Q1 2020 Earnings Call
[music] good morning, Lainie missionaries, though the your conference facilitator at this mine I would like.
Welcome everyone to the Borgwarner 2021st quarter results Conference call all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question and answer period, if you'd like to ask a question during the times with respect to star one on your telephone keypad. If he would like to withdraw your question Trust account, if you're using a speakerphone. Please pick up again.
But before asking your question I would now like to turn the call over to Patrick Nolan Vice President Investor Relations Mr. Miller, you May begin your conference.
Thank you Karen good morning, everyone and thank you for joining us today.
Yes sure earnings release earlier. This morning is posted on our website Borgwarner dot com on a homepage and on our Investor Relations homepage.
Before we begin nature formula during this call we may make forward looking statements, which involves risks and uncertainties are detailed in our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation, well I'll highlight certain non-GAAP measures.
In order to provide a clearer picture of how the core business performed.
For comparison purposes or prior periods.
When you hear Astana comparable basis that means excluding the impact of FX that M&A and other non comparable items.
When you hear say adjusted that means excluding non comparable items.
When you hear us to organic that means excluding the impact of FX and M&A.
You will also we will also refer to our growth compared to our markets.
When you Harris 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 that a front.
Thank you Pat and good morning, everyone.
We're very pleased to share our results for the first quarter and provide an overall company update.
Let me start to the highlights of the first quarter on slide five.
Why do the industry production rates were clearly volaris dry enjoying the quarter. We performed strongly on the relative basis with approximately 2.3 billion in sales we were down about 8.1% organically and this compares to our market being down almost 20%.
This means we drove significant outgrowth.
In fact full quota we saw double digit outgrowth in all major regions.
Our decremental margin was approximately 26% in the quota as al margin performance was impacted by Koby 19 related shutdowns.
Given the pace at which the shutdowns old cured. We think this is a relatively good outcome.
We did even strong free cash flow of $146 million full the quota providing an additional cash cushion as we manage through the lower production levels expected in the second quarter.
Lastly, I am proud on how the team has reacted to these challenging environment.
We met the challenges of managing older leaf production shutdowns.
Ill facilities in Europe, and North America White also managing production ramp ups in China.
Let's now turn to slide six.
Where you can see our perspective on the global industry production.
Overall, we expect a very challenging environment in 2020, especially in the second quarter.
On the full year basis, we expect the market decline to be in the minus 25 to minus 31% range.
Looking at this decline by region, we're planning for Europe to be down in the 29% to 38% range in North America, we expect a 27% to 35% decline.
On the relative basis, the outlook for China is stronger.
As their shut down in Q1 were shorter than what we're saying in the other two geographies.
But we still expect 18% to 21% decline in China production for the full year.
As you see from the line shop, showing our different scenarios Q1 is the quarter, which has the largest expected production declines and at the same time the most uncertainty.
The biggest drivers for these declines and the significant uncertainty on the production.
Now the timing of production restarts and the pace of industry production ramps.
Under our iron scenario would she is represented by the light Green line, we're expecting Europe, and North America production to largely resumed by mid May.
Our low and scenario represented by the Dark Blue line uses the assumption that Europe, and North America will not resumed production fully until mid June.
For both scenario, we expect the second half of 2020 to remain challenged due to lower consumer confidence.
Visibility into the production outlook at certainly improved versus a month ago, but there is still a tremendous amount of uncertainty around plan restarts.
The pace of production ramp ups and ultimately consumer demands were maintaining a very active dialogue with our customers and suppliers in order to support an older products and ramp up and manage effectively through these challenging environment.
On slide seven you see the cost actions that we've taken.
Who helped moderate the impact of the CV of production declines.
Discussed action has been across all major areas of the company.
We've taken temporary salary reductions in many locations throughout the world, including 20% pickets amongst our senior executive leadership team.
I'm pleased that many of our facilities have been put on temporary layoff due to lower production or in many location the complete productions shutdown.
And we'll also worked with our strategy third party relations she vendors who have in most cases agreed to share in the economics of the situation by voluntarily reducing their work or bidding rates.
These actions what painful all the right things to do for the financial well being of our company.
I want to thank all involved, especially our internal team members with kept their focus and strong engagement. Despite the sacrifices that have been Anders.
The industry is next big challenge will be to successfully manage the production restock.
Let's take a look at how we'll manage this on slide eight.
Why we must be ready to supply our customers as they resumed production. We are first and foremost focused on what is best in terms of health safety of our people.
