Q2 2020 Borgwarner Inc Earnings Call
[music]. Good morning, My name is shared and that will be your conference facilitator that this line I would like to.
I never want to the Borgwarner 2022nd quarter results Conference call. All line fiber based on mute to prevent any background noise. After the speaker's remarks will be a question and answer period. If you might ask a question during that time since I started one on your telephone.
If you like to withdraw your question press the pound.
If you're using a speakerphone please pick up a handset before asking your question I'd now like to turn the call over to Patrick Nolan Vice President of Investor Relations Mr. Nolan you may begin your conference.
Thank you Shirley good morning, everyone and thank you for joining us today.
You should our earnings release earlier this morning.
First our website Borgwarner dot com on our homepage and on our Investor Relations homepage.
With regard to our Investor Relations calendar, we will be attending multiple comp just between now and our next earnings release. Please see the event section of our Investor Relations homepage for a full list.
Before we begin nature for me that during this call. We may make forward looking statements, which involve risks and uncertainties as detailed in our 10-K.
Our actual results may differ significantly from the matters discussed today.
During today's presentation will highlight certain non-GAAP measures.
In order to provide a clearer picture of how the core business performed and for comparison purposes of prior periods.
When you hear say on a comparable basis that means excluding the impact of FX net M&A and other non comparable items.
When you Harris say adjusted that means excluding non comparable items.
When you hear a say organic that means excluding the impact of FX and net M&A.
We will also refer to our growth compared to our market. When here say market that means change in light vehicle production waited for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the markets.
Please note that we pursue posted an earnings call presentation to the IR page of our web site. We're encouraged you to follow along with these slides during our discussion.
With that Im happy to turn the call that a Fred Thank you Pat and good morning, everyone.
We're very pleased to share our results for the second cool to today and provide an overall company of date starting on page five.
What are the industry production rates with really weak during the quarter. We performed strongly on the really two phases.
With approximately 1.4 billion in sales were down about 43% organically and this compares to a market being down about 50%. This means we drove a significant outgrowth in fact for.
Well the quota we saw our growth in all major regions.
I'll decremental margin was about 28% in the quarter as our managing performance was impacted by the could be 19 related shutdowns and inefficiencies related to their production restarts.
We delivered positive free cash flow for the quarter, despite lower production levels, which we believe is a testament to the underlying cash generating ability of this company.
I am proud of how the entire pool, one that team as reacted to this extremely challenging environment.
We met the challenges of managing costs and cash during the production shutdowns, while ensuring our ability to supply our customers as production resumed.
All this was done putting the health and safety of our employees in France.
Let's now turn to slide six where you can see our perspectives on the global industry production.
Overall, we expect the challenging environment to continue throughout the remainder of Twentytwenty. However, our industry production expectations for the full year have improved primarily due to the second quarter production coming in at the high ends of our higher expectations.
Since.
It's people it is important to note that the market environment is still volatile with the risk of future production disruptions.
Rising from Koby 19.
With that important caveats in mind on the full year basis, we expect the market decline to be in the minus 22 to minus 25% range compared to our prior expectation over 25, 31% decline.
Looking at this by region, we're planning for Europe to be down in the 26% to 28% range and in North America, we expect to 24% to 27% decline.
On the relative basis, the outlook for China is stronger, where we still expect 13% to 15% decline for the full year.
As you will see from the line chart showing our different scenarios, we expect the second half production declines to be less significant than those we experienced during the first half. However at the midpoint of our guidance, we still expect low double digit market declines in the second half.
Yes.
As we manage through the challenging global market environment. We've continued to maintain a very active dialogue with both our customers and our suppliers, while remaining focused on pursuing new business and technologies.
Next I would like to highlight the significant new business program that we announced this morning on slide seven.
I'm really excited to tell you that we're building a power packed integrated drive module or so-called IDN for Fords, New all electric Mustang Maggie.
The IDN comes complete with the Borgwarner thermal management systems and gearbox integrated with the motor and Polychronic from other suppliers and showcases our system integration expertise.
The idea is being supplied to how the Mustang Mac is real wheel and all wheel drive configurations.
On the all will drive GT version Borgwarner is supplying the secondary drives units as well.
We were able to capitalize on our experience with scalable and modular approach is to ideas to deliver these customized drive module that met falls stringent requirements.
We're excited to partner with four to deliver high quality clean and efficient product propulsion solution to the high performance electrification market.
This is another significant milestone for our electric business and there is still more to come particularly as we expand our power electronics portfolio. Following the close of the Delphi technologies acquisition.
Let me provide an update of that particular pending acquisition on slide eight.
We achieved several milestones towards closing during the fast during the last few months.
First we completed a 1.1 billion senior notes offering at favorable terms and Kevin will discuss this in more detail later.
