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 2020 Second 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'd like to ask a question during this time, simply press star 1 on your telephone keypad. If you'd 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'd 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. 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 as 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 performs 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. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to outgrowth compared to our market. When you hear us say market, that means 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're very pleased to share our results for the second quarter today and provide an overall company update starting on page five. While the industry production rates were clearly weak during the quarter, we performed strongly on a relative basis. With approximately 1.4 billion in sales, we were down about 43% organically and this compares to a market being down about 50%. This means we drove a significant outgrowth. In fact, for the quarter, we saw outgrowth in all major regions. Our decremental margin was about 28% in the quarter, as our margin performance was impacted by the COVID-19-related shutdowns and inefficiencies related to the production restarts. We delivered positive free cash flow for the quarter, despite lower production levels, which we believe is a testament to the underlying cash-generating ability of this company. I am proud of how the entire BorgWarner team has reacted to this extremely challenging environment. We met the challenges of managing costs and cash during the production shutdowns while ensuring our ability to supply our customers as production resumed. All this was done putting the health and safety of our employees in front. Let's now turn to slide 6 where you can see our perspectives on the global industry production. Overall, we expect the challenging environment to continue throughout the remainder of 2020. our industry production expectations for the full year have improved, primarily due to the second quarter production coming in at the high end of our prior expectations. It is important to note that the market environment is still volatile with the risk of future production disruptions arising from COVID-19. With that important caveat in mind, on a full year basis, we expect the market decline to be in the minus 22 to minus 25% range, compared to our prior expectation of a 25 to 31% decline. Looking at this by region, we're planning for Europe to be down in the 26 to 28% range, and in North America, we expect a 24 to 27% decline. On a relative basis, the outlook for China is stronger, but we still expect 13 to 15 percent decline for the full year. As you will see from the line chart showing our different scenarios, we expect the second half production declines to be less significant than those we experienced during the first half. However, at the midpoint of our guidance, we still expect low double-digit market declines in the second half. As we manage through the challenging global market environment, we continue to maintain a very active dialogue with both our customers and our suppliers while remaining focused on pursuing new business and technologies. Next, I would like to highlight a significant new business program that we announced this morning on slide seven. I'm really excited to tell you that we're building a power-packed integrated drive module, or so-called IDM, for Ford's new all-electric Mustang Mach-E. The IDM comes complete with a BorgWarner thermal management systems and gearbox, integrated with a motor and power electronics from other suppliers, and showcases our system integration expertise. The IDM is being supplied to power the Mustang Mach-E's rear wheel, and all-wheel drive configurations. On the all-wheel drive GT version, Ford Corner is supplying the secondary drive unit as well. We were able to capitalize on our experience with scalable and modular approaches to IDMs to deliver this customized drive module that met Ford's stringent requirements. We're excited to partner with Ford to deliver our high-quality clean and efficient propulsion solution to the high-performance electrification market. This is another significant milestone for our electric business, and there is still more to come, particularly as we expand our power electronics portfolio following the close of the Delphi Technologies acquisition. Let me provide an update of that particular pending acquisition on slide 8. we achieved several milestones towards closing during the last few months. First, we completed a 1.1 billion senior notes offering at favorable terms, and Kevin will discuss this in more detail later. Second, Delphi Technologies shareholders approved the transaction by an overwhelming majority. We believe this underscores the value that is inherent in bringing our companies together. Third, we've now received regulatory approval in six of the seven jurisdictions required for us to close the transaction. Importantly, there have been no conditions placed on the regulatory approvals we've received so far. We expect to receive approval in the remaining jurisdiction in the coming month. And finally, the integration teams continue to work very well together. There is a high level of commitment and excitement among the teams as we drive towards day one readiness and capitalize on the value creating opportunities of the combination. To sum up, I'm pleased with the overall progress as we drive towards the expected closing of the transaction in the second half of 2020. Next, on slide 9, I'd like to highlight that we published our sustainability report last month. At BorgWarner, we embrace sustainability to deliver value to all stakeholders. And there are three pillars to our sustainability strategy. First, create a cleaner, more energy-efficient world. We do this first and foremost through the products we offer. products that drive cleaner mobility and efficiency in moving vehicles from point A to point B. We're also very focused on how we manufacture these products in a cleaner and more energy efficient way. Our goals include reducing our energy intensity usage by 37% and our greenhouse gas emissions intensity by 50% by the year 2030. Second, is to live the BorgWarner beliefs. We encourage our employees to live our beliefs which serve as a foundation for how we work together. I would like to highlight that we are focusing on developing a talented and diverse workforce. In late 2019, I signed the CEO Actions for Diversity and Inclusion where BorgWarner is pledging to take actions to cultivate a workplace with diverse perspectives and experiences are welcomed and respected. BorgWarner employees around the world are also involved and engaged in their communities and have given about 63,000 hours of service, helping others last year. And finally, we partner with and report to our stakeholders. We want to promote responsibility and sustainability within our supply base, while also providing transparency in our impact and reporting accordingly. In summary, BorgWarner strives to make the vehicles we drive more efficient and the world we live in cleaner. We embrace diversity and inclusion, develop our employees, and give back to the communities where we live and work. Before I turn it over to Kevin, Let me summarize our second quarter results and our outlook on slide 10. We achieved a significant second quarter outgrowth in all major regions, and we are excited to continue to drive that outgrowth as the market shifts towards electrification. Wins like the IDM for the Ford Mach-E continue our evolution into electrification. We delivered positive free cash flow during this exceptional quarter, and as Kevin will discuss, we expect the second half free cash flow to meet or exceed our year-to-date generation. We are on track to close the Delphi Technologies acquisition in the second half of this year. There have been tremendous challenges in 2020 with the COVID situation. As I look at what we've accomplished at Port Warner, thus far in this environment, and what we're positioned to accomplish over the balance of the year, I am confident that we remain strongly positioned to execute in the near and long term from both a financial standpoint and a technology standpoint, driving our profitable growth. Now over to you, Kevin.

