Q4 2019 Earnings Call
Good morning, My name is sharing and I'll be your conference facilitator at this time I would like to welcome everyone to the Borgwarner 2019 fourth quarter and full year results conference call. All lines have at least on mute to prevent any background noise. After the speaker's remarks, they'll be a question and answer period. If you like ask a question. During this time simply press star.
One on your telephone keypad, if he would like to withdraw your question press the pound Keith if you're using a speakerphone. Please pick up the handset before asking your question I would now like turn to turn the call over to Patrick Nolan Vice President of Investor Relations Mr. Nolan you may begin your conference.
Thank you Karen good morning, everyone. It. Thank you for joining us today.
You should our earnings release earlier. This morning is posted on our website Borgwarner dot com on our homepage and on our Investor Relations homepage.
With regard to Investor Relations calendar will be attending multiple comped is paying down our next earnings release. Please see the event section of our Investor Relations home page ROFO list.
Before we begin to ensure format. During this call. We may make forward looking statements, which involve risks and uncertainties are detailed in our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation will highlight certain non-GAAP measures in order to provide a clearer picture, but not a core business performed and for comparison purposes were prior periods.
When you hear say on a comparable basis that means excluding the impact of FX, no M&A and other non comparable items.
When you hear a stay adjusted that means excluding non comparable items.
When you hear a say organic that means excluding the impact of FX and the M&A.
We will also refer to our growth compared to our market. When you hear a say market that means the change in light vehicle production waited for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the market.
Please note that we posted 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 fraud.
Thank you Pat and good morning, everyone.
Very pleased to share our results will 2019, this morning and provide an overall company update.
Let me start with the highlights of the cool down 95.
I am pleased with our stronger than expected top line and margin performance for the year driven by the full school to performance.
Well that approximately 10.2 billion in sales.
Up about 1.7% organically.
This compares to a market being down approximately 4.6%.
So I'll I'll glow was 530 basis points for the year, which was ahead of expectations going into the fourth quarter driven by stronger than expected revenue trends in China and Europe.
Well the 40 year, we so our growth in all major regions, we delivered high single digit outgrowth in Europe and China.
North American outgrow was in the mid single digit range.
[noise] 2019 earnings per share came at school Dora 13 cents ahead of our guidance driven by the full quarter upstate.
We delivered strong free cash of about $700 million for the year.
We expect this strong free cash to continue in 2020.
Our near term cost actions, all supporting our incremental amounts in and we have identified additional cost saving opportunities that we believe will sustain all strong margin profile.
Escaping will discuss in detail eight though we believe our backlog supports all targeted mid single digit outgrowth going forward.
And lastly, I'll planned acquisition of Densified technologies with friends that no propulsion leadership, why supporting our long term growth out.
Let's now turn to slide six.
Which highlights the additional cost restructuring steps that we have announced today.
As you will recall.
On an offshoot to call we highlighted our intention to find additional ways to adjust our cost structure without compromising our longer term aspirations.
Well the last six months.
The team has identified additional restructuring opportunities in all major regions.
These actions will include the restructuring closure will come through they should have both manufacturing and technical senses.
We have also made the decision to consolidate all dolbeau and emissions businesses in order to create product differentiation without syllable and EG all under one roof.
As well as consolidating overhead costs.
These actions are expected to generate incremental annual cost savings in the range of 90 200 million by 2023.
Combined with our previously announced restructuring plan.
Plan to achieve gross cost savings of 135 245 million per year by 20 to 23.
[noise] cost improve money is a continuous focus for borgwarner. We view these actions as proactive steps that we believe we've positioned the company to sustain its strong margin profile and overall long term competitiveness.
Why we must adjust all costs to the challenging global market environment.
We continue to focus on pursuing new businesses and new technology.
I want you full product announcements I like this focus and they are summarized on slide seven.
First we disclose that we would be launching out triple clutch P to hybrid module and hydraulic control unit, we shall again this year.
This module, Dave as cost effective hybridization and he is compatible with existing vehicle platforms.
Next we disclosed our first award for our Ito, though.
This program now she is with the European OEM in 2022.
It is a great example of combining our mechanical rotating electric.
And it clinics in software expertise.
Lastly, we see choose another high voltage coolant eat the program with a major European premium OEM.
This program announced she is in 20 to 23 full both hybrid and battery electric vehicle applications.
These three programs are great. Examples of revenue that's the pulls all strong backlog through 2023.
On slide eight.
I would like to summarize the key points of our planned acquisition of then fight technologies.
First and foremost it wheels Hanson, our leadership position in electrified propulsion systems, as we gain scale expertise and capabilities in electronics.
At a time when the industry is moving towards electrification.
At the same time, it wouldn't handheld combustion commercial vehicle and aftermarket businesses driving an even better than market advantage for us.
The combined company would offer comprehensive portfolio of industry, leading products and systems across propulsion type.
As we bring our offering together I know.
We will be better positioned than ever before to meet our customers evolving needs.
It is not just this tragic fits we are excited about we believe the financial benefits also compelling.
As we expect this transaction to f. significant synergies and to be meaningfully accretive.
We're confident that this transaction will deliver enhanced returns full stockholders, both in the near near term and long into the future.
I would like to highlight a sampling oh, the meat revenue synergies opportunities from the Delphi technologies acquisition on slide nine.