We formed a high level task force that as and we'll continue to roll out our save freestyle program to all our global facilities.
The program includes a set of 17 minimum standards and nine additional recommended best practices.
However, our focus on the safety of our people will extend beyond these standards.
We have already seen an additional innovative safety solutions developed at the plant level and we will continue to utilize and promote this innovation to other facilities around the globe.
It is this plot level innovation and the appetite to share ideas that is promoted by the Borgwarner culture.
Let's now turn to slide nine.
I would like to briefly comment on our Seneca South Carolina plant, South Carolina plant, which was unfortunately struck by a tornado on April 13th.
Seneca is one of our largest plants supplying transfer cases to multiple Oems in North America.
Thankfully the plot was not in operation at the time of the tone of those truck.
But unfortunately, a security down at the facility at the facility was killed our thoughts and prayers.
Our with his family.
Now I'd like to give a status update on the plants.
As you can see by the picture on the slide the level of damage varied widely the damage to machining portion of the facility was more limited. However on the left side of the picture you can see the roof of the final summary, our is missing.
That has some areas sustained a more significant amount of damage.
Over the past several weeks.
There has been a tremendous amount of remediation work completed and we've also performed a significant amount of equipment testing and validation and where appropriate we have erected temporary structure.
With all of these hard work over the last three weeks I am proud to report.
At the facility resumed production on May four.
And that the production rates should improve throughout the month of May.
This was an amazing accomplishment I would like to personally thank the team in Santa careful their hard work and our customers for their support we have turned a terrible situation into a borgwarner success story.
Next I would like to provide an update on our planned acquisition of Delphi technologies on slide 10.
This morning.
We announced that Baldwin and Delphi technologies agreed to an amendment of the transaction agreement.
This amendment effectively tools the breach of the debt covenant that we asserted at the end of March.
Under the terms of the Amendment then site technologies as agreed to new closing conditions with requiring that at the time of the transaction closing it growth gross revolver that cannot exceed 225 million and net of its cash balances will not exceed 115 million.
In addition, the parties agreed that Delphi technologies net debt to adjusted EBITDA ratio will not exceed the specified threshold measured at closing.
These new closing condition, where structured to provide delphi with the flexibility needs to manage through the current environment and execute on its current forecast.
At the same time, they also product borgwarner from scenarios that could result in more significant cash usage or a bid that deterioration.
The party also agreed to revise the purchase price.
In recognition of the potential incremental debt that could be outstanding at closing the equity exchange ratio was reduced by 5% as a result current bull woman Delphi technology shareholders will own approximately 85% and 15% respectively.
Of the outstanding shares of the combined company following completion of the transaction.
We're pleased to put this issue behind us and turn our food and divided attention.
To driving towards the closing.
In regards to our effort to close on this transaction there has been a significant amount of other work down over the past several months.
The integration teams continued to work very well together.
The regulatory filings on process in several geographies.
And last week, we closed on a 750 million delayed draw term loan to support our potential financing needs at the time of closing.
I am pleased with the progress as we continue to work towards the closing of the transaction in the second half of 2020.
Before I turn it over to Kevin Let me summarize our first quarter results and our outlook on slide 11.
We achieved significant first quarter outgrowth in all major regions.
We delivered positive free cash flow during the first quarter and ask Kevin will discuss we expect to be free cash flow positive for the full year.
Full warm as one of the most robust liquidity position within our industry.
It is these financial strength.
Combined with the operational discipline of the company.
That will allow us to successfully manage the challenges we expect throughout 2020.
As I look beyond the challenges of 20 to 20 I'm confident that we remain strongly position both from a financial and technology standpoint to capitalize on the long term trends that will continue to support our future profitable growth.
Now over to Kevin.
Thank you Brett and good morning, everyone.
Before I review the financials in detail I'd like to highlight two overarching themes, you'll see in our year to date results.
First our financials have been quite resilience in the face of this challenging environment.
During the first quarter, we delivered strong revenue outgrowth in all regions sustained double digit operating margins and generate meaningfully positive free cash flow.
Second our liquidity remained strong and it's actually gotten stronger over the course of the first four months of this year.
Let's turn to slide 12.
As we look at our year over year revenue walk for Q1, you can see the impact from the thermostat divestiture. We executed in early 2019. Additionally, you can see that the stronger us dollar reduced revenue by about 2% from year ago.
Excluding these items are organic sales were down 8.1 per cent compared to the 19.6% decline in industry production.