Thank you, Fred. And good morning, everyone. Before I review the financials in detail, I'd like to highlight the two important takeaways regarding our second quarter results. First, our financial results were solid in the face of a very challenging production environment. During the second quarter, we delivered strong revenue outgrowth in all regions. We were able to maintain decremental margins below 30%. And most importantly, we generated positive free cash flows. The second key message is that we continue to execute on the financing measures that position us to successfully close on the Delphi Technologies acquisition. Let's turn to slide 11. As we look at our year-over-year revenue walk for Q2, you can see that the stronger U.S. dollar reduced revenue by about 1.4% from a year ago. Excluding this impact, our organic sales were down just under 43%. compared to the 50% decline in weighted average market production. That means we delivered revenue outgrowth of 730 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 58% compared to the market decline of approximately 63%. The outgrowth was driven by better than expected diesel-related revenue, as well as new programs. The good news in diesel has been a trend for us the last few quarters, as we believe our mix of diesel business has held up better than the overall market. But we don't expect that tailwind to necessarily continue over the longer term. In North America, we outperformed the market decline of 69% by over 7%, driven by strong mix in new programs. From a mixed perspective, our slightly overweight position in SUVs and pickup trucks has boded well for our ability to deliver outgrowth. And in China, we outperformed the market by approximately 6%, primarily due to stronger than expected year-over-year growth in our DCT products, as well as strength in our China commercial vehicle business, which was about a 150 basis point positive contributor to our outgrowth. we're pleased that we continue to deliver revenue outgrowth even in this challenging end market. Now let's look at our adjusted operating income performance, which can be found on slide 12. Our Q2 adjusted operating loss was $9 million compared to $303 million of income in the second quarter of 2019. Our adjusted operating margin was negative 0.6%. which was down compared to the positive 11.9% we delivered in the second quarter a year ago. On a comparable basis, adjusted operating income decreased $310 million on almost $1.1 billion of lower sales, which translates to a decremental margin of 28%. As you know, when markets move downward quickly, we tend to see decrementals that can be 30% or higher, just like we saw at points in time last year. So we view the 28% decremental as a reasonably good level of performance given the suddenness of the dramatic decline in industry volume during the quarter and the costs and inefficiencies related to the initial production restart. Adjusted loss per share was 14 cents for the quarter. The decline in adjusted earnings per share compared to the second quarter of 2019 was driven by the lower adjusted operating income and a slightly higher tax rate. Moving to cash flow, we are proud of the fact that we delivered $10 million of positive free cash flow for the second quarter. In a quarter where global production gets cut in half, which is what we saw in Q2, it is critical to maintain a very clear focus on cash flow. And in the second quarter, we did just that. We achieved this through discipline in managing decremental margins, focus on driving working capital performance, and effective management of capital expenditures. Now let's discuss our full-year revenue outlook on slide 13. Our guidance is based on the end market assumptions that Fred reviewed earlier, with global production being down 22 to 25%. We expect to drive market outgrowth for the year, but not at the level we saw in the first half. Our guidance now incorporates full-year revenue outgrowth of approximately 450 to 600 basis points. This assumes our outgrowth for the remainder of 2020 is in the range of 0 to 300 basis points, which at the midpoint is relatively consistent with the outgrowth guidance we provided to start the year. This range of outgrowth expectations is wider than typical given the volatility in OEM weekly production schedules and launch timing of new programs. We expect this volatility will continue much of the second half. As a result, we expect a full year 2020 