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 BorgWarner 2019 First Quarter 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, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. If you are using a speakerphone, please pick up the handset before asking your question. I would now like to turn a 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 release at 6.30 a.m. Eastern Time. Posted on our website, BorgWarner.com, both on the homepage and our Investor Relations homepage. A replay of today's call will be available through May 9th. The dial-in number is 855-859-2056. And the conference ID is 659-9394. Or you can simply 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 event 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 involves risks and uncertainties as detailed in our 10-K agenda. 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 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. And when you hear us say organic, that means excluding the impact of FS 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. Now, back to today's call. First, Fred LaSalle, our President and CEO, will comment on the industry. He will then follow this with a high-level overview of our Q1 results, our 2019 outlook, and the cost restructuring plan that we announced this morning. Fred will conclude with a discussion of our recent product highlights. Then Tom McGill, our controller, will discuss the details of our results as well as our guidance. Also with us today is Kevin Nolan, our recently appointed CFO. Please note that we have 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'll turn it over to Fred.

Thanks, Pat, and good morning, everyone. We're very pleased to share our results from Q1 2019 today and provide an overall company update. Before we begin, I'd like to welcome Kevin Nolan to his first earnings call with BorgWarner as our new CFO. Kevin's impressive background speaks for itself, but suffice it to say, His experience will be invaluable as we continue our long legacy of strong financial discipline. He's hit the ground running during his first few weeks, and you will be hearing more from him in the coming months. I'd also like to thank Tom McGill for his excellent financial leadership, and I'm very pleased that he is now our controller with responsibilities for all our accounting, tax, and enterprise risk management operations. Now I'll start by sharing a few thoughts on the industry shown on slide five, starting with Q1. The global light vehicle production came down about 5.2%, which is more than 100 basis points better than the mean point of our expectation going into the quarter. In addition, I'm very proud to say that our growth in Q1 was also stronger than expected, driven by higher volume of new programs, especially in Europe and North America. European light vehicle production was down about 5.5% as customers worked through the final stages of the WLTP certification. China light vehicle production was down mid-teens year over year as our customers reacted to lower demands, and reduce their inventories. North American light vehicle industrial production declined about 2.5% year-over-year. Now, looking to the remainder of 2019, we expect that the challenging conditions in China and Europe will continue for the remainder of the year. Even with these challenging conditions, we expect to be able to deliver on our full-year earnings and cash flow guidance. On a full-year basis, we continue to expect a market decline in the minus 2 to minus 5% range. At the midpoint of our guide, we're factoring in China down high single digit, Europe down more than 3%, and North America down more than 2%. The key is that we expect to continue to outgrow the market in 2019 based on continuous strong demand for our products. Let me now move to slide six. First, a brief summary of our Q1 results. Overall, I'm very pleased. Organic growth was above our guidance, and while we fell short of our typical 20% decremental margin, the performance was in line with our Q1 guide. With $2.6 billion in sales, we were down 3.3% organically. This compares to our market being down approximately 5.2%, so our outgrowth was approximately 200 basis points in the quarter, which was ahead of our expectations. Regionally, our China revenue declined 18%, as ramp-up schedules of new programs were impacted by inventory reduction at our customers. Our European light vehicle revenue was down about 1%, outperforming the industry decline. Our North American light vehicle revenue was flattish year-over-year, and our commercial vehicle off-road and aftermarket business was also flat year-over-year. Adjusted earnings per share came at $1, which was ahead of our guidance, driven by revenue outperformance. Now, for the full year 2019, whilst we are encouraged by the stronger Q1 performance, we're maintaining our full year guidance. We continue to expect revenue to be down 2.5% to up 2% organically, and this represents an outgrowth of 250% to 400 basis points over our expected market decline. We continue to expect our adjusted earnings per share to be at $4 to $4.35. I would also like to briefly touch on our planned margin and R&D cadence for 2019. As Tom will explain later, our guidance for Q2 implies a shortfall compared to our typical decremental margin. In addition to the cost related to tariffs and supply bankruptcies, we're also supporting elevated R&D spending in Q2. This is mostly related to the recently awarded programs. The prototype spending for this program is a bit lumpy throughout 2019, with some of the largest impacts in Q2. For example, during this quarter, we will experience a $10 million year-over-year impact from prototype spending related to recent complete module awards for P2 hybrids. However, at the high level, our R&D spending expectations for 2019 remain unchanged. We continue to deliver strong outgrowth in 2019, and we must continuously look at ways to adjust our cost structure without compromising our long-term aspiration. The cost restructuring plan that we announced in our press release this morning is consistent with this long-term commitment. We've taken a company-wide view of areas to reduce our current cost structure. Based on our analysis, We believe that we can achieve a 40 to 50 million annual improvement in our current structural costs over the next two years. Discussed actions will range from capacity realignments, efficiency improvement in SG&A expenses within our businesses, and cost reduction opportunities within our corporate overhead. We expect these actions will result in restructuring expenses in the 80s million to 100 million range through the end of 2020. Our plan is to redeploy these savings into spending to support future growth in hybrid and electric propulsion. Specifically, we expect to use savings to increase our R&D spending as a percentage of sales without negatively impacting our overall operating margin. We continue to see a strong pull for our products from our customers, and we expect the return on these higher spending will not only drive stronger growth, but generate returns in line with our historic level. Now I'd like to discuss some of our recent product successes, which are on slide seven. For the second year in a row, BorgWarner has been recognized as an Automotive News Space Awards winner. This year, we won for our revolutionary dual-volume turbocharger for gasoline engines. General Motors is the first OEM to put this innovative technology in its full-size pickups with its four-cylinder turbocharged engine. This is a great example of technology that will help support our above-market growth in the combustion propulsion. In hybrids, We also announced that a major European commercial vehicle manufacturer has chosen our HVH410 electric motor for plug-in hybrid electric truck to be launched in 2019. I'm also strongly encouraged by our year-to-date wins across multiple hybrid architectures and electric products. Before I turn it over to Tom, let me summarize my opening remarks. Q1 was a strong start of the year, and we feel very confident in our full-year outlook. Our cost restructuring plan will help support our future profitable growth while sustaining margin performance. And the year-to-date new business wins that we've achieved across combustion, hybrid, and electric vehicles will position us strongly for the future. Now, let me turn it over to Tom.