Yes.
As part of our due diligence work the sales and engineering teams from both Borgwarner and Delphi technologies.
Focused on identifying the key customers, where we expect to pursue modular solutions to various hybrid and electric programs.
Within this customer list, we then drill down to hybrid and electric programs that are likely to be awarded by these customers over the next 18 to 24 month.
What you see on this slide all the top 15 programs that we identified as our priority pursuits post closing.
And now it's a majority of these programs are expected to lounge in the 2024 to 2025 timeframe.
They all three takeaways from this like that I would like to highlight.
First the size of the list reinforces our view that the opportunities electrification accelerating.
We believe the revenue opportunities are significant.
With these programs alone represent $1.7 billion in potential additional revenue by 2025 and growing to 1.3 billion by 2027.
It is the size and acceleration of these opportunities that supports our view that the acquisition of those fight technologies is not only supportive but accretive to our long term growth outlook.
Before I turn it over to Kevin Let me summarize all 2019 rentals and long term outlook.
We exceeded our expectations for revenue growth and margin.
We delivered strong free cash flow.
We're taking the necessary cost actions to maintain our margin profile and overall competitiveness.
We continue to see strong demand for a product as evidenced by our new program wins and strong net new business backlog.
It is the operational and financial strength of this company.
That allows us to execute the transaction like the planned acquisition that then fight technologies that will help support our long term revenue outlook.
Now onto Kevin.
Thank you Fred and good morning, everyone.
Before I review the financials in detail I'd like to provide a quick overview of the two key drivers of our fourth quarter results.
First.
Our revenue outgrowth was ahead of our expectations at 850 basis points in the quarter.
This was driven primarily by higher volumes of new programs in China and stronger than expected diesel related revenue in Europe.
Second our margin performance was ahead of our guidance driven by better than expected sales and are focused on cost management actions.
Let's turn to slide 10.
As we look at our Q4 year over year revenue walk you can see the impact from the thermostat divestiture, we executed in early 2019.
Additionally, you can see that the stronger U.S. dollar reduced revenue by about 2% from a year ago.
Excluding these items, our organic sales were up 2.6%, despite the 5.9% decline in industry production.
This is the 850 basis points of market outgrowth and importantly, it's outgrowth occurred in all of the major light vehicle markets around the globe.
In Europe are light vehicle organic revenue was up low single digits on strong new programs as well is better than expected diesel related revenue and.
And in China, We grew high teens over the market.
Partially offsetting the strengthen our light vehicle outgrowth.
Our commercial vehicle in off highway businesses declined relative to last year, resulting in a 100 basis point drag on growth, but that's already netted in our reported 850 basis points of outgrowth.
Overall, we're pleased that we continued to deliver revenue outgrowth. Even this in this challenging end market environment.
Now, let's look at our adjusted operating income performance, which can be found on slide 11.
Q4, adjusted operating income was $340 million compared to 323 million in the fourth quarter 2018.
Our adjusted operating margin was 13.3% up compared to 12.5% in the fourth quarter of 2018.
On a comparable basis adjusted operating income increased $27 million on 67 million of higher sales, which translates to an incremental margin of 40%.
The result was ahead of our guidance and our typical conversion rate of 15% due to our cost management actions and lower R&D spending compared to the same quarter in 2018.
Adjusted earnings per share was $1.15 cents for the quarter.
The six cents decline and adjusted earnings per share compared compared to the fourth quarter of 2018 was driven by lower equity in affiliates earnings higher corporate costs and a higher tax rate.
Moving to cash flow.
We're proud of the fact that we delivered a strong result for the fourth quarter.
In the fourth quarter, we generated $221 million, a free cash flow, which drove our full year free cash flow of $699 million. This was well ahead of our guidance and a great result, as we continue to focus on cash generation at the management team.
Let's turn to slide 12, where you can see our perspective on industry production for 2020.
Overall, we expect that the challenging industry conditions will continue into the new calendar year.
Full year basis, we expect the market the decline to be in the minus two to minus 4% range.
By region, we're planning for China to be down anywhere from 1% to 5% on a full year basis, as we expect customer demand to remain under pressure.
Europe is expected to be down 2% to 5% as our customers maneuver through 2020 Cotwo emissions targets.
And in North America, we expect a modest 1% to 2% decline.
However, as you'll see in a moment, we expect to continue to outgrow the market in 2020 based on continued strong demand for our products.
So, let's discuss our full year guidance on slide 13, which excludes the potential impact of the pending Delphi technologies acquisition.
Our guidance is based on the end market assumptions that I, just reviewed with global production being down 2% to 4%.
Despite that we expect organic revenue to be in the range of down only 2.5%.
Up 0.5%.
That's because we continue to expect to drive total market outgrowth of 150 to 250 basis points.
Embedded in that outgrowth range is 100 basis point headwind from declining commercial vehicle volumes, which means that our light vehicle outgrowth is expected to be 250 to 350 basis points.
With these organic growth assumptions, we expect 2020 revenue to be in the range of 9.75 billion to $10.075 billion.
Our adjusted operating margin is expected to be in the range of 11.6% to 12.0%.
The tend to 50 basis point decrease in our margin outlook relative to 2019 reflects normal decremental margins on declining sales.