That means we delivered revenue outgrowth of 1100 50 basis points in the quarter.
And importantly that outgrowth occurred in all of the major light vehicle markets around the globe.
In Europe are light vehicle organic revenue was down mid single digits compared to the market decline of approximately 19%. The outgrowth was driven by better than expected diesel related revenue as well as strong new programs.
In North America, we were close to flat year over year versus the 10% industry decline driven by new programs and strong mix.
And in China, we outperformed the market by more than 20% due to the year over year growth in our DCT business and other new business.
Overall, we're pleased that we continue to deliver revenue outgrowth, even in this challenging end market environment.
Now, let's look at our adjusted operating income performance, which can be found on slide 13.
Q1, adjusted operating income was $234 million compared to 295 million a year ago.
Our adjusted operating margin was 10.3%, which was down compared to the 11.5% we delivered in the first quarter of 2019.
On a comparable basis adjusted operating income decreased $54 million on 205 million of lower sales, which translates to a decremental margin of 26%.
As you know when markets move downward quickly we tend to see initial decrementals that can be 30% or higher just like we saw at points in time last year.
So we view the 20%, 6% as a reasonably good level of performance given how quickly industry production declined.
And we accomplished this objective while increasing R&D expenditures in our drivetrain segment, where we're continuing to invest in our electrification portfolio.
Adjusted earnings per share was 77 cents for the quarter.
The 23 set decline in adjusted earnings per share compared to the first quarter of 2019 was driven by the lower adjusted operating income.
Moving to cash flow, we are proud of the fact that we delivered $146 million a positive free cash flow for the first quarter.
In an environment, where revenues are under pressure, it's critical to manage our working capital effectively and in the first quarter. We did just that which is why we were able to deliver such a great result.
So, let's discuss our full year revenue outlook on slide 14.
Our guidance is based on the end market assumptions that Fred reviewed earlier with global production being down 25% to 31%.
We expect to continue to drive total market outgrowth for the year, but not at the level, we saw in the first quarter.
Our guidance now incorporates full year outgrowth of approximately 400 to 500 basis points.
This assumes our outgrowth for the remainder of 2020 is in the range of 150 to 250 basis points, which is inline with our prior full year guidance, but obviously this full year guide is higher than our initial 2020 assessment simply given how much we outperformed in the first quarter.
As a result, we expect a full year 2020 organic revenue decline of 20% to 27%.
And that translates to an expected 2020 revenue range of 7.25 billion to $8 billion.
Let's turn to slide 15, we can see an update of our liquidity profile.
As of March 30, Onest, we had $2.4 billion of liquidity or 24% of 2019 sales.
This consisted of our quarter end cash balance of $901 million and our undrawn revolver of $1.5 billion.
You might recall that at the end of December our revolver capacity was $1.2 billion, but in the middle of March we worked with our bank group to increase the capacity to the new level, thereby bolstering our liquidity by $300 million.
It's also important to note that we had a leverage ratio that is more than two turns below the covenant in our revolving credit facility, which means that we have full unfettered access to the 1.5 billion dollar facility.
Adding to this last week, we entered into a 364 day delayed draw term loan facility, which provides us with an additional $750 million of liquidity.
To be clear, we don't think we need this additional liquidity to manage to the current environment.
Instead, we put this facility in place as an insurance policy to support any potential financing needs at closing related to a Delphi technologies transaction.
Nonetheless, the facility is available to US right now prior to any such close which simply means that we have that much more liquidity today.
Finally, while we're not providing specific earnings guidance, we did want to give you color on our free cash flow outlook.
In light of our first quarter results and our success, thus far and managing our working capital we expect to generate positive free cash flow for the full year in the range of $100 million to $300 million, even in a challenging environment suggested by our revenue outlook.
That's a testament to the strong financial condition of the company.
Our boards confidence in our financial condition was evidenced by their decision to maintain our current dividend at this time.
However, I would note that given the current global macroeconomic pressures, we don't expect to be executing on our share repurchase program in the near term.
So let me summarize my financial remarks.
Overall, we had a solid quarter in spite of the industry pressures delivering strong outgrowth and positive free cash flow.
We expect the market to remain under tremendous pressure throughout the year down 25% to 31% from last year, yet we expect to deliver positive free cash flow.
And finally, we have significant sources of liquidity to manage through this environment.
As a management team, we are taking the necessary actions to navigate through the current environment, while ensuring the company a strongly positioned for the eventual industry recovery and our future profitable growth.
