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spk05: Good morning. My name is Gerald, 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. 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 it over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.
spk04: 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 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. 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 performs for comparison purposes with prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, M&A, and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We will also refer to our growth compared to our market. When you hear us say market, that means the change in light vehicle production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. Please note that we'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.
spk00: 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 five. 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 two. 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 six, 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 caveat 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 the minus 18.5 to minus 19% range compared to our prior expectation of a 22 to 25% decline. Looking at this by region, we're planning for Europe to be down in the 23 to 24% range, and in North America, we expect a 20% to 21% decline. On a relative basis, the outlook for China is stronger, but we still expect 7% to 9% decline for the full year. As you see from the line chart, we expect a low to mid-single-digit decline in Q4. As we manage the balance of 2020, we will continue to maintain a very active dialogue with both our customers and our suppliers to manage any production volatility. Let's now discuss some new business awards. First, I'm happy to announce on slide seven our second eTurbo award with a major European OEM launching in 2023. Our eTurbo is an efficient solution capable of delivering crucial benefits for our partners, especially in hybrid application. The in-house association of the mechanical, in this case the turbo, state-of-the-art motor, and an electronic controller was key for us to win. Next, I would like to summarize our latest inverter win that was announced in September on slide 8. We're partnering with a premium European OEM to supply our 800-volt silicon carbide inverter for their next generation battery electric vehicle. This business will launch in 2024 and is another great win in power electronics. Our 800-volt silicon carbide inverter significantly improves efficiency and range, whilst enabling, through the 800-volt architecture, a 50% charging time reduction. We're excited to build upon the momentum of this win and position PorgWarner as a leading supplier of inverters for future battery electric vehicles. I would like to give you a little more detail on our planned customer engagement on vehicle electrification on slide nine. We have been looking forward to engaging with our customers about our expanded electrification product offerings after the closing of the Delphi transaction. And we're excited to report that we've hit the ground running post-closing with customer meetings currently underway. We have plans to meet with customers representing 70% of the global industry volume over the next four months. We will be pursuing both full system and component opportunities with these customers. The charts on the right are just a sampling of the programs we expect to pursue. We believe that we are very well positioned to secure our share of the expected industry award activity over the next 12 to 24 months. Before I turn it over to Kevin, let me summarize our third quarter results and our outlook on slide 10. We achieved a better than expected outgrowth in the third quarter, driven by new business in China. Our margin performance has been solid. Despite the industry challenges throughout 2020, we delivered strong year-to-date free cash flow. As I look forward, I'm excited about our positioning as we look to capitalize on the profound industry shift towards electrification. like the 800-volt silicon carbide inverter and the eTurbo only help support our continued and accelerated evolution. It is our people and their efforts that allow us to manage through a year like 2020 while continuing to secure our future position in the industry. I am very proud of the teams. With that, I will turn over to Kevin.
spk06: 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 yielded an adjusted operating margin of 12.5%, which was up compared to the 11.8% in the third quarter of 2019. On a comparable basis, adjusted operating income increased $25 million on 20 million of higher sales. This earnings performance in the quarter was driven by our ability to successfully convert on the revenue recovery and the benefit of our restructuring actions and some of the temporary wage reductions we implemented earlier in the year. Adjusted earnings per share was 88 cents for the quarter, which was lower than a year ago due to a higher tax rate this year. The higher tax rate was driven by a U.S. tax regulation change announced at the end of the quarter which will limit our ability to utilize certain foreign tax credits to offset future tax obligations. Moving to cash flow, we're proud of the fact that we generated $390 million of positive free cash flow during the third quarter. Fundamentally, we demonstrated our ability to convert operating income into cash flow. In addition to that, we drove inventory performance that was better than we anticipated, and we saw some accelerated customer collections, as certain customers paid early in China in advance of the Golden Week holiday period that started on October 1st. Our year-to-date cash flow performance positions us very well to deliver higher full-year free cash flow than what we were previously projecting. I'll talk about that more in a moment. Before I discuss our updated full-year outlook, I wanted to take a few minutes on slide 13 to review the expected impact