And a year over year increase in R&D spending, which is expected to largely offset the benefit of any restructuring savings in the year.
For the full year adjusted EPS, our guidance ranges $3.85 to $4.15 per diluted share.
And finally, we're targeting free cash flow, a $675 million to $725 million, which at the midpoint is flat year over year, Despite lower earnings and an expected increase in capital spending to support our future growth.
That's because of the cash savings related to the elimination of our best this liabilities back in October and lower working capital given the lower revenue outlook.
That's our 2020 outlook.
Let's now look at our longer term view of revenue with a snapshot of our updated multiyear backlog on slide 14.
As you can see we expect to deliver revenue outgrowth across combustion hybrid and electric vehicles more.
More specifically, we see increased content on electric fight vehicles accounting for more than 100% of our light vehicle net new business backlog over the coming years.
Within this we expect over 20% of our net backlog will be related to vehicles with electric propulsion systems.
And we expect our hybrid related revenue to continue to be supported by hybrid system solutions as well as increased penetration of our combustion products on hybrid vehicles.
And from a regional perspective, we see outgrowth in all of our major markets.
On a cumulative basis, our 2020 to 2023 backlog is expected to be within a range of roughly $2.5 billion to $2.6 billion.
Now you'll notice that the 2020 backlog is down about $350 million from last year's disclosure.
This is primarily due to two main factors.
First expected industry volumes adjusted for the regional exposure of our backlog are more than 15% lower than our expectations from a year ago.
That lowered the backlog by approximately $125 million.
Second the pull forward of volume into 2019, which drove our outsized light vehicle outgrowth of 950 basis points in Q4 is creating a $140 million year over year headwind.
When you then look at ahead to 2021 to 2023.
We expect the combined net new business backlog of $2.1 billion.
Importantly, we believe this backlog supports an average outgrowth of roughly 500 basis points. During this timeframe, which we feel very confident in.
Let me summarize our financial results.
Overall, we had a really solid year and finished with results that exceeded the top end of our previous guidance range across the board, 12.1% adjusted operating margin.
530 basis points of market outgrowth.
$4.13 of adjusted EPS, and $699 million, a free cash flow.
As a management team, we're taking the necessary actions to maintain our companies historically strong margin profile and to strengthen our free cash flow generation.
We'll continue to do this while balancing the need to manage a very difficult near term market environment with the need to continue taking the necessary steps to solidify the company's future profitable growth.
With that I'd like to turn the call back over to Pat.
Sharon ready to open up for questions.
At this time I would like to remind everyone. If you'd like to ask your question Press Star one on your telephone keypad, if you're using a speakerphone. Please pick up the handset before asking your question and the interests of time. Please limit yourself to one question and one follow up question well pause for just a moment tick up how the culinary roster.
First question comes from John Murphy with Bank of America.
Hi, Good morning, guys I've got a bunch of questions, but I'll try to keep it brief here.
Gross over market discussion is one obviously is pretty favorable.
Do you given where you are in the vehicle, but I'm just curious as as you think about your backlog.
And where it is focused in the powertrain issued a potentially if the market falters on volumes bit more your growth above market might expand just given the sticking is off from a regulatory perspective, as well as sort of market demand perspective for what you're delivering it to the market your technology I'm trying to understand 'cause it seems like Thats whats happened more recently.
It seems that that's very possible are likely going forward.
I think that.
This is the beauty of the strategy of being balanced across combustion hybrid electric.
Having the right portfolio and capitalizing from electrification acceleration, but also having great great products on the combustion say that see additional take rate.
In within that combustion and also within hybrid.
Okay.
But I mean, but it does seem like.
You mean that this outgrowth may may expand fines come down just because it's kind of products that are discretionary or would get pushed out assays that are reasonably fair statement.
You never know you know for example diesel diesel surprises in Q4.
And.
Even if we don't think that this is a trend.
Those stores our growth from from a quarter over quarter. Luke is very very is very very tricky.
So I'm very confident with us marching towards the 500 basis points.
Ill growth mid term.
We have done that last year. This year, if you exclude the pre buy and if you do get.
If you do get light vehicle would be at 440, a and it's not going to be 500.
Exactly every year, but we don't we are within that range and the and the backlog supposed that 500 basis points on growth.
Okay, Great and then maybe just one follow up.
Given that were quite some time has passed since the acquisition of Delphi has been now so I'm. Just curious if you have any incremental customer feedback and if we think about what you're discussing on slide nine with the focus pursued opportunities.
Is that sort of.
Just early days in what you're identifying and that you are reasonably confident is a target and how should we think about sort of when rates when you get into these very focused.
Pursued opportunities are they similar to sort of typical when rates as you're going after.
Programs or.
The higher just given what you're delivering to the customers.
Yes feedback from customers is is supposed to saying hey, we understand the product fit we understand the technology.
And.
And when you look at slide nine those are real programs and the significant revenue opportunity for for us. So I think customers customers are.
Our.
A really liking that technology fit and and this and this unique positioning that we will be able to.
To have having mechanical run thinking worthy thing electrics and and electronics that skill.
John I think it's a bit needs to talk about when rates, but we feel good about the the number of programs and the size of those programs.
Okay, and then just one housekeeping real quick on slide six you. This is this is all Wasnt Warner specific.