Second Delphi technologies shareholders approved the transaction by an overwhelming majority.
We believe this underscores the value that is inherent in bringing our companies together.
Third we have now received regulatory approval in six of the seven jurisdictions required for us to close the transaction.
Importantly, the I've been no conditions placed on the regulatory approvals we've received so far.
We expect to receive approval in the remaining jurisdiction in the coming month.
And finally, the integration teams continue to work very well together.
There is a high level of commitment and excitement among the teams as we drive towards the one readiness and capitalize on the value creating opportunities of the combination.
To sum up I'm pleased with the overall progress as we drive towards the expected closing of the transaction in the second half of 2020.
Next on slide nine I'd like to highlight that we published our sustainability report last month.
At Borgwarner, we embrace sustainability to deliver value to all stakeholders and they are three pillars to our sustainability strategy.
First create a cleaner more energy efficient world.
We do this first and foremost through the products we offer.
Products that drive clean the mobility and efficiency in moving vehicles from 0.82 point B.
We're also very focused on how we manufacture these products in a cleaner and more energy efficient way.
Our goals include reducing our energy intensity usage by 37% in our greenhouse gas emissions intensity by 50% by the year 2030.
Second is to leave the Borgwarner beliefs, we encourage all employees to leave our beliefs, which serve as a foundation for how we work together.
I would like to highlight that we're focusing on developing a talented and diverse workforce.
In late 2019, I signed the SKU actions for diversity and inclusion we're borgwarner is pledging to take actions to cultivate a workplace with diverse perspectives and experiences are welcomed and respected.
Borgwarner employees around the World are also involved and engaged in their communities and have given about 63000 hours of service, helping others last year.
And finally, we partner with and report to our stakeholders, we want to promote responsibility and sustainability within our supply base, while also providing transparency in our impact and reporting accordingly.
In summary, Borgwarner strives to make the vehicles, we drive more efficient and the world will even cleaner.
We embrace diversity and inclusion develop our employees and gives back to the coming communities, where we live and work.
Before I turn it over to Kevin Let me summarize our second quarter results and our outlook on slide 10.
We achieved a significant second quarter outgrowth in all major regions.
And we are excited to continue to drive that our growth as the mass market shifts towards electrification.
Wins like the ATM for the Fort Mac E continue our evolution into electrification.
We delivered positive free cash flow.
During this exceptional quarter and as Kevin will discuss we expect the second half free cash flow to meet or exceed our year to date generation.
We're on track to close the Delphi technologies acquisition in the second half of this year.
There's been tremendous challenges in 2020 with the covered situation.
As I look at what we've accomplished at Borgwarner, thus far in this environment.
And what will position to accomplish over the balance of the year I am confident that will remain strongly positioned to execute in the near and long term from both a financial standpoint, and the technology standpoint, driving our profitable growth.
Now over to Kevin.
Thank you Brad and good morning, everyone.
Before I review the financials in detail I'd like to highlight the two important takeaways regarding our second quarter results.
First our financial results were solid in the face of a very challenging production environment.
During the second quarter, we delivered strong revenue outgrowth in all regions.
We were able to maintain decremental margins below 30% and most importantly, we generated positive free cash flow.
The second key message is that we continue to execute on a financing measures that position us to successfully closed on a Delphi technologies acquisition.
Let's turn to slide 11.
As we look at our year over year revenue walk for Q2, you can see that a stronger us dollar reduced revenue by about 1.4% from a year ago.
Excluding this impact our organic sales were down just under 43% compared to the 50% decline in weighted average market production.
That means we delivered revenue outgrowth of 730 basis point in the quarter and importantly data growth occurred in all the major light vehicle markets around the globe.
In Europe are light vehicle organic revenue was down 58% compared to the market decline of approximately 63%.
The outgrowth was driven by better than expected diesel related revenue as well as new programs.
The good news in diesel has been a trend for us the last few quarter. It as we believe our mix of diesel business has held up better than the overall market, but we don't expect that tailwind to necessarily continue over the longer term.
In North America, we outperformed the market decline of 69% by over 7% driven by strong mix and new programs.
From a mix perspective are slightly overweight position in ltvs and pickup trucks has boding well for our ability to deliver outgrowth.
And in China, we outperformed the market by approximately 6% primarily due to stronger than expected year over year growth in our DTT products.
As well as strengthen our China commercial vehicle business, which was about 150 basis point positive contributor to our outgrowth.
Overall, we're pleased that we continued to deliver revenue outgrowth, even in this challenging end market.
Now, let's look at our adjusted operating income performance, which can be found on slide 12.
Our Q2, adjusted operating loss was $9 million compared to $303 million of income in the second quarter of 2019.
Our adjusted operating margin was negative, 0.6%, which was down compared to the positive 11.9% we delivered in the second quarter a year ago.