organic revenue decline of 16% to 20% which translates to an expected 2020 revenue range of $8.0 billion to $8.4 billion. Let's turn to slide 14, where you can see an update on our cash flow guidance and other important considerations. During the first half of 2020, we generated $156 million of free cash flow, which we view as a tremendous achievement in such difficult markets. And as you can see on the slide, we expect the trend of positive free cash flow generation to continue with $300 to $400 million of free cash flow for the full year. This implies approximately $150 to $250 million of free cash flow in the second half, despite the working capital investment needed to fund the production ramp-ups and the sequential increase in capital spending in the second half. You should note that we do expect second half free cash flow to be weighted more towards the fourth quarter as we expect a much larger working capital investment in the third quarter with a sequential step-up in revenue. Turning to margins, we continue to expect full-year decremental margins to be in the 30% range for the full year. Second-half decremental margins will be impacted by expected volatility in weekly OEM production schedules and some higher costs versus the first half, namely the end of our temporary wage reductions and higher R&D relative to Q2. As we mentioned last quarter, we intend to continue to sustain the pace of our R&D investment during this downturn because we view it as important to deploy our positive free cash flow to invest in our long-term growth. Also on decremental margins, I would point out that Q4 decrementals will likely be higher than the full-year decremental margin due to the really strong 13% operating margin comparable from Q4 2019. Nonetheless, we feel confident in our ability to deliver on our free cash flow guidance for the year. And that confidence is reflected in the Board's decision to maintain our current dividend again for this quarter. As we went through the depths of this COVID-19 downturn, we continued to generate positive free cash flow, which allowed us to sustain our dividend uninterrupted and unreduced. Next on slide 15, I'll summarize the financing actions that we've undertaken related to the upcoming closing of the Delphi Technologies acquisition. First, as many of you are aware, we successfully renewed and upsized our revolver in March. While a revolver is $1.5 billion today, as part of our revolver renewal from a few months ago, the capacity will automatically increase by an additional $500 million upon the closing of the Delphi Technologies acquisition. Next. During the second quarter, we completed a $1.1 billion senior notes offering. The proceeds from this offering will be used to repay amounts outstanding under the Delphi Technology Senior Secured Credit Facility, while also allowing us to repay our own $250 million in notes maturing in September. Concurrent with this transaction, we entered into a cross-currency swap that synthetically converted the notes to Euro-denominated debt at an effective interest rate of 1.78%. which we view as an attractive rate, particularly in this environment. And finally, over the next couple months, we plan to initiate an obligor exchange offering on Delphi Technologies' 800 million 5% notes. We intend to exchange substantially similar BorgWarner notes for the Delphi Technology notes, with the exchange becoming effective shortly after the closing of the transaction. By executing this exchange offering, we would avoid the potentially significant cash cost of a May colon refinancing transaction. Importantly, this exchange represents the last major financing action that we need to complete ahead of the closing of the acquisition. So let me summarize my financial remarks. Overall, we had a solid quarter in spite of the industry pressures, delivering strong outgrowth and positive free cash flow. We expect the markets to remain under pressure throughout 2020, but we've increased our revenue and cash flow guidance for the year. And finally, we were able to execute an important financing transaction that positions us to close on the Delphi Technologies acquisition in the second half of 2020. Just as I said last quarter, we are proactively navigating through the current environment while ensuring the company is very well positioned for the eventual industry recovery and our future profitable growth. With that, I'd like to turn the call back over to Pat.

