BorgWarner Inc.

Good morning. My name is Sharon, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Board of Warner 2018 Fourth Quarter and Full Year Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, some people have star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. If you're using a speakerphone, please pick up the handset before asking your question. 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. We issued our earnings and backlog releases at 6.30 a.m. Eastern Time. They're posted on our website, borgwarner.com, on our homepage, and on our Investor Relations homepage. A replay of today's call will be available through March 1st. The dial-in number is 855-859-2056. And the conference ID is 677-8077. Or you can listen to the replay on our website. 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 IR page for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K-A. Our actual results may differ significantly from the matters discussed today. Also, during today's presentation, we'll highlight certain non-GAAP measures in order to provide a clear picture of how the core business performed for comparison purposes of 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 on a reported basis, that means U.S. GAAP. 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 our market. Now, back to today's call. First, for Fred LaSalle, our President and CEO, We'll discuss our achievements for 2018. Fred will add comment on the industry outlook. This will be followed by a high-level overview of our Q4 results, as well as our 2019 outlook. Fred will conclude with highlights of our three-year net new business backlog. And Tom McGill, our interim CFO and treasurer, will discuss the details of our results, as well as our guidance. Please note that we've posted an earnings call presentation to the IRF page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn it over to Fred.

Thanks, Pat, and good morning, everyone. Today, we're pleased to share our results for 2018, our initial guidance for 2019, and our three-year backlog. I'd like to start by sharing a few thoughts on 2018 on slide six. 2018 was a year of strong execution for Ball Warner. Despite the industry volatility, we delivered more than 600 basis points of outgrowth. This is an amazing performance. We had significant launches and wins across combustion, hybrid, and electric vehicles. Specifically, wins in hybrid and electric included multiple P2 programs including three complete module awards, multiple high-voltage coolant heater awards for battery electric vehicles, and continued electric motor and electric drive module bookings. At our investor day, we shared a 2023 revenue outlook of $14 billion before any M&A and a free cash flow outlook of $1 billion. As you will see later, Our backlog supports the necessary outgrowth to reach these goals. We continue to approach our customers as a balanced propulsion partner. Looking at the wind flows, we expect to be overweight in hybrid and electric by 2023. Turning to the industry on slide seven and starting with Q4. The global light vehicle production came down about 3% versus our expectation of about 1% decline going into the quarter. So this was a 200 basis point headwinds versus our expectation. However, I'm very proud to say that our outgrowth in Q4 was slightly stronger than what we expected, which allowed us to achieve our growth guidance. The biggest impact to industry volume expectation were once again Europe and China. European light vehicle production was down 6% year-over-year as our customers continued to work through WLTP certification. China light vehicle production was down 15% year-over-year and nearly 20% in December. Now for 2019. We expect that the challenging conditions in China and Europe will continue into 2019. In Europe, we still expect first half industry volume to decline as customers work through the final WLTP impact. In China, we expect double-digit industry declines in Q1 as customers reduce inventory. As a result, This is also impacting the launch of some of our backlogs. As we look to the full year, we expect a market decline in the minus 2% to minus 5% range. At the midpoint of our guide, we're factoring in China down 10%, Europe down 3%, and North America down 2%. But the key is that we expect to continue to outgrow the market in 2019 based on continued strong demand for our product. Let me now move to slide eight. First, a brief summary of the Q4 results. Overall, very pleased with the way the teams reacted to the weaker industry backdrop. With $2.6 billion in sales, we are up 2% organically. This compares to our market being down approximately 3%. so our outgrowth was very strong in the quarter at approximately 500 basis points. Looking at our regional light vehicle growth, our North America revenue grew high single digits. We saw a low single-digit revenue decline in China for more than 10% better than the industry decline. Europe's revenue declined low single digits. This light vehicle growth was supplemented by positive revenue trends in commercial vehicle and off-road. We reached our goal of a double-digit incremental margin despite the industry volume volatility. Our earnings per share is at $1.21 and was above our guidance range due to a year-end tax screw-up. Now, for the full year 2019, we expect revenue to be down 2.5% to up 2% organically. This represents an outgrowth of 250 basis points to 400 basis points over our expected market decline. Excluding the first quarter, which is being impacted by launch timing and customer inventory adjustments, our outgrowth is expected to be 400 basis points to 550 basis points above market. We expect our earnings per share to be at $4 to $4.35 with a wider than typical range reflecting the end market uncertainty. While we continue to deliver strong outgrowth in 2019, we will also look at ways to adjust our cost structure to adapt to the current environment without compromising our longer-term aspirations. Now, let's look at this exciting longer-term view for BorgWarner with a snapshot of our updated backlog. Starting on slide 10, from a product perspective, we see growth across the portfolio. 20% of our backlog will be related to vehicles with combustion propulsion systems. 70% of our backlog will be related to hybrid, and 10% of our backlog will be related to battery electric vehicles. So 80% of our backlog is from hybrid and electric. This is a great example on how we are executing our proportional growth strategy with overweight, hybrid, and electric. Turning to slide 11, from a regional perspective, we see outgrowth in all our major markets. 25% of the backlog is in the Americas. 15% is in Europe, as continued diesel declines impact the net new business backlog. 60% of the backlog is in Asia. Within this, China accounts for 50%. China is where the music is being played for hybrid and electrics. And we're doing very, very well there. This is playing an increased factor in our growth. From a customer perspective, our very diverse customer base is increasingly important. This gives us great insight to what's happening across the entire proportion landscape. Wrapping up on slide 12, our 19 to 21 backlog is expected to be within the range of $2 to $2.4 billion. You'll notice that the 2019 backlog is down from last year's disclosure due to obvious lower industry volumes and launch timing impacts in 2019. However, you'll notice strong backlogs for 2020 and 2021. Importantly, this backlog will support an average outgrowth of 500 to 600 basis points for the next three years and keep us on track to reach $14 billion of revenue by 2023. These targets are achievable because electrification accelerates the opportunities for board wellness. With that, I will hand it over to Tom.