On a comparable basis adjusted operating income decreased $310 million on almost $1.1 billion of lower sales, which translates to a decremental margin of 28%.
As you know when markets move downward quickly we tend to see decrementals that can be 30% or higher just like we saw at points in time last year.
So we view the 28% decremental as a reasonably good level of performance given the suddenness of the dramatic decline in industry volume during the quarter and the cost and inefficiencies related to the initial production restart.
Adjusted loss per share was 14 cents per for the quarter.
The decline in adjusted earnings per share compared to the second quarter of 2019 was driven by the lower adjusted operating income and a slightly higher tax rate.
Moving to cash flow, we're proud of the fact that we deliver $10 million of positive free cash flow for the second quarter.
In a quarter, where global production gets cut in half, which is what we saw in Q2. It is critical to maintain a very clear focus on cash flow and in the second quarter. We did just that.
We achieved this through discipline in managing decremental margins.
Focus on driving working capital performance.
And effective management of capital expenditures.
Now, let's discuss our full year revenue outlook on slide 13.
Our guidance is based on the end market assumptions that Fred reviewed earlier with global production being down 22% to 25%.
We expect to drive market outgrowth for the year, but not at the level, we saw in the first half.
Our guidance now incorporates full year revenue outgrowth of approximately 450 to 600 basis.
This assumes our outgrowth for the remainder of 2020 is in the range of zero to 300 basis points, which at the midpoint is relatively consistent with the outgrowth guidance, we provided to start the year.
This range of outgrowth expectations is wider than typical given the volatility in OEM weekly production schedules and launch timing of new programs.
We expect this volatility will continue much of the second half.
As a result, we expect a full year 2020 organic revenue decline of 16% to 20%, which translates to an expected 2020 revenue range of 8.0 billion to $8.4 billion.
Let's turn to slide 14, we can see an update on our cash flow guidance and other important considerations.
During the first half of 2020, we generated $156 million of free cash flow, which we view as a tremendous achievement in such a difficult markets.
And as you can see identified we expect the trend a positive free cash flow generation to continue with $300 million to $400 million a free cash flow for the full year.
This implies approximately $150 million to $250 million, a free cash flow in the second half. Despite the working capital investment needed to fund that production ramp ups and the sequential increase in capital spending in the second half.
You should note that we do expect second half free cash flow to be weighted more towards the fourth quarter as we expect a much larger working capital investment in the third quarter with the sequential step up in revenue.
Turning to margins, we continue to expect full year decremental margins to be in the 30% range for the full year.
Second half decremental margins will be impacted by expected volatility in weekly OEM production schedules and some higher costs versus the first half, namely the end of our temporary wage reductions and higher R&D relative to Q2.
As we mentioned last quarter, we intend to continue to sustain the pace of our R&D investment during this downturn, because we view it as important to deploy our positive free cash flow to invest in our long term growth.
Also on decremental margins I would point out that Q4, decrementals will likely be higher than the full year decremental margin due to the really strong 13% operating margin comparable from Q4 2019.
Nonetheless.
We feel confident in our ability to deliver on our free cash flow guidance for the year and that confidence is reflected in the board's decision to maintain our current dividend again for this quarter.
As we went through the depth of this cobot 19 downturn, we continue to generate positive free cash flow, which allowed us to to sustain our dividend on interrupted and on reduced.
Next on slide 15, I'll summarize the financing actions that we've undertaken related to the upcoming closing of the Delphi technologies acquisition.
First as many of you are aware, we successfully renewed and upsized our revolver in March.
While our revolver is $1.5 billion today as part of our revolver renewal from a few months ago. The capacity will automatically increased by an additional $500 million upon the closing of the Delphi technologies acquisition.
Next.
During the second quarter, we completed a $1.1 billion senior notes offering.
The proceeds from this offering will be used to repay amounts outstanding under the Delphi technology senior secured credit facility, while also allowing us to repay our own $250 million and notes maturing in September.
Concurrent with this transaction, we entered into a cross currency swap at synthetically converted the notes to euro denominated debt at an effective interest rate of 1.78%, which we view as an attractive rate, particularly in this environment.
And finally over the next couple months, we plan to initiate and obligor exchange offering on Delphi technologies 800 million, 5% notes.
We intend to off to exchange substantially similar Borgwarner note for the Delphi technology nodes with the exchange becoming effective shortly after the closing of the transaction.
Executing this exchange offering we would avoid that potentially significant cash cost of a may colon refinancing transaction.
Importantly, this exchange represents the last major financing action that we need to complete ahead of the closing of the acquisition.
So let me summarize my financial remarks.
Overall, we had a solid quarter in spite of the industry pressures delivering strong outgrowth and positive free cash flow.
We expect the markets to remain under pressure throughout 2020, but we've increased our revenue and cash flow guidance for the here.