With that I'd like to turn the call back over to Pat. Thank you, Kevin Sharon the rate opened up for questions.
At this time I would like to remind everyone like asked the question like Star one on your telephone keypad, if you're using it.
Okay and then.
Your question it means that the flight limit yourself to one question and one follow up lots and lots of this moment second topic a little roster.
First question comes from John Murphy with Bank of America.
Good morning, guys, it's great to hear from you and thank you for all that detail.
And the stab at at the outlook for this year, it's very helpful.
Just really a first simple questions, we look at slide six.
There is some variability that you're indicating around the second quarter, but we're in the second quarter. So I'm just trying to understand what Craig when you were mentioning bid they restart versus mid June restart.
Service some of the scenarios you're looking at.
<unk>.
We are hearing early many which is what we're in right you know for for Europe, and and mid May for North America.
Let me, let information should be reasonably available to you from your customers I'm. Just curious you know on schedule releases, what kind of information and lead times, you're getting from the customers that hopefully can eliminate some of that variability in scenario planning you and how much. The time you expect from them can afford it just seems.
Like some of the stuff should be reasonably well communicated to you at this moment for the restart.
John.
There that there is a there is a wide range of.
Restart date.
And restart scenario I think we have to not think about just the date of ovaries stop but that was at what level of capacity will be stopped.
And it is changing.
Daily both from a restart update and and and ramp up.
Ramp up production. So so I think it's still.
It's feel it's didn't Verizon will add we still have a lot of uncertainty in Q2 from a volume perspective.
Okay. So we'd be fair to say that you're getting some communication on on restart date, but obviously the uncertainty is still flowing down from from the customers. So there's still tremendous uncertainty on what the what the level. It's going to start you can even need at this point, that's got a fair assessment.
Well I think the fair assessment is that we're in constant communication with our customers and and and yet we following that very very closely.
And yeah things change things do change.
Okay, and then maybe just a quick follow up I mean, the 26% decrementals on on the lower volumes towards the end of the third ended first quarter.
It's very very impressive as we think about sort of the pressure in second quarter and throughout the year. I mean is that the kind of number we should be thinking are there any actions that might make that better or because you are lower in the cap euchre, maybe it'll be a bit worse I mean, how should we think about sort of bracketing around that 26%, which was very good performance in the first quarter.
Yes, I think we were pleased with that 26% as well and that's really a function as a lot of the cost restructuring actions that we were executing on throughout last year that we announced back in April on it allowed us to manage the Decrementals now and we're seeing the benefit of that and that's even while we were investing additional dollars an R&D and that drive train segment. So a good risk.
But all in all things considered in this environment I think with the pace at which production is coming down on a year over year basis, I think it's still challenging to manage decrementals that are our something less than a 30% range. In this type of an environment I think thats a reasonable directional proxy to think of how to think about our decrementals going forward.
Okay. That's very helpful. I'll pass it off thanks, so much guys.
Thanks, John.
Next question comes from David Leiker with Baird.
Good morning, this is actually Aaron watts embark on for David.
Next question is just about if you can kind of walk us through what years, you mean in terms of that Q3 Q4 production scenario that you put on your slide what that means in terms of kind of e. The pacing the cadence of OEM ramp up in the back of the year and any color about.
So.
Oh.
We are looking at your question is very is very broad, but let me give you. Some some color here so on the on the on the high scenario.
We're looking at.
[noise], 25% down for the full year, we're looking at a 53%.
Down in Q2.
16 is in in Q3, and and about 10 in Q4, and the low scenario would be a little bit.
Lower than the especially in Q2 as you've seen in the end.
In the the chart in the charts on the underpins that John alluded to.
So it what matters is really win win customer restyle and how fast do we stopped.
And I am so there's not going to go customer by customer, but on an aggregate standpoint. This is where we are cool to.
By quarter.
Okay. That's helpful. And then just my second question is if you can talk about kind of the trackers that outgrowth in in Q1, I mean, obviously you mentioned a number of factors by region, but was there any impact on you know kind of stocking or timing benefits in terms of what you're shifting to OEM plants and could there be a bit of a delay I guess.
And what you're shipping in early Q2 I in fact production ramp backup. Thank you.
I I, we don't thing its its stocking.
And we add in Europe, a our engine group stronger with with actually stronger these diesel demand and stronger new small gas engine demand.
And as you see was strong.
And ER and also strong from from an emissions business standpoint.
And.
And I'll Towable business was a was pretty strong in North America.
So that's pretty much what drove the the the significant algos in Q1.
