins, given the stronger second half performance this year operationally. Just -- is there an element of more difficult comps relative to how you were thinking about things a few months ago? Or are 30% incremental margin still the right target for BorgWarner's base business next year?

Yes. I mean when we speak of the 30% incrementals that we were talking about earlier this year and taking a step back, what we said is, hey, given the pace at which revenue was coming out as a result of COVID-19, we thought we would generate decrementals at about 30%. And then we said, hey, as we thought end markets recovered or rebounded from those COVID lows that we should be able to deliver incrementals on that end market recovery at the same rate at which we decrement it. And that's effectively what you saw in Q3 results, but that's not the long-term incremental profile of the company. That's really just the short-term snapback of a rebound in revenue. We still continue to think about ourselves as being a mid- to high teens incremental converter as you get beyond the snapback in end markets like we've seen here. So I wouldn't look at next year and then layer on 30% on top of that. If you kind of look at our revenue profile, we're back to a north of $10 billion of annualized revenue here in Q3 and Q4, and we've converted on that effectively, incrementally back at the 30% like we had hoped and expected.

Okay. So first half next year at the same decrement that you had in the first half in 2020. And then in the second half, maybe at a normalized rate.

Yes. I think that's a fair way to think about it because we're coming off -- if you're doing a year-over-year comp, you can see the second quarter, we should expect to be at that type of an incremental because we're getting back to that -- off the end market lows in Q2 to end market norms, hopefully, in Q2 of 2021. So you would see those types of incrementals getting back to normalized markets at more of that 30%-ish type of range. But above and beyond that, our growth should be -- you should expect it to be back the way it was historically.

Your next question comes from Dan Levy with Crédit Suisse.

First, I just wanted to ask a question on your core turbocharger business. Given the bankruptcy filing by your largest competitor in the space, is there any potential to see maybe incremental turbocharger business over the near or midterm? And then, similarly, maybe you could give us a sense of the underlying price or margin trends you've seen in terms of whether you anticipate this competitive development maybe shifting with those pricing or margin trends. So just an update on turbos given the development.

Yes. What I would say is that balance sheet strength is certainly a competitive advantage, and that's what we're seeing in the turbo field. We're not seeing any major changes from a pricing standpoint that we've seen in the past. It remains a competitive business, where product leadership is absolutely important because turbo efficiency translates for our customers into direct impact on fuel economy. And so, in this business, like in a lot of business in our field, it's a lot around efficiency and the product leadership we can provide to our customers.

And I appreciate the balance sheet strength that you have. If customers view that as a good reason to use you as a sourcing solution, how long would it theoretically take for some of that incremental revenue to show up in the backlog or ultimately hitting the revenue line?

It would take about 3 to 4 years to hit the revenue line from a sourcing event or from a booking event.

Okay. So nothing near term. Okay. Great. And then, second, just wanted to ask about your outgrowth trends in Europe. And we're obviously seeing a sharp inflection in Europe powertrain trends right now just as automakers are scrambling to meet these emission targets. And I know that you're more advanced hybrid and EV solutions, those don't launch for a couple of years. But maybe you could give us some color on why we wouldn't have seen maybe better Europe outgrowth this quarter in powertrain. I mean, I know you had the tough issue with the diesel comps, and that's rolling off. But wondering why we're not seeing this more pronounced shift by automakers as they scramble, impacting you. Is it just simply portfolio -- the portfolio, and they're choosing to address it with EVs and it's not hitting sort of enhanced powertrain-type solutions right now?

So I think you pointed a good point. I mean the diesel decline sequentially is certainly a factor. And you pointed out the second half of my answer, which is we are not extremely active into the first generation of hybrids. We're way more active into the plug-in hybrids and higher-voltage hybrids that will come in 2023 and beyond. We've announced a few wins already in past quarters. So that's the key point. Maybe one element for you is that from Q2 to Q3, diesel -- when the diesel take rate went down 370 basis points, which is one of the biggest decline quarter-over-quarter over the past several quarters.

Okay. So that explains a lot of what's going on there.

Your next question comes from Noah Kaye with Oppenheimer.

So obviously, you kind of hit the ground running here on the Delphi integration in terms of the customer outreach. Can you talk to us a little bit about the execution on some of the ramps that we knew Delphi has and had in front of them in terms of scaling up their GDI and power electronics business? What are some of the priorities there? How do you see that tracking? Where is your focus going to be with some of those launches?