And finally, we were able to execute an important financing transaction that positions us to close on the Delphi technologies acquisition in the second half of 2020.
Just as I said last quarter, we are proactively navigating through the current environment, while ensuring the company is very well positioned for the eventual industry recovery and our future profitable growth.
With that I'd like to turn the call back over to Pat.
Thank you, Kevin Sharon, we're ready to open up for questions.
At this time I would like to remind everyone that you'd like ask a question press star one on your telephone keypad, if you're using a speaker Paul you got the handset before asking a question in the interest implying please limit yourself to one question and one follow up question.
Just a moment you could probably can you maybe roster.
Next question comes from John Murphy with Bank of America.
Good morning, guys. This is Alan Smith on for John.
First question I appreciate your outlook doesn't incorporate the impact of additional production downtime from coal that however, its or internal planning purposes. How closely are you monitoring your supply base and your production Frank and are there any proactive measures you're taking to mitigate potential hick ups to production that may pop up in the back half of the year.
And specifically how are you planning for launches in this environment.
So the answer is absolutely, yes, we are running the company.
At all times ready for downturn and we've shown in Q2 that we can manage that so concept downturn lands ready to be implemented. The good thing is that we've we've just done it. So it will be it will be a repeat and like most of the repeats it's easier than than that.
First thing you do it.
While we are also as I mentioned in my prepared remarks, staying very close to our customers and suppliers to figure out.
In detail details of schedules and analytics, and this and expectations and potential issues.
So as far as lounges concern.
We don't we see a little bit of program delays, but.
So far we're pretty confident that we're going to be able to on the old allowances that we have.
Up and running and ready to launch in the second half.
Great. That's very helpful and second more strategic question on the announcement of the IDN win on the Ford Moxi as you think about further quoting for integrated drive modular should we expect a similar level of content coming through other suppliers that you're integrating with your own components or is there a substantial opportunities you get some.
The electric motor and power electronics electronics content over time, particularly considering what you acquired with rainy and what you will be acquiring with Delphi.
Yeah, I would say first that we have we're super excited to partner with fold on this on these great product and as I mentioned in the past we don't have to set a system. We are flexible we have modular design.
And you may be rate, we've extended our product portfolio.
In the in the past few years to be ready to have more internal contents.
But we're very flexible around adapting our content intensity with what the customer wants.
Okay and one last question if I may more housekeeping on the outlook for free cash flow. That's improved to 300 of 400 million is that just consistent with the higher revenue outlook or does it also reflects more progress than expected on some of your cost saving or cash conservation initiatives.
It's really in line with our revenue outlook in I think you can see that with the low end of our revenue outlook now matching the high end of what we had before and that cash flow not coincidentally is 300 million at that revenue range. So as we look at the 400 million upside at the top end of our range right now that coincides with the 8.4 billion of revenue.
Great Thats very helpful. Thanks for taking the questions.
Welcome.
Next question comes from not Rod Lache with Wolfe research.
Hi, everybody.
Hi.
Yeah, a couple of questions. One is some nice backlog this quarter I'm just wanting you to clarify are you including mix.
In that backlog line.
Because it looks like you're obviously your production mix is pretty helpful. In the quarter or is it was the backlog really backlog and what I'm getting at is.
Set backlog as a 100% hybrid needy and we're seeing really.
Impressive strength in those categories.
Around the world. So is that something that we can extrapolate to extrapolate from as we think about you know how solid.
Backlog that you've previously disclosed is.
Yes, I mean that backlog includes anything that that's not market or FX effectively so it can pickup mix impacts and absolutely. We're seeing some positive mix impacts in the quarter. So that is a piece of the equation. It basically the anything thats driving us to outgrow the market.
So any color on what's happening with regard to the hybrid NPV and is that a significant contributor already now or or not yet.
I mean, I think from a mix perspective, a lot of the mix benefit that we were seeing in the second quarter. In particular has to do with you the our exposure to pickups and Sq. These in North America as well as our diesel related content in Europe seems to be holding up better than the overall diesel market as we've seen for the last few.
Quarters now we have seen some some DCT growth over in China, as well, which is supporting that backlog as we think about the h. any content in our backlog most of that's coming in the years to come in terms of where we expect to really see that driving our outgrowth and becoming more than 100% of the net backlog that's really a comment on two.
21% to 23 timeframe, Okay Gotcha Gotcha, and then secondly can you just update us on the status of that $110 million cost reduction plan that you've talked about that this is specific to the borgwarner business, not the synergies or where the Delphi side.
And you know is that 30% decremental that we're seeing right now is that including some benefit there how should we be thinking about incrementals into next year with the savings and nonrecurrence of temporary actions you've taken.
So far this year and any color on that.