Rationalization and restructuring and has nothing to do with a combination at this point it's active.
It it has nothing to do the combination that's I think noninterest doesn't independent.
Great. Thank you very much.
Thank you John.
Next question comes from Joe Spak with RBC capital markets.
Hi, Good morning, everyone I wanted to dive a little bit too [laughter].
You know the backlog and.
A greater than 100% of the growth coming from.
You know electric so sort of implies a declining.
Ice business, even if you are sort of outgrowing I guess underlying nice, but and that's all sort of great and that sort of drives that outperformance on the topline, but how do you think about the margins over that time period, because you have the high margin legacy business declining.
New electric business ramping.
Like does this restructuring savings of 90 to 100 million you know is that enough to sort of have you sort of hold core borgwarner margins over that 23 time period.
Yeah, I see that you know we run the business with the return on invested capital we don't see any differences whether it is combustion hybrid electric we are as you've seen accelerating our restructuring program and in order to be proactively mitigating risk that.
Maybe me up and you know in this industry things things happen.
And so we are absolutely.
Into them confident that we can maintain the high level of managing that we had in the current margin profile Thats, what we that's what we do.
The restructuring program also.
Okay, I I guess the second question.
And maybe sort of an update like you have any.
You know refreshed views now that works for the year.
No further into this of.
On the Electra traction Motors I think you've been saying you know you expect like 50% in source that person outsource is there any is there any movement there and I guess the you know the reason I ask if you've seen some other companies like <unk> like Nidec sort of really investing here I think they've had a comments, which said the X their aiming for 35% share I'm not sure exactly what button.
I mean by that but if you know effects of if only 50% or outsource than are talking like you know, 70% I'm sorry, I didn't know if you're sort of seen any any change there on on how the market develops anything changing on the competitive front.
And I guess also do you need to potentially partner or within automaker you know in a more.
Structured fashion on the motor side.
We see movement going both ways from from customers around the world. Some of that wanted to make motors are actually outsourcing motors and vice versa, but we feel that the 50% in soles versus outsold is about right.
Okay and is there a benefit to.
Having a more formal structured.
Program with a potential customer.
Oh I would say that you know, we we don't we don't.
We would never say never say.
No, but I I. This is this is this is not the path we're on.
Okay. Thank you very much.
Your next question next question comes from Rod Lache with Wolfe Research.
Good morning, everybody.
Just.
Two things one is I I'd like to better understand how.
We should be thinking about this restructuring you pointed out that it's there to sustain margin it's not incremental.
And I suspect that the streets gonna be speculating on the reasons why a which could include incremental price pressure lower margins on new technologies, shrinking ice higher R&D or or maybe some other assumptions. So maybe just first.
Talk to us about what is different now in this environment that you know this this additional restructuring doesn't accretes to the margins and also how much is the oh of the restructuring is cash.
Brought out.
I was on something like I turn it over to Kevin for giving you more cone cash.
We all have been in this business for long time right I've been in this business more than 30 years and and things that when you have to be proactive in those restructuring effort.
I have to to implement proactive risk mitigation.
We talked to be the bell pricing pressure coming.
From the towable side of our business.
We don't see worsening, but it's still it's in the case.
We are maintaining a very very strong return on invested capital discipline.
But the the need of being.
Competitive.
And to the need of maintaining an overall long term competitiveness is is necessary and that's why we do those two proactive actions.
And I'll comment on the last piece or maybe just to add to that here that we as a company pride ourselves on the the sustained strong margin profile. We've had over a long period of time any seven consecutive years of north of 12% operating margin, we take a lot of pride in being a top tier supplier from that perspective, and part of it is taking the proactive steps necessary to be able to sell.
Staying that margin over the long term in terms of your kind of question about cash the amount that we quoted on there that $275 million to $300 million range that we provided is is the potential restructuring cash cost.
Okay that is and Gotcha and then secondly, okay. It's just no. It's noteworthy that Europe, which you know appears to be the epicenter of C. O. Two regulation right now only accounts for 10% of the company's backlog and.
Yeah, I was hoping you can give us a little bit more color on what you see going on there what that that backlog would look like if you sort of ignored the decline in diesel and of these opportunities that you're outlining I'm on slide number nine.
<unk> any color on you know, how that's kinda splits regionally.
Yes sure that.
When you look at that backlog waiting and you see Europe at 10% keep in mind. This has been net backlog, but it's pluses and minuses in there and in one of the big Minuses clearly that we continue to have in the European business is the impact of diesel and so we are overcoming that with this backlog because it is net of the diesel headwind the diesel head when I think you should think in totality.
About 20 points impact on the backlog now if these lower sustaining itself there'd be some offset on the gas side, but not completely.
But but that is about a 20 point headwind purely associated with the diesel portfolio.
What does that mean 20 points, Kevin I'm 20.3 isolation, if I don't assume any offsets in gas or other things if I just look at how much lower the backlog is as a result of diesel coming down it's about 20 points, okay. The 20% it would be 20% higher.
20 percentage points higher than that 10% if it wasn't for that you're saying.
I would say really focused on the turbo side in particular, but there would be offset on the gas side as well not one for one but there would be an offset but thats. The gross impact of diesel correct Gotcha alright. Thank you.