Next question comes from Dan Galves with Wolfe Research.
[noise], hoping you could talk a little bit about how headcount might have changed from yearend too.
Yeah.
And.
Debt pay down I think we lost you.
Can you repeat your question, Dan we lost him.
The next question.
Brian Johnson with Barclays. Please go ahead.
Yes, good good morning, or good afternoon, and some of your in Europe, you a couple of questions.
First you.
You know.
Could you comment a bit more on the decremental performance.
Not only was a different between engine and drivetrain when we think of the real production impact in the quarter was kind of the month of February in your China operations, and then second half of March in North America Europe. So if you could give a little bit more color on the decremental margins, maybe ideally by geography by did.
Vision, if you don't want to go that far at least kinda geographically. So it could begin to think through twoq.
I think I'd give it more directly by the segments. The way we disclose publicly in it I mean in the engine segment you can see the simple math says that our decrementals were around 20% that's because the bulk of the cost restructuring actions. We've taken over the past year have been in that segment and they're getting the benefit of that even as they manage the decremental margins on.
Lower revenue I think you could see in the drivetrain drivetrain segment there they're decrementals came in in the low Thirtys say for the quarter on a year over year basis, but the bulk of that was because of the increase in the R&D spend on a year over year basis in that segment to support our electrification program. So if you were to strip out that increase in the R&D.
I would have had the decrementals that are in a low twentys.
Okay, I guess, what I was getting at is is can we expect worst decrementals in twoq because of your European and North American cost structure.
That's being less flexible demand in China.
Yeah, I think the Decrementals are really driven by the pace at which the revenue is down as opposed to something unique about the geography. So I wouldn't expect that to be the driver of of a change in Decrementals I think just the challenge of operating with significantly lower production. The magnitude of that decline is really the driver of.
Decremental, that's probably at a higher rate just like we experienced a point in time last year I think this this year, it's even under more pressure so something in that 30% ZIP code is probably the right way to think about us.
Okay second question as we go into second half can you talk a little bit about the impact is since you probably in line, but the impact of social distancing pp steps, you're going to need to taking the factories and how that might affect hop productivity in margin.
Yes, you know in particular, you do you have cut operations, where.
It'll be relatively easy as opposed to maybe say a crowded cut and sew for another parts supplier to kind of keep the kinda protections that work is that a best practices dictate.
Brian C. C safety is is where people want to excels.
We have extraordinary safety results in the from.
We are on a high perspective, and we using exactly the same accidents that we have built in this company over the past decades too.
To restart production was safety.
And koby 19th.
So we have done a tremendous amount of work to figure out how we would restyled home by Paul.
Including exactly what you said socially sensing, which is possible, but not not always and PB.
But also goes way beyond the productions are yeah also it impacts the way people breakout the way people knew poses and so on and all that has been loop, that's and ER and Altamont managers have done a terrific.
Terrific job wonderful job in getting elements ready to restart.
And I just add to that Brian I think thats part of the reason you when we talk about the 30% decremental.
It's a directional guide at this point as part of the reason, we're not giving specific earnings guidance I think theres a lot of variables. When you have a revenue range that's from low to high $750 million why some of it can be what is the operational efficiency in the plan. It can be what a commodity prices doing what's happening in the supply base or their struggles there.
There what additional cost actions might we take so there's a whole host the things that I think we're going to be learning over the coming months that will ultimately impact what those decrementals are and how op how efficient we operate.
Okay. Thank you.
Thanks, Glenn [laughter] next question comes from never came with Oppenheimer.
No sorry there.
Morning alarming.
Yep Yep, Okay, great. Thanks, all right.
You know two part question as you prepare to re ramp.
First how would you assess the stability of the supply base.
And to Howard.
I think it was lost no too.
No I think we lost about.
Okay, and I kind of I can sell no supply base.
I would say that we are absolutely.
Really saying.
The supply base is under some kind of of the at least some stress.
And ER today, we've not seen any disruption, but the key fulfill those deals to supply as will be their ability to from a production restarts.
We are we're playing all the best practices that we've developed win.
When it is around managing supply distress over the past several years, but I would say no that yeah potentially this is clearly a a different scale.
Sean we raised our next question.
Next question comes from Chris Mcnally with Evercore.
Thanks, so much Scott.
I think we've had a couple questions on the Decrementals. This year I know, it's super Super early but as as we think about you know exiting.
You guys used to give you know rule of thumb the.
Essentially incrementals it could be it in the high teen Agers.