Yes, I mean, it decrementals absolutely includes the benefit associated with the restructuring actions and Weve started to see the benefits of both obviously last year's restructuring actions that are taking hold and helping us on a year over year basis as well as we're starting to get some benefit associated with the restructuring that we announced back in early February.
Timeframe. So that is mitigating the decrementals and should continue to be a tailwind as we look out to the next few years.
Help offset any other bad news that could come into the equation. My Cobot 19 did this year.
So overall, though I would say to the question that is on track, we're continuing to execute according to the plan that we laid out several months back and we're on track for that.
So just to help us out if we wanted to enter just sort of disaggregate that 30% decremental what.
Is the incremental savings that you're seeing this year in what is the incremental number that you were targeting for next year. It typically disclose back in February timeframe that we expected the 2020 numbers could benefit by about $50 million of incremental savings and I would say we're on track to deliver that in our decremental numbers. So that is a tailwind in.
Decrementals in addition to any of that temporary types of cost actions that we executed in the second quarter like temporary layoffs and wage reductions in those types of things or temporary in nature, but did help us in the second quarter as well.
And then next year, you've got another 50 was it or do I remember that wrong I think it was in the 35 ish ZIP code as I as I recall, but we'll give more specific guidance on that when we get to the the beginning of next year, but I think you should think overall that plan directionally remains intact and on track.
All right. Thank you.
Next question comes from Joseph Spak with RBC capital markets.
Hi, Thank you good morning.
Good morning, maybe.
Maybe this is.
Definitional, but.
Your backlogs and very strong.
Okay.
Okay.
Thanks.
Yes.
Okay.
Okay, great inclusive of the backlog.
But but the midpoint of the range for the year is basically equal to what you did in the backlog for the first half. So you just explain the bridge between the two metrics or are you, saying there is no backlog in the back half.
I think backlog and outgrowth or to slightly different things.
Backlog is basically our growth before you consider pricing outgrowth actually is backlog net of pricing and so if you look at what our backlog actually is.
To date through the first six months I think it's around $525 million are so our backlog for the full year effectively if you take the outgrowth and you add pricing back to it or somewhere in the $580 million to $730 million range. So there is based thats kind of how we get to the walk outgrowth the backlog.
Okay. Thank you and then.
Just on the Maki any idea.
One maybe you could.
Let us know when Ford sort of brought you into the process.
And you know I know you mentioned some other suppliers.
Are you at Liberty to mention if one of those other suppliers on like the power electronics is Delphi.
And then finally on that you talked about how your integration expertise really helped with his business.
But if you have all the elements.
Fred will eventually.
But.
Yes.
To your thinking Joe we lost a little bit there towards the end I think we got the adjusted the.
So.
Yeah, So Joe will us through at the end, but.
Of fool than vulgar be working together for for a few years on this and the.
Right from the good goes too so it's a few years back.
You know Delphi is not the polychronic supplier and three.
Yeah, we with the portfolio that Weve added over the past years, we'll certainly on the position too.
Do the whole thing.
But again as I mentioned before we don't have to and we we were very.
The constructively with the Louise and depending on what they want to do and what they want to work with them, we absolutely fixable.
Excellent comes from Brian Johnson.
Hi team this is Jason.
Kevin you've already given some some some good color around 2021, I was just kind of trying to ask again, because I think 2020 is fairly straightforward, but but as we think after 2021 I was wondering if you could maybe just comment on how the cost base in 2021, the fixed costs.
State compares to that of 2020, and I guess, the moving pieces I would wonder about are the incremental restructuring savings. We're supposed to get in 2021 have any of those than brought forward into 2020.
Any step up in engineering that we need to think about and then any co that related inefficiencies in 2020 that may bleed into 2021 sort of all those things wrapped together should we still see the fixed cost base lower next year versus this year.
Yeah, I think it's it's premature for us to start talking about 2021, but I can't comment on a few of those elements I mean rich from a restructuring perspective as I mentioned I am response to rods question earlier, we are on track for executing against the plan that we laid out a few months ago and I wouldn't say there is any accelerations are done.
Ladies and that plant I think it's right on track. So I think it's fair to think about the Incrementals that we were showing back in February going from 20 to 2021 to remain intact from an engineering and R&D perspective, I think you should continue to expect us to invest in that low 4% to 4.5% range as.
As a percent of revenue now this year it will be elevated because were sustaining our dollar investments in R&D around that 400 million dollar level and Thats a conscious decision. We made is a leadership team in this environment to sustain our investments supporting long term growth prospects for the company because we have strong liquidity and strong cash flow generation and then into.
Terms of the inefficiencies arising from Cobot 19, I think we're going through that process right now as we're building our long range plans to understand what if any types of efficiencies do we expect to carry into next year. The last thing, obviously and we're not prepared to comment on a further as we start to think about 2021, obviously, we expect.