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

At this time, I would like to remind everyone, if you would like to ask a question, press star 1 on your telephone keypad. If you're using a speakerphone, please pick up a handset before asking your question. In the interest of time, please limit yourself to one question and one follow-up question. We'll pause for just a moment to compile the Q&A roster. This question comes from John Murphy with Bank of America.

Good morning, guys. This is Aileen Smith. I'm for John. First question, I appreciate that your outlook doesn't incorporate the impact of additional production downtime from COVID. However, for internal planning purposes, how closely are you monitoring your supply base and your production footprint? And are there any proactive measures you're taking to mitigate potential hiccups to production that may pop up in the back half of the year? And specifically, how are you planning for launches in this environment?

So the answer is absolutely yes. We are running the company at all times ready for downturn. And we've shown in Q2 that we can manage that. So plants have downturn plans ready to be implemented. The good thing is that we've just done it. So it will be a repeat and Like most of the repeats, it's easier than the first time you do it. We also, as I mentioned in my prepared remark, we're staying very close to our customers and suppliers to figure out in detail the details of schedules and expectations and potential issues. So as far as launch is concerned, we see a little bit of program delays, but so far we're pretty confident that we're going to be able to honor all the launches that we have up and running and ready to launch in the second half.

Great. That's very helpful. And second more strategic question, on the announcement of the IBM win on the Ford Mach-E, as you think about further quoting for integrated drive modules, Should we expect a similar level of content coming through other suppliers that you're then integrating with your own components? Or is there a substantial opportunity to get some of the electric motor and power electronics content over time, particularly considering what you acquired with Remy and what you will be acquiring with Delphi?

Yeah, I would say first that we are super excited to partner with Ford on this great product. And as I mentioned in the past, we don't have to sell a system. We are flexible. We have modular design. And you may be right. We've extended our product portfolio in the past few years to be ready to have more internal content. But we're very flexible around adapting our content intensity with what the customer wants.

Okay, and one last question, if I may, more housekeeping on the outlook for free cash flow that's improved to $300 to $400 million. Is that just consistent with the higher revenue outlook, or does it also reflect more progress than expected on some of your cost-saving or cash conservation initiatives?

It's really in line with our revenue outlook, and I think you can see that with the low end of our revenue outlook now matching the high end of what we had before. and that cash flow, not coincidentally, is $300 million at that revenue range. So as we look at the $400 million upside at the top end of our range right now, that coincides with the $8.4 billion of revenue.

Great. That's very helpful. Thanks for taking the questions.

You're welcome.

Next question comes from Rod Raj with Wolf Research.

Hi, everybody. Hi, Rod. I have a couple questions. One is... Nice backlog this quarter. I'm just wanting you to clarify, are you including Nix in that backlog line? Because it looks like you're obviously your production mix was pretty helpful in the quarter. Or is the backlog really backlog? And what I'm getting at is, you said backlog is 100% hybrid and EV and we're seeing really impressive strength in those categories. around the world. So is that something that we can extrapolate from as we think about, you know, how solid the backlog that you've previously disclosed is?

Yeah, I mean, backlog includes anything that's not market or FX effectively. So it can pick up mixed impacts. And absolutely, we're seeing some positive mixed impacts in the quarter. So that is a piece of the equation. It's basically anything that's driving us to outgrow the market.

So any color on what's happening with regard to the hybrid and EV and, you know, is that a significant contributor already now or not yet?

I mean, I think from a mixed perspective, you know, a lot of the mixed benefits that we were seeing in the second quarter in particular has to do with our exposure to pickups and SUVs in North America as well as our diesel-related content in Europe seems to be holding up better than the overall diesel market. market as we've seen for the last few quarters now. You know, we have seen some DCT growth over in China as well, which is supporting that backlog. But as we think about the H&E content in our backlog, most of that's coming in the years to come in terms of where we expect to really see that driving our outgrowth and becoming more than 100% of the net backlog. That's really a comment on 21 to 23 timeframe. Okay, gotcha.

And then secondly, could you just update us on the status of the $110 million cost reduction plan that you've talked about? This is specific to the BorgWarner business, not the Synergies or the Delphi side. And, you know, is that 30% decremental that we're seeing right now? Is that including some benefit there? How should we be thinking about incrementals into next year? with the savings and non-recurrence of temporary actions you've taken so far this year, and any color on that?

Yeah, I mean, decrementals absolutely include the benefits associated with the restructuring actions, and we've started to see the benefits of both, obviously, last year's restructuring actions that are taking hold and helping us on a year-over-year basis, as well as we're starting to get some benefit associated with the restructuring that we announced back in early February timeframe. So that is mitigating the decrementals and should continue to be a tailwind as we look out to the next few years to help offset any other bad news that could come into the equation like COVID-19 did this year. And so overall, though, I would say to the question, that is on track. We're continuing to execute according to the plan that we laid out several months back, and we're on track for that.

So just to help us out, if we wanted to, you know, just sort of disaggregate that 30% decremental, what – is the incremental savings that you're seeing this year and what is the incremental number that you were targeting for next year?