She turns essentially flat to positive could you just maybe help but do you know I think well a lot of us or trying to figure out the increased cost.
You know that become when when production.
We start so you know even trying to model sequential.
Incremental margins you know do you think will still be able to to achieve.
Hi teams into into the low 20% you know when things get better sequentially Q3 in Q4.
I think that's how we think about it in terms of the way we manage our incrementals in Decrementals, obviously right now we're in the process of managing Decrementals in the challenge in Q1 as well as Q2 was will be under even more pressure as you can see from our our revenue chart in terms of what we're expecting from a production standpoint, so right now we're in the process of managing debt.
Our metals, which means making sure we manage operational efficiency supplier risk and additional cost actions that we take to manage in that environment, and then that positions us as we start to see the rebound whether you're looking on an increment sequential basis or year over year basis to be able to deliver at something consistent with our historic guidance of operating in that.
High teens basis on a ramp up.
Okay, Great and then just <unk> technical one when we're trying to like back.
That's all from maybe about it to sort of in an implied EBIT for the year can you just talk a little bit about the working capital assumptions are you assuming that you'll have a working capital inflow, which we would sort of expect.
You know given the production decline.
Yes, that's exactly right and that's some of the tailwind that we've seen already in Q1 as well as heading into Q2, because we do run positive working capital. If you look really receivables payables inventory, we tend to run in the color about 12, and a half ish percent. So I think when you think about the Decrementals, we obviously have real cash flow pressure.
From the decremental, but we also have an offset coming from free cash flow or I'm, sorry from working capital and we're experiencing that right now I would say in this type of an environment and we all saw this in 2008 2009 inventory tends to to come out of the system much more slowly, but that said, we still run positive working.
Capital when you look receivables versus payables and that's the real benefit that we're seeing at the moment couple other things that you should think about from a cash flow perspective, as well as right now we're continuing in our planning assumptions you can see at the high end to maintain our capital investments at the levels that we operated with last year and that's because with a company like us.
One of our strengths is because of our liquidity and free cash flow profile. We can continue to invest in programs and the long term to support our customer needs, but obviously, that's something we'll continue to monitor as the year goes on whether we need to do anything differently. There. So I think those are some of the key puts and takes as you think about cash flow.
Great. Thanks, so much team.
Next question comes from jokes back with RBC capital.
Hi, Thanks.
During the month.
Kevin just to follow up on that point and tend to be clear that within your free cash flow guidance for the year working capital is still a sources I I would expect there to be some use of working capital as you have to ramp back up in the back half.
Yeah, I mean, when you ramp back up at the use but net net were down on a full year basis say in each quarter as the year and so that allows it to be a pickup when you look at each quarter as well as the entirety of a year. So yes, working capital is going to be a positive for the here that's our expectation.
Okay. Thank you.
Then maybe just.
On the quarter and I know this is.
All sort of prior guidance gets gets thrown out the window here, but.
You know your backlog I think previously was 400 to 530, we can we can mark that down obviously for sort of industry volume assumptions, but the first quarter really strong you know I think over 300 million you guys showed.
So did that come in better than you were initially planning some of that.
Timing or maybe just talk a little bit more about about you know how some of that backlog roll them.
Joe I think we're very happy with Q1, Oh, it was better than than than than expected.
We don't think that it's a it's approved for.
Have a of backlog up but we're not willing to assume that that this you know al growth is going to continue at this point.
We are watching is officially the diesel demand.
That.
That was strong versus our assumption in Q1 and also we're looking at in great detail in China our growth.
Okay.
And Fred Lastly, just on on back to the supplier stress comment.
I mean, it it maybe you could sort of remind us what would be sort of done in the past, but how would you support your supply base to sort of ensure a your supply if needed. I mean is that just you know payment term news would it be sort of potentially.
Taking a man or are you, hoping that that some of those businesses will be able to rely on some some government assistance.
Well you know we are using the same the seem tools that that weve used over the past I would say about two years. When we started talking about the distress of of some of the supply base in Europe, We know how to do it we have risk management departments and we understand all those.
All the levers that we can pool.
Youre right Woods was a bit different now is that you might have some gulf of them instead to help and we will put this.
Inputs in consideration when we decide how we what we do it how we do it.
One of the key thing is to one of the key thing is really just stay close to two the supply base close to the customers to understand ramp ups and.
And link and Lincoln.
Thanks.
Your next question comes from James Gorilla with Bank capital markets.
Hey, good morning, guys.