Closed on the Delphi transaction in the second half of this year and Thats going to obviously have some meaningful implications on what 2021 looks like as a consolidated company. So those are some of the things to consider.
Understood. Okay very helpful and maybe just on your last point.
Just just a quick clarification on the Delphi deal can you remind us of what the last jurisdiction requiring approval is and I think you mentioned that would happen in the next month is is the approval that jurisdiction really the last bottleneck in this deal I know there's.
It's changing any deal with the delta, but but if you could just maybe remind us of what the bottlenecks are you know between now and when the deal closes.
Yes that the the last jurisdiction that we have at this point is the European Union.
And we've been going through interacting with the regulators and going through that administrative process and we think where we are in that process keeps us on track for closing in the second half of the year consistent with what we've been saying for the last number of months. So that is really the last major I'd say it administrative hurdle between now and closing the other big.
One that we had were obviously the sick other six jurisdictions, which are now behind us as well as the Delphi shareholder vote, which took place back in late June and and received overwhelming support from the shareholders. So I'd say, that's really the last major step and then as we get to closing that than Delphi, we'll have to test the conditions to closing to make sure that they meet those and we fully expect.
But that there will be on track to do that but we'll obviously assess the time, we get the closing.
Understood. Thanks, so much.
Next question comes from Chris Mcnally with Evercore.
Oh, sorry, this got it. Thanks, yeah. Thanks, so much for taking my question I think we've covered the margins maybe two questions on little bit of the cadence of out outgrowth and this is more qualitative I know, we're not commenting on on 21 or 20.
But I think as we see these these big yeah, Edwin announcements and a lot of people are seeing the the amount of new introduction is only going to accelerate as we get into sort of the 2022 timeframe I know you've talked about this sort of balanced approach, where you have roughly 5% out.
Growth, but maybe you can just add a little qualitative.
Commentary to can we see that outgrowth get better 21 into 2022.
Because we have just opposing forces 21 is going to be that the height of all things legacy powertrain should be a great outgrowth for you, but then if you making these new announcements on on products that are coming in 2022 that that leaves us I think that there's also grow so maybe just a little bit of qualitative about how we think about when these TV product could start to really.
Be accretive.
To the overall outlook number.
Yeah, Chris.
So an accrued and electrification accelerate our growth and.
Being E or age.
What do you see is that everything that is being booked at this point in time is going to see.
Daylight past 2022.
And business will 20 to 22 is pretty much already awarded.
And so this is this is in our.
Our.
Goal of outgrowing the market.
Year by year by 500 basis points and we're on track to do that.
The Tom gave for the full year full 20, Twentys 450 to 60 basis points.
So that's that's what I would tell you also I would also tell you that we see we don't see a slowdown of our request for quotes or system support.
And discussion that.
At the very high level between Oems and Borgwarner to discuss the next generation.
Yes, but also the next generation.
Most advanced hybrid.
Architectures.
That's great and then maybe just a question around the more near term you know this this idea of diesel within the in the mix I think at one point, probably about two years ago. We thought so the clinical diesel drag would be sort of Don late 19 into into 2020.
The diesel numbers that are less bad than we we feared at what point, where we sort of stopped talking about.
Due to where it probably doesn't have a mix and sort of Europe is balanced.
From gasoline terrible versus diesel turbo like when are we essentially fully balanced on the European He's a fun.
So anything you are right you see you see the quarter over quarter reduction, reducing so it's it's flat doing around.
29, 30% take rate.
We are starting you know, we've we've outgrown weve outgrew that diesel market for few quarters, I think we're going to start lapping the European diesel benefits that I stopped in the second half of.
Of Nineteena.
And I would say that in 2021, the diesel headwinds we stopped.
Fading away you won't see any any impacts at all as far as we'll concerns.
That's great. So if we see 30% go to 20% from 2020 to 2025, you think by that point, you'll be balanced so it wont wont be really talking about a drag even though the number diesel will be going down.
I would say so.
Okay, great. Thank you so much guys.
Thank you Chris.
Next question comes from Miller came with Oppenheimer.
Thanks.
Taking the questions. Good morning, I guess first on the subject of.
The vertical integration of some of these electric solutions.
Given that there isnt focused on that with afford announcement. This morning. Thanks, a couple of weeks ago, you announced the three awards in China.
To supply the B M three new electric models.
I presume those.
With the exception is how are the clients are those are vertically integrated.
For you you're supplying a complete solution there.
Yes.
Okay is it generally the trend or do you see a like a regional variation in trend, where you were tending to have more vertical integration in one geography versus another so can you provide color on that.
No. There is no geographic trends, it's certainly not a one size fits all you see dust and those that want us to integrate.
The full system.
Do that and we capitalize on our integration and system knowledge.
An experience.
It is some customers would would want us to supply transmission and loads on so we're flexible it is true that more will come as we are.