Yeah, I think we disclosed back in February timeframe that we expected the 2020 numbers to benefit by about $50 million of incremental savings. And I would say we're on track to deliver that in our decremental numbers. So that is a tailwind in the decrementals. In addition to any of the temporary types of cost actions that we executed in the second quarter, like temporary layoffs and wage reductions in those types of things, more temporary in nature, but did help us in the second quarter as well.

And then next year you've got another 50, was it, or do I remember that wrong?

I think it was in the 35-ish zip code, as I recall, but we'll give more specific guidance on that when we get to the beginning of next year. But I think you should think overall that plan directionally remains intact and on track.

All right.

Thank you.

Next question comes from Joseph Spack with RBC Capital Marketers.

Thank you. Good morning. Good morning. Kevin, maybe this is, you know, definitional, but, you know, your backlog today has been very strong . But, you know, the midpoint of the range for the year is basically equal to what you did in the backlog for the first half. So can you just explain the bridge between the two metrics, or are you saying there's no backlog in the back half?

Yeah, I think backlog and outgrowth are two slightly different things. You know, backlog is basically our growth before you consider pricing. Outgrowth actually is backlog net of pricing. And so if you look at what our backlog actually is – to date through the first six months, I think it's around $525 million or so. Our backlog for the full year, effectively, if you take the outgrowth and you add pricing back to it, we're somewhere in the $580 to $730 million range. So that's kind of how we get to the walkout growth, the backlog.

Okay. Thank you. And then just on the MACI and the IDM, One, maybe you could let us know when Ford sort of brought you into the process. And, you know, I know you mentioned some other suppliers. Are you at liberty to mention if one of those other suppliers on, like, the power electronics is Delphi? And then finally on that, you know, you talked about how your integration expertise really helped with this business. But if you have all the elements, Fred, you will .

Joe, we lost you a little bit there towards the end. I think we got .

So, yeah, so, Joe, we lost you at the end. Ford and Borg have been working together for a few years on this and right from the get-go. So it's a few years back. Two, no, Delphi is not a power electronics supplier. And three, yeah, with the portfolio that we've added over the past years, we certainly are in a position to do the whole thing. But again... As I mentioned before, we don't have to, and we work very constructively with the OEs, and depending on what they want to do and what they want to work with, then we are absolutely flexible.

Next question comes from Brian Johnson. Thank you.

Hi, team. This is Jason on for Brian. Kevin, you've already given some good color around 2021. I was just going to try to ask again, because I think 2020 is fairly straightforward. But as we think after 2021, I was wondering if you could maybe just comment on how the cost base in 2021, the fixed cost base compares to that of 2020. And I guess the moving pieces I would wonder about are, the incremental restructuring savings that we're supposed to get in 2021, have any of those been brought forward into 2020? Any step up in engineering that we need to think about? And then any COVID-related inefficiencies in 2020 that may bleed into 2021? Sort of all of those things wrapped together, should we still see the fixed cost base lower next year versus this year?

Yeah, I think it's premature for us to start talking about 2021, but I can comment on a few of those elements. I mean, from a restructuring perspective, as I mentioned in response to Rod's question earlier, we are on track for executing against the plan that we laid out a few months ago. And I wouldn't say there's any accelerations or delays in that plan. I think it's right on track. So I think it's fair to think about the incrementals that we were showing back in February going from 20 to 2021. to remain intact. From an engineering and R&D perspective, I think you should continue to expect us to invest in that low 4% to 4.5% range as a percent of revenue. Now, this year, it'll be elevated because we're sustaining our dollar investments in R&D around that $400 million level, and that's a conscious decision we made as a leadership team in this environment to sustain our investment, supporting long-term growth prospects for the company because we have strong liquidity and strong cash flow generation. And then in terms of the inefficiencies arising from COVID-19, I think we're going through that process right now as we're building our long-range plans to understand what, if any, types of efficiencies do we expect to carry into next year. The last thing, obviously, and we're not prepared to comment on it further, is we start to think about 2021. Obviously, we expect to close on the Delphi transaction in the second half of this year. and that's going to obviously have some meaningful implications on what 2021 looks like as a consolidated company. So those are some of the things to consider.

Understood. Okay, very helpful. And maybe just on your last point, just a quick clarification on the Delphi deal. Can you remind us of what the last jurisdiction requiring approval is? And I think you mentioned it would happen in the next month. Is the approval of that jurisdiction really the last jurisdiction bottleneck in this deal. I know it's changing to do with the Delphi bonds, but if you could just maybe remind us of what the bottlenecks are between now and when the deal closes.