Good morning, just curious.
Does the current environment affect the timing of your question a in Cogs restructuring savings at all relative to the cadence you outlined last quarter is there a.
Delay or are possible acceleration in what you can achieve.
I don't think there's a significant movement, one way or the other we're going to continue to support funding of the restructuring actions that we identified and talked about back on the January call. In this environment. There can be some modest movements, just some timing movements pull forward or even pushed out a little bit but that.
I'd say overall directionally, there's not a material change in what we guided to from the January outlook, we're still proceeding on that path and the good news I mean that you'll remember what we talked about when we announced that restructuring that set of restructuring initiatives. We are trying to be proactive to manage unforeseen risks to to offset potential.
For seen risk to manage our margin profile, we didnt anticipate cobot 19 necessarily but here. It is is one of those unforeseen risks and the good news as we were out in front of trying to make sure that we have it and ability to sustain our long term margin profile, but taking those types of actions.
Got it that's helpful. Then just based on what you're willing to share can you.
Just walks through the rationale on on the acquisition Amendment, the 5% reduction on the conversion rate like just curious what led you to that in a number maybe from a valuation standpoint.
Clearly compared to the original timing of the announcement the world has changed pretty dramatically beyond just 5% lets say so any color there would be helpful.
Yeah, I guess in the first thing I'd say about that as we remain confident in a strategic merits of this transaction and so all of US see the long term prospects of combining these two companies and so remember what the nature of this consent agreement is that we signed up to this morning, it's to resolve in issue with an operating covenant and we view. The amendment then as a way to provide.
Delphi with the flexibility needed to execute on its financial plan in this environment, while protecting us from further unanticipated downside risk the reduction in the equity exchange ratio that we agreed to is intended to compensate us for that additional risk, we're taking by providing that covenant relief and remember the financials.
Of all companies in this environment Borgwarner included Borgwarner Delphi others in the sector have all been under pressure and our stock prices reflect that and since this isn't all equity transaction you know the effect of equity purchase price has already been impacted as a result of the environment. We're in so that's that's really the totality of how we think about this.
Okay Fair enough that's helpful and just last one on I'm a strong diesel demand in Europe. This is a follow on to the the uptick in demand that you saw in the fourth quarter, which I don't think you expected to continue so just what's your take on the on the carry over there.
Yeah, we're looking at the in great detail.
I would not will not clearly the plans and we're doing we're doing that study with a lot of with a lot of a ground there I do but we haven't seen we haven't seen this ER in registration.
So so I think it might be also due to the different different element of diesel sizes, and we more and more into the big diesels, and but I would say I would say that this is this is something that.
Huh.
This is this is not a trend that we're ready to bet on yet actually if you look at.
The penetration rates will diesel.
It's still in Q1, 2020 about 5% lower than than Q1 19. So.
As it happens, but I'm not ready to bets on on the fact that this could be.
A trend.
Thanks.
Next question comes from Emmanuel.
Go ahead.
Hi, Good morning, first question, Randy and the clarification around that the backlog Alcoholics. So you did close to 360 million in the first quarter.
It is the right way to look at Stifel. Your own Cook. The Oscars bucket is essentially the backlog in which case is less this 400 to find removal. So so are you assuming no Oh limited amount of new business over the rest of the year and if that is the case is that are resulting delays or things that you're seeing yet is there.
Elements of conservatism in there.
We don't see a major delays I would say that Q2 Q4 are in line with with the price or.
Guide and we choose 150 to 250 basis point allow growth.
Okay, but it was my math.
And with the that's wants to chime in Winter was my math right like is the 480 397 through 47 into 2020 mph use of comparable with the 333 million you did in Q1 was at a different thing I rang I'll take you through they are backlog math offline, but just mathematically either.
Either way to think about as the outgrowth remaining three quarters. The average will be that wanted to have two and half percent fried reference which is in line for the prior guide.
Okay, and okay understood and then I guess just on them more.
You mean mission basis, it's encouraging to see no you're not seeing any delays as well so we see the steel makers in the first quarter.
From a high level point of view, you think they couldn't be any.
Structural changes in the case of adoption of various powertrain technologies post post movies like could there be.
Some automakers pulling back on that occasion and used in norlander mandate that seamless America or vice versa there'd be an acceleration of some other technology that you see anything changing the midterm Mitch so foot powertrain as result of all the equipment.
So.
The first thing I would say many mail is that.
Our strategy of being balanced across CH any makes it.