Adding more products in our portfolio and b and be able to to do it all and and by doing that drive the maximum efficiency out of that device, but again there is not one so speed oil and certainly as far as we were concerned more to come on this field.
Okay and last question you know I think we've seen an uptick in interest and frankly in public capital market access for alternative power trains on the commercial vehicle side in the last quarter of both the TV and fuel cell can you talk a little bit about positioning and the interest level you're seeing from customers.
On the commercial vehicle side, and where that interest might be coming from you know a medium duty electric bus regional delivery. Just how are you position then how is the interest.
Yeah, no assets Olivia Olivia above nor are we see we see a decent acceleration in and it could have a prepaying different different vehicles, including including long haul trucks with different types of technologies.
Obviously light vehicle will be the big the bigger because volume for us, but we're very committed in supporting commercial vehicle electrification too.
With.
With all the product portfolio that we have you know there is no video product in the in the propulsion area.
From an execution standpoint that that we can supplies. So we're supporting although all customers in commercial vehicle included and yes, we see we see we've seen acceleration that in this field.
Great. Thanks, so much.
Thank you know.
Next question comes from Ryan Brinkman with JP Morgan.
Hi, Thanks for taking my question.
Firstly are you able to quantify the non repeating the back half or I don't know, maybe even a catch up from any austerity measures taken into Q I'm trying to gauge the degree to which the implied back half decremental guide may be driven in part by conservatism versus something maybe more specific you're seeing from a cost perspective, such as you mentioned R&D just given.
The outlook for 30% Decrementals for the full year versus 26% in one cute and 28% into Q as hopefully the industry backdrop in the back half should be improved quite a bit from the first.
Yeah, I mean, not gonna dimension, the specifics of each component of the of how we mitigated the decremental margin were able to manage it down to 20%, but obviously you can imagine our contribution margin as well north of 28% and so that the types of things that we had to execute the managed to that level include the restructuring actions were tier.
Providing a tailwind and are more sustainable on permanent.
As from.
Reduction perspective, but then we do have benefits coming from some of those temporary actions like the temporary layoffs in the wage reduction so those will creep into the second half. We'll also see some level of higher R&D spend in the second half of the year as I look sequentially from Q2, we were a little bit lighter in the second second quarter than where our full year.
Run rate average is expected to be and then the other thing just to keep in mind Q4, decrementals are going to be impacted mathematically by the fact that were jumping off at 13% plus operating margin from a year ago and so that just makes the comp pretty challenging as you look at Q4.
Okay. That's helpful. Thanks, then maybe lastly, a question on the integrated drive module when I afford us into they have a lot more electric vehicles coming down the pike with her team Edison initiative I'm curious if your work on the Maki puts you in a strong position to win additional awards with that automaker or if you can't comment specifically, maybe just any kind of an update you can provide on what your discussions with automakers have.
Didn't like with regard to idea maybe what those discussions have been like since Corona virus. I think you know announced awards generally across the sector have slowed a little bit as automakers sort of focus on the crisis, but I'm curious if you know behind the scenes.
You see discussions with regard to electric vehicles accelerating.
The.
The the developments and the.
Design work for a proportion architectures in electric vehicles and hybrids are are all.
Our being done and on time and pursuing a sense.
We are confident that.
You know a worlds are going to carry on and again more to come on this field, we were very uniquely positioned as especially with the identified technologies acquisition to have again.
Both mechanical mobile John Pollok, Tronics under one roof and being able to work on all the types of efficiencies that those subsystem interact with and so we think that that we are well positioned to supply whatever customers want.
US to to work on either full system or Subcom all sub systems. So.
It's it's it's it's moving at the right pays them Im happy we what im seeing.
Okay. Thank you very much.
Next question comes from aren't everything because its yet Morgan Stanley.
Oh, great. Good morning, Thank you for taking the question.
With regards to the Delphi integration I'm curious you know what you've seen since you announced the transaction that you know maybe progressing better or worse than you expected I think you know the first quarter results.
Were quite strong for Delphi they had similar benefit.
From diesel with regards to their growth over market. The decrementals are a bit better maybe and it seems like there's some momentum there around gd I power electronics.
Is it really the Kate.
The last couple of years, So maybe you can comment on it.
What were your integration teams are working on it.
Learn from from the company over the last several months.
What I would say is that we're very pleased on the how the the integrating the integration teams in the match payers on both sides are working and collaborating in the virtual environment.
This is we've not missed a beat and very very happy with the way the way, though those teams interact and and create value.
I will not is a position to have dates the financials will do that closer to the closing date, but but it's it's moving at the right pace and the.
And ER and.
I'd really like the engagements and the results Im seeing.
Okay.
And then maybe on the cost side you know you. Your your restructuring actions are helping you get to those 30% decremental margins for the back half of the year.