Okay. So first of all, on GDI, I see a lot of demand. And also, I see some bookings coming our way. From a launch perspective, we're laser-focused into helping the plants to launch their products. We have, as I mentioned before, put into the fuel injection system business unit a team of excellent operators from BorgWarner. We left that business unit untouched in order to not disturb any of those launches in any shape or form. Similarly, on power electronics, we just announced a few -- the bookings over the past month. And also a very high focus on launch effectiveness across our PDS business unit.

And as you've got -- I don't know how much more information you've been able to glean since the merger closing. But how do you think about the pricing and the pricing contract structures in those businesses? And anything else that you've learned incrementally that makes you more or less confident in being able to do better than kind of Delphi on a stand-alone basis was hoping to do in terms of reaching breakeven or corporate average margins in those businesses over the next 1.5 years?

We've not seen anything dramatically different than what we looked at over the past month, so no surprises for us.

And I think from a disciplined perspective, we are instilling the BorgWarner culture. We have a focus as we look at new programs of maintaining the discipline of driving towards a 15% ROIC on any new programs. And that's the same discipline we'll hold, whether it's a business that we acquired as part of the Delphi acquisition or part of a legacy BorgWarner position. It's the same approach that we take to the entire portfolio of businesses we have at BorgWarner.

That's great. And if I could just sneak one more in. It's really around the pace of overall booking activity and quoting activity you're seeing in the space. I think we've heard from some peers that, interestingly, I mean, some bookings were still awarded in 2Q. But there was a surprising level, just ongoing engineering and development activity for what the conditions were in the pandemic. And I want to ask, if you have seen then, how you think about kind of the cadence and pace of booking activity as we are exiting the year here?

I agree with you, Noah. I think it's amazing how teams and human beings can still strive and push forward programs during the pandemic. And we are a good proxy of that. We're spending more R&D in Q4 than prior year. And so we don't see any slowdown from an electrification trend perspective. And so this is still very, very important for our customers to just carry on, working on those new powertrain architectures. This is becoming very, very important for them to be able to sell going forward. So we don't see any slowdown in our field.

[Operator Instructions]. Your next question comes from John Saager with Evercore ISI.

It's John Saager on for Chris McNally. Congrats on finalizing the transaction. We saw the sort of go-to-market strategy on Slides 7 to 9, and I'm wondering if there's any upside to the initial Delphi margin outlook or order bookings from potential electrification synergies if we were to get a Democrat sweep on Tuesday.

Yes. I'd say, just stepping back from a margin outlook, I mean, from a margin perspective, we still feel good about the direction that we're taking the business and the ability to deliver the 11-plus percent margin as we look at the run rate over the next few years. I think in terms of the impact on the near term of what an election might do, TBD, but it's part of our strategy of being balanced across combustion, hybrid and electric that, hey, we are positioned to be successful in all those environments, depending on which portion of the portfolio is growing more quickly than the others. So if there is more emphasis on electrification here following an election, that's great. We'll look to capitalize on that. And I think the Delphi Technologies acquisition will only help that with the power electronics and electronics capabilities that they bring to the table.

Sure. Makes sense. And then does BorgWarner care if you're a fully integrated solution versus just one of the components? In other words, an OEM does the integration and then sources BWA as one of the critical components. Is it logical to think about the full integration drive module, could that be the highest-margin product for Borg?

We had to partner and serve our customers, and so we'll be happy to provide a system like we do for the Mach-E. We'll be also happy to provide components. For us, we run the company with return on invested capital, and we will look at getting the same hurdle rates, whether it's a system or a component.

Okay. And then just -- is the -- do you think the full integration drive module, like, could that possibly be the highest-margin product that you have?

We don't get into the margins of our specific products. But I would say, just as Fred mentioned, whether it's a component or a system offering, we look at driving the same discipline around return on invested capital. They may have different levels of capital investment requirements. But overall, we would drive that same discipline. Obviously, as you get to an integrated drive module, particularly if it has all of our components, it's a higher dollar amount than selling an individual component. And so you have the opportunity to generate more dollars. But in terms of the return on the employed capital, we maintain the same discipline of that 15% target, whether it's a component or a system.

Your next question comes from Brian Johnson with Barclays.

Yes. Just following up on that question. Could you maybe drill down a little bit more into the dynamic? And it's kind of represented on Page 9 between component opportunities for BEV versus integrated iDM opportunities for BEV. It looks like any components that most of the things you're chasing are inverter related. I guess a couple of questions there. Is that a fair characterization? And then as inverters are designed to be bundled very close to or part of the motor as opposed to a stand-alone power electronics box, how comfortable are you with the Delphi product line that you got in terms of the ability to supply inverter components into highly engineered integrated modules that the OEM themselves is producing?