of Delphi technologies on our Q4 outlooks. starting with revenue. We expect the acquired businesses to contribute between $950 million and $1 billion of revenue to our Q4 results, which would be down 5% to 10% from Delphi's reported fourth quarter revenue last year. We expect the adjusted baseline operating margin for the Delphi businesses to be in the range of 4.7% to 6%, inclusive of $10 million in synergies. This lower year-over-year margin is the result of downside conversion on the combustion portfolio being only partially offset at this point by the benefits from restructuring actions. This is in line with what we've told you to expect for this business. Specifically, we don't expect to see the standalone business before Synergies to return to 2019's level of margin performance until we see both the restructuring initiatives fully implemented in 2022 and a recovery of revenue to pre-COVID levels. In addition to the baseline performance of the Delphi businesses, we're anticipating between $55 and $60 million of annualized purchase price amortization. That means we expect to have around $15 million in amortization each quarter. So inclusive of this amortization, we expect a Q4 adjusted operating income impact of $30 million to $45 million from the acquisition. And finally, from a free cash flow perspective, we expect our fourth quarter cash flow to be impacted by approximately $100 million of transaction-related costs at or around the closing and the cost of achieving synergies during the quarter. Now that you have a good understanding of how the Delphi acquisition is expected to impact our Q4 results, let's talk about our consolidated full-year outlook on slide 14. Our guidance is based on the end market assumptions that Fred reviewed earlier. with global production being down 18.5% to 19%. Also, we expect to drive market outgrowth for the full year of approximately 550 to 600 basis points, which is at the high end of our prior guidance of 450 to 600 basis points. Based on these assumptions, our 2020 organic revenue would decline by 12.5% to 13.5% year over year. Then, adding the Q4 revenue from Delphi Technologies we're projecting total 2020 revenue to be in the range of $9.7 to $9.85 billion. From a margin perspective, we expect our full-year adjusted operating margin to be in the range of 8.7 to 9.0%. This contemplates the legacy BorgWarner business delivering full-year decrementals in the 30% range, consistent with our prior guidance. Now, this implies a somewhat higher Q4 decremental margin, as a result of the relatively strong 13.3% margin from a year ago, which makes for a difficult comparable, Q4 R&D that we expect will be higher by about $25 million as we continue to fund investment in our long-term organic growth opportunities, and our expectation that we'll experience some level of COVID-related costs and inefficiencies that impact our operational performance. This guidance range also contemplates the impact of adding Delphi technologies to the mix which means that we're adding up to a billion dollars of revenue in Q4 with much lower operating margin for the reasons I noted earlier. Let's turn to slide 15, where you can see our updated free cash flow guidance. Year to date, we've generated $546 million of free cash flow, which we view as a tremendous achievement in this very challenging end market environment. As COVID-19 hit, we focused our team on taking the actions necessary to manage decremental margins while at the same time managing working capital and capital expenditures prudently. The results speak for themselves. As we look ahead to the full year, we now expect to generate between $575 and $625 million of free cash flow before the $100 million of expected Delphi Technologies transaction-related costs and costs of achieving synergies that I mentioned earlier. But even with the Q4 headwinds arising from the transaction, we still expect to deliver $475 to $525 million in free cash flow, a significant increase from our prior guidance. This positions us to continue investing in our future growth opportunities while maintaining a focus on returning cash flow to shareholders. So let me summarize my financial remarks. Simply put, we had another strong quarter. In spite of overarching industry pressures, We delivered outgrowth at the high end of our expectations. We delivered a strong operating margin for the quarter, back to levels we've seen in recent years. And we converted our earnings to free cash flow, both for the quarter and on a year-to-date basis. So as we wrap up this quarter and look ahead to the balance of the year, we're confident in reinstating our margin guidance and in raising our 2020 expectations for both revenue and free cash flow. With that, I'd like to turn the call back over to Pat.
spk04: Thank you, Kevin. Jerome, are you ready to open up the call for questions?
spk05: At this time, I would like to remind everyone, if you would like to ask a question, press par 1 on your telephone keypad. If you are using a speakerphone, please speak up to 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. Your first question comes from John Murphy with Bank of America. Give me an after question.
spk01: Good morning, guys. 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. You know, it's a little less sexy than EVs maybe, but it's still pretty sexy on the profit side.
spk06: 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. And when we talk about North America mix benefits that we're seeing, part of it is the benefit of having a mix that's skewed a little bit more toward 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.
spk00: Yeah, and John, I just wanted 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 higher level, if you look at – the vehicles that are going to be produced between now and 2030. It's about a billion vehicles. IHS is saying 17 percent electrification. Let's round it to 20. Out of that billion vehicles, 900 million vehicles 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.