Yeah, I think there their cost action. It seemed like we're also necessary to drive their incremental decremental margin at the rate that you'd be.
Comfortable with <unk> in order to get those 11% margin, maybe you could talk to you know where where there'll be opportunities for upside from the restructuring program outside of the normal course of incremental decremental margin for either company.
And with respect to the restructuring we're pleased with the fact that our program remains on track any both the program, we announced a year ago about 15 16 months ago as well as the program, we announced earlier this year, which was a pretty aggressive program to manage and sustain our margin profile to offset headwinds, including things like cobot, 19, which we didnt know about.
At the time, so it was a proactive measure to sustain our margin profile and we're going to execute against that plan to help mitigate the impact of things like cobot or whatever else might get thrown at us from a Delphi perspective.
Not going to comment in detail on their business other than overall, we're pleased with the progress they've made on their restructuring programs and feel like they're on track to delivering what they've committed directionally I think you'll see I think they'll file their financials today or tomorrow, and so you'll get to see what their results are looking like here for the second quarter, but but directionally, we're pleased with what.
We see and we'll give more fulsome update of the financial outlook of the combined companies when we get the closing.
Okay.
Great. That's all I had much appreciated.
Thank you elements us.
Next question comes from Dan maybe that's great.
Hi, good morning, Thank you.
So two questions on on on backlog.
But.
What I'm looking at the 2.1 billion dollar.
Three your backlog you gave back in February obviously, there is that a production assumption.
Underlying that so we do have a lower environment today, so could you give us a sense.
Of how we might be thinking about how much do we need to haircut that that backlog or is it potentially impact given we have a more favorable environment on hybrid.
Thank you how to think that the haircut.
On backlog.
Yes, I'm not sure the hair cut you be referring to but I mean, directionally, we're pleased with our backlog shaping up this year you know as we enter 2020.
We actually expected that we were gonna have lower revenue outgrowth than what we're actually seeing is and if thats really across the globe. So our backlog in total if you look at it we're guiding to $580 million to $730 million of backlog coming through RPM now in 2020 in terms of what are the 2020.
One through 2023 and beyond horizon looks like not provided not prepared to provide any update to that other than directionally. I think we still feel very confident about the fact that we're going to deliver 500 basis points of outgrowth from aboard Warner Standalone perspective in terms of what are our overall outgrowth is expected to be over those years some.
Here's might be higher or lower than others, but on average we should be in that 500 basis points ZIP code and the good news is that's actually playing out this year in 2020, as well, which we didn't anticipate as we started the year.
Okay. That's helpful. Then just a follow up also on on backlog, we noticed the majority of it.
It's fine or whatever and good news in the quarter, I think hybrids getting better credit and the any be sitting in China. So what could you tell us on hybrid demand in China.
It potentially upside to your backlog and entity that we do have an uptake hybrids in China, what would be the timing of the incremental demand do you think this is over the next.
You are too or is this really outside of your three year planning period in a couple more so beyond 2022.
So no you're absolutely right. The nothing we we've always been talking about the fact that.
Electrification.
And in China is not only but really to vehicle, but it's also.
Including the most advanced hybrid propulsion architectures, and we see we see.
Launches, we see our request for quotation and we see partnership with Chinese Oems Oems on on on the hybrids and and we part of that.
We did have an impact before the end of the con backlog season.
Probably not because this will be announced has passed the past the backlog season for the full the majority of the businesses.
We view, where do you see more hybrid powertrains in China, especially the most of them hybrids absolutely yes.
Okay, great. Thank you.
You have time for one final question that question comes from and yes bonds within Europe.
Hi, Thank you for taking my question is regarding China.
I had.
Just wanted to check with you read the situation and overall business situation in China.
As we know that during the first half the.
Sales of east kind of fed and much faster than the overall market. So do you are you seeing any cancellations of a easy programs. All you know how is the business developing and do you see.
The trend improving in the late late last night after half off or is this going to continue.
So.
The the trend of electrification, we think is profound it's not going to be a quarter over quarter steadily increase you will see some ups and downs. So we'll see some downs.
The first half in China for the long term trends as far as we were concerned we were thing is unchanged.
Just timing related we see some program delays, but we see a lot of focus in getting this done.
And and bringing those hybrid electric powertrains into the marketplace.
And it's really in other parts of the world too or is it is essential when you look at the.
Newly published.
Regulations. It is essential for all of us to move into clean on more energy efficient powertrains being Alex.
Electrical or hybrid also efficient combustion powertrain so.
Efficient combustion powertrain, yes equipment. So it's it's it's it's accelerating and we're not missing a beat.
Alright, thank you.
With that I'd like to thank you all for a good questions. Today Sharron, you can go out and close up the call.
That does conclude or Warner 2022nd quarter results Conference call you may now disconnect.
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