Western comes from Noah Kaye with Oppenheimer.
[laughter], thanks, very much wouldn't follow back on the the color you provide around the opportunities joint opportunities you could pursue with Delphi I guess, just given your expectations for the closing to occur in the back half of the year and and so first of all still verifying. That's the case you know if some of these program.
I'm sure gonna be awarded.
Relatively soon subsequently the that how quickly do you feel you can move you know in collaboration to two to capitalize ER and actually close on some of those opportunities and maybe if you could explain why you think the integration could could or could be relatively fast.
[noise] I think no the our ability to move quickly you certainly the goal. The key is that we've identified the a focus pursuits and we'd be able to move very swiftly once we once again.
It is not going to be.
Something that is going to take a long time, we are understanding what we need the technology from an end votes of perspective is state of the OS and we'll be able to move to quickly. We both have world class product that we marry very will each other.
Okay.
That's helpful. <unk> you know obviously you provide some color in the prepared remarks around the reduction to that 2020 backlog and part of that is pull forward.
For the part of it that is just a a pure reduction you know the adjustment in volumes down 15%.
Just wondering within that is any of that related to lower expectations for you know easy in hybrid relative to the past. The think you know in 2019, we did see it'd be a bit more you know softness than expected just wondering how you think about the the impact of that you'd be in hybrid truck.
Three now relative to maybe where you saw last year.
Yeah, I'll start with that and maybe I'll ask spread to comment on the hybrid and electric trajectory in total, but but the number we quoted there in terms of the 15% down it's purely markets. So if you look at where we what our 2020 expectations were a year ago at this time versus where we're sitting today based on what's happened in 19 and then in 20.
China is down 25% from those expectations North America is down about six and Europe's down about 10%. So the blended impact of purely production on the backlog and art our mix of the backlog relative to those production levels coming down is about 15% and that has nothing to do with how we see combustion hybrid or electric.
Yeah, we see a as I mentioned, we see an acceleration in the in either electrified propulsion architecture.
I'm only bev, but a lot of hybrid programs that that.
We will that we are targeting as we speak.
But okay, but but but the those programs will impact the backlog at Wheatstone NAFTA.
Okay, great and just like a sneak one more and you know you provided color on the cadence of benefit from restructuring can you give any color on the cadence of or the actual cash outlays for the restructuring program. Yeah. I think I mean, we still haven't finalized all those plans were still working through the approached taking appropriate steps that we need to.
Before we actually from up some of these plants, so theres a little bit of of of potential timing uncertainty I'll say as in terms of when the cash comes in but I think you should think in our and our cash flow planting guidance for this year, we're probably in the $50 million to $100 million range from a cash restructuring perspective.
Very helpful. Thank you.
Next question comes from Brian Johnson with Barclays.
Yes, thank you very much.
I don't want drill in a few things around the backlog you know first and I think I know the answer but just given the record you know see it says they'll be they like that distinction in the past as everything went CB, we should know second.
I'm just trying to get my head around the pull Florida backlog into 2019.
Launch schedules launch volumes could you.
Explaining that and then kind of and also in 70 split between drive train of engine, we ought to be aware.
Okay. So last year, the backlog and I put is is that CV was going to be flat.
I I missed the second part of your question, Brian I apologize.
Oh, the pull forward effect could you explain just mechanically how that works.
Well I think what we're saying about the pull forward is is my what we're looking at a backlog measure like this we're looking at a year over year basis, and so the fact that we saw a 950 basis points of light vehicle outgrowth in the fourth quarter is something we weren't anticipating so you. If you look at the annual effect of that on 2020, as you're doing a year over year comparison.
That creates thought about 140.
Million dollar impact on the backlog.
Okay was that meaning some programs partially launch in 19 and also continuing their launch the 20 had hired 19 volume. So hats. That's a headwind for 20, if you will effectively and get our backlog in revenue outgrowth has a year over year, so that the jump off point to the comparative period.
Is that much higher which we didn't anticipate.
As we ended 2019 it came in a lot stronger so for the full year, we delivered 530 basis points of outgrowth 580 on a light vehicle basis and that was well above what we were guiding to throughout the year now as we head into 2020 that a year over year headwind as you do a comparison of your backlog in 20 versus 19.
Okay, and then the drivetrain segment margins hit an all time high how sustainable is that likely are there kind of onetime and to be a true ups.
That we need to be aware of.
Yeah, I mean, I think both segments saw pretty strong margins in the fourth quarter I don't view fourth quarter margins as necessarily something you should expect quarter to quarter, we typically have strong.
Results in the fourth quarter, driven by certain things with respect to supply chain recoveries that oftentimes come in later in the air performance initiatives as well as we had quite a bit in a way of R&D customer recoveries, which came in in the fourth quarter across both segments, which is part of the reason you saw net R&D down so I don't it and those tend to be.
Lumpier toward the back half of the here than the front half as we jump into the new year, we're very focused on sustaining our strong margin profile, but I don't think you should think of that margin in Q4 as the jump off 0.4 in 2020.
Okay. Thanks.
Next question comes from David Leiker with Baird.
Good morning. This is here in Austin back on for David Hi, So my first question relates to the backlog and just wondering if you could kind of French the gap in terms of how you presented backlog in the past.