spk01: Okay, that's incredibly helpful. And then just a second and a follow-up question to the diesel headwind issue. In Europe, I'm just Kevin, if you can, I mean, I understand the comps and there was some recovery and the comps get are getting a little bit tougher, but, you know, 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, you know, the worst of this, this, you know, mixed shift and how should we think about that going forward?
spk00: So, Jen, you're right, the diesel is going down, the take rate is going down, actually pretty significantly down from Q2 to Q3. We are going to, you know, 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 yeah, 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 elements in diesel. And overall, this headwind will moderate in the future.
spk01: Okay. All right. Thank you very much.
spk05: Thank you. Your next question comes from James Piccarello with KeyBank Capital Markets. Let me now ask your question.
spk10: Hey, good morning, guys. Good morning. Good morning. Just on the timing of the Delphi cost out synergies, is anything baked into the fourth quarter outlook, or should the synergy capture, you know, strictly take place next year?
spk06: 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.
spk10: Okay. And then the drivers behind, you know, drivetrains, you know, strong quarterly performance. I mean, we've seen, you know, three quarters now of, you know, call it double digit, you know, market outperformance that the margins clearly came through this quarter. I mean, does your guidance factor in, you know, sustainable momentum run rate around, you know, around, you know, this business and, you know, can provide some color on the drivers, you know, from a product and, and regional standpoint for that segment in particular.
spk00: In Q3, uh, the key drivers were, um, a strong outgrowth on dual-clutch transmissions in China and North American mix product profiles. And 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 in those programs.
spk10: Got it. And just one last one for me. Is there any change in your expectations for next year's incremental margins, you know, given the stronger second half performance this year operationally? Just, you know, is there an element of more difficult comps relative to how you were thinking about things a few months ago? Or are, you know, 30% incremental margins still the right target, you know, for BorgWarner's base business next year?
spk06: Yeah, I mean, when we speak of the 30% incremental that we were talking about earlier this year, I mean, 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 decremented. And that's effectively what you saw in our 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 and 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.
spk10: 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.
spk06: Yeah, 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.
spk10: Understood. Thanks.
spk05: Your next question comes from Dan Levy with Credit Smith. Let me know, ask a question. Hi. Good morning.
spk07: Thank you. First, 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, you know, maybe you could give us a sense of the underlying price or margin trends you've seen in turbos and whether you anticipate this competitive development maybe shifting those pricing or margin trends? So just an update on turbos given the development.
spk00: Yeah, 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.
spk07: And if, you know, appreciate the balance sheet strength that you have, if customers, you know, view that as a good reason to, you know, use you as a sourcing solution, how long would it theoretically take for some of that incremental revenue to show up, you know, in the backlog or ultimately, you know, hitting your revenue line?
spk00: It would take about three to four years to hit the revenue line from a sourcing event or from a booking event.
spk07: Okay. So nothing to return. Okay. Great. And then second, I just wanted to ask about your outgrowth trends in Europe. And, you know, we're obviously seeing a sharp inflection in, you know, Europe powertrain trends right now just as automakers are scrambling to meet these emission targets. And I know that your 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 and progress. 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, you know, shift by automakers as they scramble impact? Is it just simply the portfolio and they're choosing to address it with EVs and it's not hitting the sort of enhanced powertrain type solutions right now?
spk00: 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 a key point. Maybe one element for you is that from Q2 to Q3, the diesel take rate went down 370 basis points, which is one of the biggest declines quarter over quarter over the past several quarters.
spk07: Okay, so that explains a lot of what's going on there. Okay, thank you.
spk05: Your next question comes from Noah Kate.
spk03: Good morning, and thanks for taking the questions. You know, so obviously you've 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 acution 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's your focus going to be with some of those launches?
spk00: 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 the bookings over the past month, and also a very high focus on launch effectiveness across our PDS business unit.
spk03: And as you've got, I don't know how much more information you've been able to glean since the merger closing. But, you know, how do you think about the pricing, you know, 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, you know, do better than kind of Delphi on a standalone basis was hoping to do in terms of reaching break-even or corporate average margins in those businesses over the next year and a half?
spk00: We've not seen anything dramatically different than what we looked at over the past month. So, you know, no surprises for us.