The last jurisdiction that we have at this point is the European Union, and we've been going through interacting with the regulators and going through that administrative process, and we think where we are in that process keeps us on track for a closing in the second half of the year, consistent with what we've been saying for the last number of months. So that is really the last major, I'd say, administrative hurdle between now and closing. The other big one that we had were obviously the other six jurisdictions, which are now behind us, as well as the Delphi shareholder vote, which took place back in late June and received overwhelming support from the shareholders. So I'd say that's really the last major step. And then as we get to closing, then Delphi will have to test the conditions to closing to make sure that they meet those, and we fully expect that they'll be on track to do that. but we'll obviously accept that it's time we get to closing.

Understood. Thanks so much.

Next question comes from Chris McNally with Evercore.

Oops, sorry about that. Yeah, thanks so much for taking my question. I think we've covered the margins. Maybe two questions on a little bit of the cadence of outgrowth, and this is more qualitative I know we're not committing on 21 or 22, but I think as we see these big EV win announcements and a lot of people are seeing the amount of new EV introductions is only going to accelerate as we get into sort of the 2022 timeframe. I know you've talked about this sort of balanced approach where you have a rough 5% outgrowth, but maybe you could just add a little qualitative commentary to that. You know, can we see that outgrowth get better 21 into 2022? Because we have just opposing forces. 21 is going to be the height of all things. Legacy powertrain should be a great outgrowth for you. But then if you're making these new announcements on products that are coming in 2022, that leads us to think that there's also growth. So maybe just a little bit of qualitative about how we think about when these EV products could start to really be accretive to the overall outgrowth number.

Yeah, Chris, so electrification accelerate our growth. And being E or H, what you see is that everything that is being booked at this point in time is going to see daylight past 2022. And business for 2022 is pretty much already awarded. And, you know, this is in our goal of outgrowing the market year by year by 500 basis points, and we are on track to do that. The current guide for the full year for 2020 is 450 to 600 basis points. So that's what I would tell you also. I would also tell you that we see We don't see a slowdown of requests for quotes or system support and discussion at the very high level between OEMs and BorgWarner to discuss the next generation IDMs, but also the next generation most advanced hybrid architectures.

That's great. And then maybe just a question around the more near term. You know, this idea of diesel within the mix, I think at one point, probably about two years ago, we thought sort of the quote-unquote diesel drag would be sort of done late 19 into 2020. The diesel numbers are less bad than we feared. At what point will we sort of stop talking about a diesel where it probably doesn't have a mix and sort of Europe is balanced from gasoline-turbo versus diesel-turbo. When are we essentially fully balanced on the European diesel fund?

So I think you're right. You see the quarter-over-quarter reduction reducing. So it's plateauing around 29%, 30% take rate. We are starting, you know, we've outgrew that diesel market for a few quarters, and I think we're going to start lapping the European diesel benefits that have started in the second half of 2019. And I would say that in 2021, the diesel headwinds will start fading away. You won't see any impact at all as far as we're concerned.

That's great. So if we see 30% go to, you know, 20% from 2020 to, you know, 2025, do you think by that point you'll be balanced? So we won't be really talking about a drag even though the number of diesel will be going down?

I would say so. Okay, great.

Thank you so much, guys. Thank you, Chris.

Next question comes from Noah Kay with Oppenheimer.

Thanks for taking the questions. Good morning. I guess just first on the subject of, you know, the vertical integration of some of these electric solutions, just given that there's been some focus on that with the Ford announcement this morning. I think a couple of weeks ago you announced, you know, three awards in China to supply the EDM, three new electric models. I presume those, well, with the exception of power electronics, those are vertically integrated for you? You're supplying a complete solution there?

Yes.

Okay. Is it generally the trend or do you see like a regional variation in trend where you are tending to have more vertical integration in one geography versus another? And so can you provide color on that?

No, there is no geographic trend. It's certainly not a one-size-fits-all. You see customers that want us to integrate the full system. And we do that and we capitalize on our integration and system knowledge and experience. Some customers would want us to supply transmission and motor. So we're flexible. It is true that more will come as we are adding more products in our portfolio and be able to do it all and And by doing that, drive the maximum efficiency out of that device. But again, there is not one size fits all. And certainly, as far as we're concerned, more to come on this field.