Like it doesn't really matter for us what I can tell you is the in China, We always we I'm not saying any slowdown on on the electrification programs.
We see things moving very fast from electrification standpoint.
In Europe.
We see that the 2025 in 2030.
Hmm regulatory on.
On on field to an admission leading to more electrification is not questions actually if you look at it in detail in in some countries some programs relative to an aggregation weird deemed essential.
In the U.S. it might take a little bit more time.
But the U.S., we benefit from a great technology and the combustion standpoint.
Making making engine clean there on Lena and where wherever we are are around the world. We will see electrification accelerating growth for Borgwarner and and also a great product and combustion, making making customers.
I P. When the decides to go up and have a longer tail in combustion.
Okay, Yeah, I appreciate it probably thinking.
Next question.
I guess with Morgan Stanley.
Great. Thank you for taking the question you know looking at the exchange ratio here with Delphi I understand it compensates for the additional relief.
That Delphi is looking for.
But on the other hand, you mentioned you know there you don't expect to be executing on the share repurchase program in the near term and it's part of that transaction was.
Adding some additional share buyback. So just just just trying to think through you know the implications for share buybacks and why you didn't try to take that into account with the exchange ratio.
And with respect to the share buyback, we remain committed at $1 billion program, we announced back at the end of January I think all we're saying is that in the near term in this environment with all the uncertainty in T that we have we don't think it's the prudent decision to be deploying liquidity at this moment to start executing on that program, where subject a number of blue.
Backout anyway in the environment, we're operating in as a result of where we stand in the transaction with Delphi, but nonetheless, I think just in the coming months. We don't think it's prudent to be executing on that that said, we remain committed at $1 billion program.
Okay, great that that's all I had appreciate taking the question.
Thank you only pants.
Yeah. It's time for one final question that question comes from Bandini with credit Suisse.
Okay great.
Thank you.
First we seen others cut their own share buybacks and dividends to preserve cash.
What's the rationale for why you've maintained your dividends I saw you had zero buyback for quarter, but it is the dividends play so why why keep that.
Yeah, I mean ultimately the dividend is a decision of the board of directors, but I think you know the way we as a management team think about it is the dividend is a commitment that we make to returning free cash flow to our shareholders and generating $146 million or free cash flow in the first quarter with an outlook that sick.
Adjusted even under these difficult revenue scenarios that were going to generate positive free cash flow up for the full year I think the board undoubtedly took that into consideration and thought it was good to continue to live up to its commitments to returning that cash flow to shareholders undoubtedly that's a decision. The board will continue to monitor each quarter as it looks at the the IND.
Environment than sees how things might be changing but I'm sure that was the calculus that went into it I think with respect to buyback buybacks. We remain committed as I mentioned to armintas to the $1 billion program, but the timing of the execution of those tends to be more discretionary and so we're going to be prudent with the liquidity in this environment and look at the right timing to start redeploying the cash toward that buyer.
Back program, but we don't think now is the moment to do that.
Great. Thanks, and just a follow up on the deal with Delphi, you're assuming everything goes for your deal close the deal in a different world that what we saw at the time Gilligan helpful. Delphi is probably going to be coming in with higher leverage so how does the higher leverage ratio.
Change the way that you think you will operate the go forward and entities. There maybe are you gonna have to be more aggressive on restructuring or would you after which I'll spend in different areas. So how does leverage change attack intact for how you think you may need to operate the go forward entity.
And keep in mind, when when I talk to the slight what we agreed to with Delphi as part of this consent agreement is to put a limitation on the amount of debt. They can be outstanding at the closing and in the Grand scheme of things. When you think about that potential for incremental indebtedness. We don't think immaterially alters our view on the expected leverage ratio or the.
Financial prospects of the combined company.
Okay. So.
Still the are they the entire and he has a whole is still intact with.
This new requirement in place.
Yes, I mean remember Delphi as a call it 1 billion and a half or so or that we have a couple billion dollars of debt and we talked about the potential that there were crying about the potential that there could be additional net debt at closing of $115 million. According to the consent agreement, we signed up for so in the Grand scheme of a an entity that has 3 billion plus in debt.
That that's not a huge number that really swings.
The overall leverage prospects of the company in a way that causes us to want to operate at any differently post closing.
Okay, great. Thank you.
With that I'd like to thank you all for your time in your good questions today.
With that we're going to wrap up the call and stay safe Sharron, you cannot close the call.
That does conclude the borgwarner 2021st quarter results Conference call you may now disconnect.
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