spk06: And I think from a discipline perspective, we are instilling the Board Warner culture. We have a focus as we look at new programs of maintaining the discipline of driving toward 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 BoardWarner position. It's the same approach that we take to the entire portfolio of businesses we have at BoardWarner.
spk03: That's great. 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 this space. I think we've heard from some peers that, interestingly, some bookings were still awarded in 2Q, But there was a surprising level of just ongoing engineering and development activity, you know, for what the conditions were in the pandemic. You know, 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.
spk00: I agree with you. No, 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.
spk03: Great. Thank you very much.
spk05: 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 are using a speakerphone, please speak up to hand it before asking your question. In the interest of time, please limit yourself to one question and one follow-up question. Your next question comes from John Sager with Evercore ISI. You may now ask your question.
spk09: Hey, thanks. It's John Sager on for Chris McNally. Congrats on finalizing the transaction. We saw the sort of go to market strategy on slide seven to nine. 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.
spk06: Yeah, I think 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.
spk09: Sure. Makes sense. And then does Borg Water Care, if you're a fully integrated solution versus just one of the components, you know, in other words, an OEM does the integration and then sources BWA and 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?
spk00: We're here to partner and serve our customers, and so we'd be happy to provide a system like we do for the Mac-E. We'd 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.
spk09: Okay. And then just, you know, do you think the full integration drive module, like, could that possibly be the highest margin product that you have?
spk06: 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 the drive in 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 employee capital, we maintain the same discipline of that 15% target, whether it's a component or a system. All right. Thanks.
spk05: Your next question comes from Brian Johnson with Barclays. He's going to ask a question.
spk08: 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 nine between component opportunities for bev versus um integrated idm opportunities for for bad um it looks like in components that most of the things you're chasing are inverter related um i guess a couple 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 standalone power electronics box. How comfortable are you with the Delphi product line that you've got in terms of the ability to supply inverter components into highly engineered integrated modules that the LEM themselves is producing?
spk00: Brian, first, it is kind of funny to watch that go in different directions, and even within a customer, some programs may go in different directions between insourcing 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 full system, and being able to understand the full system from mechanical, motor, and electronics is an enabler to sell 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 insourcing, 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 insourced 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 Paul Warner has a great technology from an inverter standpoint, and the wind that I alluded to in my prepared remarks speak volumes 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.
spk08: Okay. And just to follow on, the BEV IDM opportunities are certainly, you know, congratulations on the forward wind slash 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 Altium, the Volkswagen, whether those are going to outsource their IDMs or whether they'll just be looking for components as those skateboards crystallize.
spk00: No, we don't see common characteristics of the OEMs going through insourcing or outsourcing. One element is that temporarily we see some of the OEMs that have obligations vis-à-vis their, you know, 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 characteristic. We have opportunities in all three major regions of potentially getting full IDM businesses on the system standpoint.
spk05: Okay, thank you.
spk00: Thank you.
spk05: Your next question comes from David Kelly with Jefferies. You may now ask your question.
spk11: Hey, good morning. And thanks for taking my questions. And maybe just starting with the margin assumption for the fourth quarter. Can you give us a sense for how the board Warner 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?
spk06: Yeah, from a BorgWarner restructuring perspective, you should assume that the Q4 on a year-over-year basis is in that $10 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.
spk11: 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. You know, we were curious to hear what you're seeing as it relates to CV exposure trajectory into 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? Thank you.
spk00: So the CV, China, both off-road and on highway, has been very strong and is still very strong, stronger than what 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 the highway, but we see that trend, too, pretty solidly.
spk11: All right. Got it. That's helpful. Thank you.
spk05: 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 are using a speakerphone, please pick up the handset before asking your question. In the interest of time, please limit yourself to one question and one follow-up question. Your next question comes from Joseph Spack with RBC Capital Markets. You may now ask your question.
spk02: Thank you, everyone. I just had a question, I guess, on where things are headed on electrification and 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 are 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.
spk00: Yeah, 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. Go for it, Joe.
spk02: 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?
spk00: Yeah, I'm not equipped to answer that question. I have to come back to you, Joe, on this one in particular.
spk02: Sure. Thank you very much.
spk00: 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 wheel. So I'll come back to you.
spk02: Appreciate it.
spk05: Mr. Nolan, there are no further questions in the queue. I will hand it back to you for concluding remarks.
spk04: 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.
spk05: That does conclude the BorgWarner 2020 Third Quarter Results Conference Call. You may now disconnect.
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