Okay. And last question. You know, I think we've seen an uptick in interest and, frankly, in public capital market access for Alternative power trains on the commercial vehicle side in the last quarter both EV and fuel cell. Can you talk a little bit about the positioning and the interest level you're seeing from customers? On the commercial vehicle side and you know where that interest might be coming from, you know Medium-duty electric bus regional delivery. Just how are you positioned and how is the interest?

Yeah, no, that's all of you all of the above. No, I would see we see a a decent acceleration in electrifying different vehicles, including long-haul trucks with different types of technologies. Obviously, light vehicle will be the biggest volume for us, but we're very committed in supporting commercial vehicle electrification, too, with all the product portfolio that we have. very little product in the propulsion area from an electrification standpoint that we can't supply. So we're supporting all our customers and commercial vehicle included. And yes, we see an acceleration in this field.

Great. Thanks so much.

Thank you, Noah.

Next question comes from Ryan Brinkman with JP Morgan.

Hi. Thanks for taking my question. You know, firstly, are you able to quantify the non-repeat in the back half or, I don't know, maybe even the catch-up from any austerity measures taken in 2Q? I'm trying to gauge the degree to which the implied back half decremental guide may be driven in part by conservatism versus something maybe more specific you're seeing from a cost perspective, such as you mentioned R&D. Just given, you know, the outlook for 30% decrementals for the full year versus 26% in 1Q and 28% in 2Q, as hopefully the industry backdrop in the back half should be improved quite a bit from the first.

Yeah, I think, I mean, I'm not going to dimension the specifics of each component of how we mitigated the decremental margin. We're able to manage it down to 28%, but obviously you can imagine our contribution margin is well north of 28%. And so the types of things that we had to execute to manage to that level include the restructuring actions, which are providing a tailwind and are more sustainable and permanent in terms from a cost reduction perspective. But then we do have benefits coming from some of those temporary actions, like the temporary layoffs and the wage reduction. So those will creep into the second half. We'll also see some level of higher R&D spend in the second half of the year. As I look sequentially from Q2, we were a little bit lighter in the second quarter than where our full-year run rate average is expected to be. And then the other thing, just to keep in mind, Q4 decrementals are going to be impacted mathematically by the fact that we're jumping off of 13%. plus operating margin from a year ago. And so that just makes the comp pretty challenging as you look at Q4.

Okay, that's helpful. Thanks. And then maybe lastly, a question on the integrated drive module win. Ford has hinted they have a lot more electric vehicles coming down the pike with their Team Edison initiative. I'm curious if your work on the Mach-E puts you in a strong position to win additional awards with that automaker, or if you can't comment specifically, maybe just any kind of an update you can provide on what your discussions with automakers have been like with regard to IDMs, maybe what those discussions have been like since coronavirus. I think, you know, announced awards generally across the sector have slowed a little bit as automakers sort of focus on the crisis. But I'm curious if, you know, behind the scenes you see discussions with regard to electric vehicles accelerating.

The development and the design work for propulsion architectures in electric vehicles and hybrids are are being done and on time and pursuing as planned. We're confident that, you know, awards are going to carry on and, again, more to come on this field. We're very uniquely positioned, especially with the Delphi Technologies acquisition, to have, again, both mechanical, motor, and power electronics under one roof and being able to work on all the types of efficiencies that those subsystems interact with. And so we think that we are well-positioned to supply whatever customers want us to work on, either the full system or subsystems. So it's moving at the right pace, and I'm happy with what I'm seeing.

Okay. Thank you very much.

Next question comes from with Morgan Stanley.

Great. Good morning. Thank you for taking the question. With regards to the Delphi integration, I'm curious, you know, what you've seen since you announced the transaction that, you know, may be progressing better or worse than you expected. I think, you know, the first quarter results were quite strong for Delphi. They had similar benefits from diesel with regards to their growth over market. The decrementals were a bit better. So maybe it seems like there's some momentum there around GDI, power electronics, that wasn't really the case the last couple of years. So maybe you can comment on what your integration teams are working on and what you've learned from the company over the last several months.

What I would say is that we're very pleased on how the integration teams and the match pairs on both sides are. working and collaborating in a virtual environment. This is, we've not missed a beat and very, very happy with the way those teams interact and create value. We're not in the position to update the financials. We'll do that closer to the closing date, but it's moving at the right pace and And I really like the engagement and the results that I'm seeing.

Okay. And then maybe on the cost side, you know, your restructuring actions are helping you get to, you know, those 30% decremental margins for the back half of the year. You know, I think their cost actions, it seems like we're also necessary to drive their incremental decremental margins at the rate that you'd be – comfortable with in order to get to those 11% margins. Maybe you could talk to, you know, where there would be opportunities for upside from the restructuring program, you know, outside of the normal course of incremental, decremental margins for either company.