Brian, first, it is kind of funny to watch that customers go in different direction. And even within a customer, some programs may go in different direction between in-sourcing and outsourcing the full system. And so that's why, first, it's important to be able to talk to the customer from a system perspective to look at the optimization of the design that can be done by BorgWarner versus what they can do. Secondly, when we talk to customers, we are not only talking to them about full system, but they absolutely understand that we can do a full system. And being able to understand the full system, from mechanical motor and electronics, is an enabler to sell a system, but it's also an enabler to sell components. On the transmission side, when the customer does a full system, most probably, they'll do the transmission. On the motor side, there is a mix of both in-sourcing, outsourcing. On the inverter side, as I mentioned, I think, at the last quarter call, this might be the component that has the less likelihood to be in-sourced by the customer. And so there are a lot of discussion around those components, but not limited to inverters. What I can tell you is that BorgWarner has a great technology from an inverter standpoint. And the win that I alluded to in my prepared remarks speak volume to that. That 800-volt silicon carbide is really, really, really very high technology and well managed and controlled. So we see some good tailwinds on those systems and components, both.

Okay. And just a follow-on. The BEV iDM opportunity is sterling. Congratulations on the Ford wins/upcoming launch. Is there any commonality to the types of OEMs that are willing to outsource the iDM? Or whether -- when we think about some of these large skateboards that are coming out, the GM multi and the Volkswagen BEV, whether those are going to outsource their iDMs or whether they'll just be looking for components of those skateboards crystallized?

No. We don't see common characteristics of the OEMs going through in-sourcing or outsourcing. One element is that, temporarily, we see some of the OEMs that have obligations vis-à-vis their works councils and things like that to start maybe in-source a little bit more at the start. But we don't see a common characteristics. We have opportunities in all 3 major regions of potentially getting full IDM businesses on the system standpoint.

Your next question comes from David Kelley with Jefferies.

Maybe just starting with the margin assumption for the fourth quarter. Can you give us a sense for how the BorgWarner-specific restructuring actions are going to factor in there? And just curious if you're still on track for the $50 million in incremental savings this year.

Yes. From a BorgWarner restructuring perspective, you should assume that the Q4 on a year-over-year basis is in that $10 million to $15 million range in terms of the tailwind that it's providing. And we're definitely on track in terms of achieving the restructuring objectives from a savings perspective for the full year that we laid out before.

Okay. Great. That's helpful. And then I wanted to also ask about your commercial vehicle exposure. You noted strength in China and weakness elsewhere. We've been hearing that from others as well. We were curious to hear what you're seeing as it relates to CV exposure trajectory in the year-end. Do you think that China tailwind starts to tail off here? And are you starting to see some signs of life and recovery in the other regions?

So the CV China, both off-road and on-highway, has been very strong, and is still very strong, stronger than we have expected. It is not easy to figure out if this is going to carry on. But demand is strong, and we don't see signs of slowing down. For other regions, we see that business picking up, too. What we also see is an appetite from a commercial vehicle standpoint, customer standpoint to move towards electrification of their propulsion architecture, either hybrid or fuel cell or battery electric. It's going to take time. Those cycles are long in commercial vehicles, off-road and on-highway. But we see that trend, too, pretty solidly.

[Operator Instructions]. Your next question comes from Joseph Spak with RBC Capital Markets.

I just had a question, I guess, on where things are headed on electrification in your portfolio. I know you talked about your iDM. And my understanding is that's really sort of positioned sort of in the middle, if you will, and sort of putting power to the wheels. But as some of these larger vehicle programs come to market or being shown, it seems like the motor is closer to the wheel. And I'm curious about your capabilities there, your product offerings and whether what you can do on an iDM is transferable to accommodate some of those larger vehicles as they go electrified.

Yes. We're looking at in-wheel motors. Right now, we don't see a path to growth in the foreseeable future, but we understand that technology. We still feel that having a structure that is closer to the traditional iDM architecture is, for now, the most probable path going forward, Joe.

Okay. But what about not all the way in the wheel but just closer to the wheel, like maybe some of the larger electrified pickups coming out seem to be using that sort of structure.

Yes. I'm not equipped to answer that question. I have to go -- I have to come back to you, Joe, on this one particular.

Okay. Sure.

Now, what I would say, though, is whether the motor is closer to the wheel or not, you're still going to have a motor, and you're still going to have an inverter. But I can't answer precisely what are the different characteristics of those products when you get those closer to the wheels. So I'll come back to you.

Mr. Nolan, there are no further questions in the queue. I will hand it back to you for concluding remarks.

Thank you all for taking the time today, and thank you for your helpful questions. If you have any follow-ups, feel free to reach out to me. With that, Jerome, you can conclude today's call.

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