First thing is kinda. This this new presentations I guess, you know said another way how much of the three year backlog of the of the 2.1 billion from 2021 to 2023 is it's coming in 2020 free I guess, how would that compared to that kind of that 2.2 billion that you.
<unk> last year for kind of just for your backlog figure.
[music].
I would say that this is consistent with a 500 basis points average I'll growth year over year.
I wouldn't see any change them in the way we're presenting.
Things I'm not sure I.
Oh I got that.
But the you have you know call it.
475 million in backlog hitting and 2020 and then another 2.1 billion over the three year period. After that so I guess I'm wondering kind of whats the kind of the 2020 to 22 rate would be if there's any acceleration in 2023 or fast.
Centrally consistent in terms of the cadence says about growth.
No I mean, I think we're expecting that we're going to deliver 500 basis points on average over that three year period, some years might be a little higher a little lower theres not dramatic differences between any one of those given years in the backlog period, but right now we're looking at sustaining that 500 basis points each year over the three year horizon.
Okay and then my second question is just related to Corona virus in China. So I'm wondering if you're seeing any disruption and your supply chain that could potentially spread into.
You know operations and in Europe, and North America as follows gesture your each operation.
I will start by saying that.
On this on this topic, we are focusing on our people making sure that.
The that this is the first and foremost folks that we have.
From an operations Dent on Kevin's you want to see if you.
Yeah, and just so you understand what's in our guidance I mean, our guidance effectively reflects the production disruptions. We've seen to date both through ended January and into their first couple of weeks of February as you look beyond that there's obviously still a lot of uncertainty in terms of how that plays out we have some of our production facilities are running and some are not right now.
Our China business about 1 billion eight annually in revenue, which means it's about $35 million a week. So if production disruptions continue through the back end of February and in the March there could be additional pressure on our our China revenue, but I think you touched on an important point, how could that spill over to Europe.
In North America, I think that's a big unknown and the longer Theres production disruption in China, So more risk it imposes on the OE production across the globe. So there's a lot of uncertainty around that at the moment and we'll continue to monitor this day to day, a week to week, but that type of production disruption because of the uncertainty is not embedded in our guidance at the moment just the disruptions we've seen to date.
Great. Thanks for taking my question.
Next question comes from Chris Mcnally with Evercore.
Hi, Thanks, so much guys, maybe just a very into some of that the questions that have already been been asked I guess you know Fred what people are trying to figure out is you know for for maybe 2021.
Compared to 2020 on on these the backlog growth you know the way that you used to to guide should we think about 2021 backlog being better than then 2020 and if and if we can we just maybe go through some of the areas of outflows peak, taking commercial vehicles and putting it on the side for.
Now.
I would say that the average 500 basis points is a good is a good.
He is a good is a good way to get it maybe some color can you view is some some product break breakdown from from from the backlog.
So 70% of the backlog is transmission products, including de Cts and.
And P. eggs.
Modules will hybrids.
Oh, sorry, another 30% is always driving couplings on combustion hybrid.
20% is we'll digging in equity component, which I think is is very important.
5% is a high voltage Kevin in batteries is.
5% turbos little gas and hybrid now this is net of that so the big easily impact so, but that's maybe some color that said we had a few and Chris Let me just clarify to 2020, because I know we've.
Out of it so focused on the headline number we've talked about of 150 to 250 basis points of revenue outgrowth and keep in mind in that is 100 basis points of headwind associated with commercial vehicle, just with markets and up from our perspective being down about 7% year over year. So the light vehicle outgrowth embedded into our 2020 guide is 200.
50 to 350 basis points, but that again as I was talking about a response to Brian's question, that's being impacted by the pull forward. We saw into Q4, the significant outgrowth in Q4, which is creating year over year headwind without that Q4 pull forward our light vehicle outgrowth in 2020 would be between 400 500 basis points, so little bit lower than the 500.
We're guiding to it as being on average over 21 to 23, but not significantly different. So thank you have to walk that 150 to 50, we're guiding to in totality and adjust for those two effects to understand how to really think about 2020 and put it in the context of the 2023 guide <unk>.
Absolutely guys I think they didn't make sense, though that 400 to 530 for 2020 become something like 700 on average for specifically light vehicle 20 wanted to 23 and in front I think it's fair to say that I appreciate that Bucketed color. That's very very helpful. For one of the things that we should think about is that there's an assumption that particularly.
For China that the any V market will have a better 2021 than 2020, where as you mentioned you know sort of estimates have been revised significantly over the last 69 month.
I don't think you should think about anything north of 500 basis points year over the past 2020.
So I'm not sure how you do computing 700, plus basis points that you mentioned no. The 700, just a 700 million that 2.1 billion divided by price right Yep, Yeah, I'm, sorry, I use that matchboxes point, yes.
And so you know in this backlog we have no CV growth.
Oh, we have no CV growth embedded into the into the backlog after 2020 would come through the CV flat.
Okay.
Perfect and it's it's quite clear and then just another quick one on on on Q1, I totally understand you know what you're sort of somewhat driving in the dark you know given where we are in the quarter and and low visibility, but how should we think about you know is just the type of thing, we're not going to get an update.
Oh until or acute Q1 reports of then you know the the full year guide with would have to incorporate the situation and trying to just any any rule of thumb for how long you know if facility stayed down.