I mean, with respect to the restructuring, we're pleased with the fact that our program remains on track. I mean, both the program we announced a year ago, about 15, 16 months ago, as well as the program we announced earlier this year, which was a pretty aggressive program to manage and sustain our margin profile to offset headwinds, including things like COVID-19, which we didn't know about at the time. So it was a proactive measure to sustain our margin profile, and we're going to execute against that plan to help mitigate the impact of things like COVID or whatever else might get thrown at us. From a Delphi perspective, They're not going to comment in detail on their business other than overall we're pleased with the progress they've made on their restructuring programs and feel like they're on track to delivering what they've committed directionally. I think you'll see, I think they'll file their financials today or tomorrow and so you'll get to see what their results are looking like here for the second quarter. But directionally we're pleased with what we see and we'll give a more wholesome update of the financial outlook of the combined companies when we get to closing.

Okay. Great. That's all I had. Much appreciated. Thank you.

Next question comes from Dan Neely with Credit Suisse.

Hi. Good morning. Thank you. Two questions on backlog. First, when I look at the $2.1 billion three-year backlog you gave back in February, obviously there's a production assumption underlying that. So we do have a lower environment today could you give us a sense uh of how we might be thinking about how much we need to haircut that that backlog or is it potentially intact given we have a more favorable environment on hybrids or easy how to think of the haircut uh on backlog yeah i'm not sure the haircut you'd be referring to but i mean directionally we're pleased with our backlog shaping up this year you know as we enter 2020

We actually expected that we were going to have lower revenue outgrowth than what we're actually seeing, and that's really across the globe. So our backlog in total, if you look at it, we're guiding to $580 to $730 million of backlog coming through our P&L in 2020. In terms of what the 2021 through 2023 and beyond horizon looks like, not prepared to provide any updates to that other than directionally, I think we still feel very confident about the fact that we're going to deliver 500 basis points of outgrowth from a BoardWarner standalone perspective in terms of what our overall outgrowth is expected to be over those years. Some years might be higher or lower than others, but on average, we should be in that 500 basis point zip code. And the good news is that's actually playing out this year in 2020 as well, which we didn't anticipate as we started the year.

Okay, that's helpful. And then just a follow-up also on backlogs. We know that the majority is China. We heard some good news in the quarter. I think hybrids are getting better credit in the NAV system in China. So what can you tell us on hybrid demand in China? Is this potentially upside to your backlog? And to the extent we do have an uptick in hybrids in China, what would be the timing of this incremental demand? Do you think this is over the next year or two, or is this really outside of your three-year planning period and accruing more so beyond 2022?

So, no, you're absolutely right that, and I think we've always been talking about the fact that electrification, and in China, is not only battery electric vehicle, but it's also including the most advanced hybrid propulsion architectures. And we see We see requests for quotation. We see partnership with Chinese OEMs on hybrids, and we're part of that. Will it have an impact before the end of the current backlog season? Probably not, because this will be launched past the backlog season for the majority of the businesses. But will you see more hybrid power trains in China, especially the most advanced hybrids? Absolutely, yes. Okay, great. Thank you.

We have time for one final question. That question comes from . Hi.

Thank you for taking my question. Just regarding China, I just wanted to check with you regarding the situation and the overall business situation in China. As we know that during the first half, the sales of EVs kind of fell much faster than the overall market. So are you seeing any cancellations of EV programs or how is the business developing? And do you see... the trend improving in the latter half, or is this going to continue?

So, you know, the trend of electrification we think is profound. It's not going to be quarter over quarter steadily increase. You will see some ups and downs. So we'll see some downs in the first half in China. But the long-term trends, as far as we're concerned, we think hasn't changed. It's just timing related. We see some program delays, but we see a lot of focus in getting this done and bringing those hybrid and electric powertrains into the marketplace. And it's true in other parts of the world, too. It is essential when you look at the newly published regulations, it is essential for all of us to move into cleaner and more energy-efficient powertrains, being electric or hybrid, or also efficient combustion powertrains. So efficient combustion powertrain, yes, that's what I meant. So it's accelerating, and we're not missing a beat. All right. Thank you.

With that, I'd like to thank you all for your good questions today. Sharon, you can go ahead and close out the call. That does conclude for Warner 2020 Second Quarter Results Conference Call.

You may now disconnect.