Or any rule of thumb for sensitivity on on China, because I guess you know investors are all dealing with the same thing and it's the same for every supplier a company, but we're all watching the once a week to weaken in China, you know what sort of bated breath.
Yeah.
With respect to that Chris I think it just depends on how this plays out over the coming weeks I think as you think about our China business remember, it's about 1 billion eight in revenue on an annualized basis, which is about $35 million a week in revenue and so as we look ahead, we actually have eight eight or nine production facilities. There. Some of them are open some of 'em aren't right right now if the production.
Disruption continues through the end of the month, yes, theres that risk to the China revenue, but the bigger risk could be longer term. If this extends into end of February into March does it spillover and have effects on the OE production around the globe because the always undoubtedly rely on China production, not just from us, but <unk>, but from other suppliers as well and I think thats where.
We continue to watch a day to day week to week, and we'll have more to update once we get through the ended the quarter.
Okay, great. Thanks, much guys.
Next question comes from I mean to think of US, yes with Morgan Stanley.
Great. Good morning, Thank you for taking the question.
When I look at the reported results you have for 2019 and I look at the Preannounce results from from Delphi and then you know I add those two up to get plus the 125 million of synergies that you're looking for with a deal 120 130 million of incremental cost save.
Things beyond.
2019 that you've outlined in the slides and then 150 million program that they're engaged with.
It was a pro forma a you know taking the 2019 pro forma I guess about 13.4% margins for 2019, and yet you're guiding to 11 margin, 11% margins with the combined company. So there's a bit of a gap there and I was hoping you could talk through you know is just conservatism or is this are or are there some.
Headwinds that that you're thinking through that would drive the combined margins to 11%.
Yeah.
Take that the the first thing I think you have to also remember is there's amortization of purchase price.
Purchase price amortization of intangibles that a piece of the equation as well, which I think we guided to be about $65 million to $75 million on a pre tax basis that number obviously to finalize once we get the closing, but I think you also have to realize that flows through operating margin and so that's a headwind to margin when you look at.
Delphi technologies, and what they've talked about from a restructuring perspective, you know our perspective on that was they have a good program in place in terms of.
Addressing some of the margin issues in the business, but our belief is that they are going to need some of those restructuring actions to be able to sustain their margin profile as opposed to being purely additive to their margin profile and then as you look into our restructuring initiatives as Fred mentioned, we view those as proactive measures to address risks that could pop up in the business couldn't tell you.
Even sitting here today, what those might be or then we're taking proactive measures opportunistically today to make sure we sustain our strong margin profile long into the future. So that's why we're not looking at it and saying, we'll just add that to our current margin performance, we view that it potentially going to be something that we need to do to sustain that strong margin profile, we've had for a long.
Period of time.
Okay.
And so there's there's essentially what you're saying is there's nothing embedded with regards to product transitions you know going from combustion where you have higher scale to electric where you know the scale would be building up overtime.
Now I'd say, there's nothing that I would say from a product mix perspective that stands out that causes us to say Wow. This is it the $90 million to $100 million of profit improvement, we need to offset that but we just know there's risks inherent in this industry and that spreads have been managing a lot longer than I have but we thought it was the right time in this challenging March end market environment.
It to take actions prudently and proactively.
To position ourselves for long term competitiveness.
Okay appreciate it.
Next question comes from Ryan Brinkman with JP Morgan.
Hi, great. Thanks for taking my questions, which are really around China backlog is given that it's now.
50% of the total so firstly have you broken out the China split for 2020, specifically or could you and secondly is trying to backlog still largely driven by D.C.T. et cetera, or do you see electrification starting to become the bigger driver, including with the idea I'm win in 2021, and then just lastly to the extent there is downside.
<unk> risk to trying to backlog would that simply because there's just the market could be lower or are you seeing any signs that automakers and the current environment could maybe.
Delay new program launches like they've done sometimes before on when the market was softer.
So within the China backlog, we actually having a nice back live across combustion hybrid electric.
A few of the backlog would go down we'd be more or due to market and we don't see announced amazed at this point in time.
Okay, great. Thanks, and then just a follow up on a that earlier question about China Europe backlog and.
Being so much lower than the current revenue in terms of share.
The diesel explanation was there just wanted to.
I understand that you feel like you're getting your share of electrification content over the near and medium term in Europe, and how thats looking given the seat seems like the markets like accelerating in that direction over there.
Yeah, I would say that.
The the majority of our.
Europe.
Acceleration is going to be post 2023, we were less represented in the 48 volt side I agree then we'd be way more would present to the plug in hybrid.
And high voltage hybrid systems.
Very helpful. Thank you.
Next question comes from Dan Levy with credit Suisse.
Hi, Good morning. Thank you had to have a couple of questions on a on restructuring please.
The first one is one of the points you know that we see in restructuring relates to turbos, you mentioned here that you'll be closing technical sensors, which.
Probably means reduced R&D. So this is reduced R&D in any way threaten the the turbo penetration opportunity or for really the view that there's still more than enough engineering footprints in place to drive continued gas turbo penetration and how much of that footprint reduction simply relates to diesel which just isn't that.
Sorry anymore.
I think we're taking a companywide approach on the on the restructuring.
The.
Consolidation of R&D centers growth fuel conservation is doesn't mean that we all going to.
Oh, we use the and automatically reserves R&D and those in those fields.
We feel good about our boards for the half a percent of R&D as opposed to the age of sales.
Some product lines I have more than the others, which is I think you'd be willing to manage the before you wait to manage the business.
So and again, it's it's it's companywide and it's not focused in one region in particular, though.
Got it and then second question just.
On a managing the deal alongside the Delphi and managing the restructuring alongside Delphi.
So you have your own restructuring plan Delphi has its own restructuring plan could you just talk about the ability to concurrently manage your restructuring plan alongside the Delphi plan a wants its close our our two restructuring process sees twice as challenging or are there are synergies so to speak in concur.
Currently running high to restructuring process is concurrently.
They are pretty comfortable to analyze we have all of them and they have their own and it does not into fuel with with with each other.
Project I mean, yeah, he's moved focused into Texans like consolidation from intensifies technology standpoint.
We've done our own probably this year, they standpoint or was that we announced back in April and the one that we're talking about is more looking at the cost of goods sold in it somehow as of the business and so it would ease.
Which is again is really.
Looking at it said they are disjointed.
Yes.
Great. Thank you.
Next question comes from Emmanuel Rosner with Deutsche Bank.
Hi, Good morning first question is on the the potential revenue synergies are highlighted on slide nine can you just conceptually explain a force again, we're well where do the revenue synergies come from my understanding was that's before a your acquisition Delphi you guys will read the bidding for.
Competes you that drives module electrification side, you are with you winning some and then similarly able to see Delphi has.
He has been winning some very good business on the power electronic side. So when you're thinking about these revenue synergies what is that you're actually able to accomplish in addition to that or is there was there like specific technology that you needed to take you through the next level.
No.
I think it's fairly exceed or the the the combination of the fight technologies and us from a mechanical motel Holly colleagues puts us in the position that we can sort of systems around as customers around the globe, who want system and on that page nine we talking about customers.
You want system.
So so weve with.
With their world class modal comfortable I will not modes on transmission and it puts us in in a position to accelerate those systems in the system.
Revenue synergies.
It just makes offering our product offering better faster and at scale.
Understood.
And then a follow up question on the the backlog in and its potential impacts on of its makes on on margin when they when I look at the breakdown that you gave byproduct keep feels like an overwhelming portion of that backlog would come from drive train for says engine, which obviously is intuitive sense. Its electrification. Obviously these have been.
Businesses that have considerably lower margin profile than what's going on in the powertrain. So.
As you launch this do you have sort of a natural pressure on margin from launching businesses that have the lower margins than the stuff, that's actually rolling off and I'm interested in Portugal on your earlier answer around you know focusing on our away C are you essentially saying that even though those businesses may.
Have a low reported margins you already see still comparable so we may see margin compression, but not return compression.
I I wouldn't think about it that way I mean, I think you're right. The backlog is disproportionate to the drive train business. That's absolutely the case and that's it that's by design of how we've been growing the company, particularly in the H. any products, but I think the incrementals as you think about the two businesses or are fairly comparable like we've just started from a lower base, especially if.
We've been investing in the drive train product portfolio. So I think as we increment on the incremental revenue I think you should expect that it's going to have similar types of incrementals that we would expect for the company in total and from an ROI seat perspective, yes, we manage the business is the same way we drive for.
Similar levels of ROI see we're pretty disciplined about that and all the appropriation request that Fred and I review, whether it's a drive train program or an engine program.
Great. Thanks for the color.
We have time for one final question in that question comes from James stick around a little with Keybanc capital.
Hi.
Just just regarding asking the felt this revenue funnel [laughter] what portion could you could just get essentially what portion of these 15 always would represent like true greenfield opportunities in terms of the relationship potential for Borgwarner.
Greenfield, meaning that it would not be a customer we've we've consciously will quit or the relationship would just be dramatically enhanced.
I would consider that greenfield as well.
There is there is there's not too many customers, we don't work with around around the globe.
But due to this maybe this is the with.
So to the V. and then hence relationship of the customer we would we would we would do business with the.
I.
For sure the product offering so to the and hence the reason there the relationship.
Okay, and then getting some winning.
[laughter] and regarding the the restructuring plan outlined here today.
It.
As any of this earmarked for the engineering and development spend that you will likely need to put forth.
As you see when future.
Hi, electrified proposing awards.
Yeah, I mean were.
I guess you could see already in 2020 were part of our we are anticipating an increase in R&D investment in the year up 30 plus million. If you look at the midpoint of our guidance and that is using some of the savings are basically offsetting some of the savings that we're anticipating in 2020 coming from restructuring, but that doesn't mean, we're anticipating permanent step ups from there even an.
R&D I think when we look at the the restructuring initiatives and the savings, we're simply being proactive to guard against risk whether it is increased R&D over time, whether it was something else that pop up in the business that we didn't anticipate but I'd say sitting here today, we continue to expect the we'll manage R&D in that low to mid 4% range going forward and that's the right.
The way to think about the business.
Okay. Thanks, guys.
I'd like to thank you all fear Greg questions today with that Sharron, you can close the call.
That does conclude Borgwarner 2019 fourth quarter and full year results Conference call you may now disconnect.
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