BorgWarner Inc (BWA) — Q1 2020 Earnings Call Transcript

Thank you, Sharon. Good morning, everyone. And thank you for joining us today. We issued our earnings release earlier this morning. It's posted on our website borgwarner.com, on our homepage and on our Investor Relations homepage. Before we begin, I need to inform you that during this call we may make forward-looking statements, which involve risks and uncertainties detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior periods. When you hear us say, 'On a comparable basis,' that means excluding the impact of FX, net M&A and other non-comparable items. When you hear us say, 'Adjusted,' that means excluding non-comparable items. When you hear us say, 'Organic,' that means excluding the impact of FX and net M&A. We will also refer to our growth compared to our market. When you hear us say 'Market,' that means the change in light vehicle production weighted for our geographic exposure. Our outgrowth is defined as our organic revenue change versus the market. Please note that we have posted our earnings call presentation to the IR page of our website. We encourage you to follow along with the slides during our discussion. With that, I'm happy to turn the call over to Fred.

Thank you, Pat. And good morning, everyone. We're very pleased to share our results for the first quarter and provide an overall company update. Let me start with the highlights of the first quarter on Slide 5. While the industry production rates were clearly volatile during the quarter, we performed strongly on a 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, for the quarter, we saw double-digit outgrowth in all major regions. Our decremental margin was approximately 26% in the quarter as our margin performance was impacted by COVID-19 related shutdowns. Given the pace at which the shutdowns occurred, we think this is a relatively good outcome. We delivered strong free cash flow of $146 million for the quarter, providing an additional cash cushion as we manage through the lower production levels expected in the second quarter. Lastly, I am proud of how the team has reacted to this challenging environment. We met the challenges of managing orderly production shutdowns at our facilities in Europe and North America, while also managing production ramp-ups in China. Let's now turn to Slide 6, 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 a 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 a relative basis, the outlook for China is stronger as their shutdown in Q1 was shorter than what we're seeing in the other two geographies, but we still expect an 18% to 21% decline in China production for the full year. As you'll see from the line chart 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 are the timing of production restarts and the pace of industry production ramps. Under our high-end scenario, which is represented by the light green line, we're expecting Europe and North America production to largely resume by mid-May. Our low-end scenario, represented by the dark blue line, uses the assumption that Europe and North America will not resume production fully until mid-June. For both scenarios, we expect the second half of 2020 to remain challenged due to lower consumer confidence. Visibility into the production outlook has certainly improved versus a month ago, but there is still a tremendous amount of uncertainty around plant restarts, the pace of production ramp-ups, and ultimately consumer demand. We're maintaining a very active dialogue with our customers and suppliers in order to support an orderly production ramp-up and manage effectively through this challenging environment. On Slide 7, you see the cost actions that we've taken to help moderate the impact of these severe production declines. This cost action has been across all major areas of the company. We've taken temporary salary reductions in many locations throughout the world, including 20% pay cuts amongst our senior executive leadership team. Employees at many of our facilities have been put on temporary layoff due to lower production, or in many locations, the complete production shut down. We also worked with our third-party relationship vendors, who have in most cases agreed to share in the economics of this situation by voluntarily reducing their work or billing rates. These actions were painful, although the right things to do for the financial well-being of our company. I want to thank all involved, especially our internal team members who have kept their focus and strong engagement despite the sacrifices that have been endured. The industry's next big challenge will be to successfully manage the production restart. Let's take a look at how we manage this on Slide 8. While we must be ready to supply our customers as they resume production, we are first and foremost focused on what is best in terms of health and safety of our people. We have formed a high-level task force that has and will continue to rollout our Safe Restart 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 additional innovative safety solutions developed at the plant level. We will continue to utilize and promote this innovation to our other facilities around the globe. It is this plant-level innovation and the appetite to share ideas that is promoted by the BorgWarner culture. Let's now turn to Slide 9. I would like to briefly comment on our Seneca, South Carolina plant, which was unfortunately struck by a tornado on April 13. Seneca is one of our largest plants supplying transfer cases to multiple OEMs in North America. Thankfully, the plant was not in operation at the time the tornado struck, but unfortunately, a security guard at the facility was killed. Our thoughts and prayers are with his family. Now I'd like to give a status update on the plant. As you can see from the picture on this slide, the level of damage varies 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 assembly areas missing. That assembly area sustained a more significant amount of damage. Over the past several weeks, there has been a tremendous amount of remediation work completed, and we have also performed a significant amount of equipment testing and validation, and where appropriate, we have erected temporary structure. With all of this hard work over the last three weeks, I am proud to report that the facility resumed production on May 4 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 Seneca for 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 BorgWarner and Delphi Technologies agreed to an amendment of the transaction agreement. This amendment effectively cures the breach of the debt covenant that we asserted at the end of March. Under the terms of the amendment, Delphi Technologies has agreed to new closing conditions requiring that at the time of the transaction closing, its gross revolver debt 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 a specified threshold measured at closing. This new closing condition was structured to provide Delphi with the flexibility it needs to manage through the current environment and execute on its current forecast. At the same time, they also protect BorgWarner from scenarios that could result in more significant cash usage or EBITDA deterioration. The parties 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 BorgWarner and Delphi Technologies shareholders would own approximately 85% and 15%, respectively, of the outstanding shares of the combined company following completion of the transaction. We are pleased to put this issue behind us and turn our full undivided 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 done over the past several months. The integration teams continue to work very well together. The regulatory filings are in process in several geographies. 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 as Kevin will discuss, we expect to be free cash flow positive for the full year. BorgWarner has one of the most robust liquidity positions within our industry. It is this 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 2020, I am confident that we remain strongly positioned 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 you, Kevin.

Thank you, Fred. 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 resilient 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 generated meaningfully positive free cash flow. Second, our liquidity remains strong and has 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 U.S. dollar reduced revenue by about 2% from a year ago. Excluding these items, our organic sales were down 8.1% compared to the 19.6% decline in industry production. That means we delivered revenue outgrowth of 1,150 basis points in the quarter. Importantly, that outgrowth occurred in all of the major light vehicle markets around the globe. In Europe, our 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. 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 growth 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 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 could be 30% or higher just like we saw at points in time last year. So we view the 26% as a reasonably good level of performance given how quickly industry production declined. 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 $0.77 for the quarter. The $0.23 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 of 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. 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 basis points to 500 basis points. This assumes our outgrowth for the remainder of 2020 is in the range of 150 basis points to 250 basis points, which is in-line with our prior full-year guidance. 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, where you can see an update of our liquidity profile. As of March 31, 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 have 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 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 through the current environment. Instead, we put this facility in place as an insurance policy to support any potential financing needs in closing related to a Delphi technology 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 context on our free cash flow outlook. In light of our first-quarter results and our success thus far in 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 the challenging environment suggested by our revenue outlook. That's a testament to the strong financial condition of the company. Our board's 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 markets to remain under tremendous pressure throughout the year, down 25% to 31% from last year. Yet, we expect to deliver positive free cash flow. 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 is strong with a position for the eventual industry recovery and our future profitable growth. With that, I'd like to turn the callback over to Pat.

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

Good morning, guys. It's great to hear from you, and thank you for all the detail and the stab at the outlook for this year. It's very helpful. Just really, first, simple question. As we look at Slide 6, there's some variability that you're indicating around the second quarter, but we're in the second quarter. So I'm just trying to understand, Fred, when you were mentioning mid-May restart versus mid-June restart, sort of as some of the scenarios you're looking at. We're hearing early May, which is what we're in right now for Europe and mid-May for North America. So that information should be reasonably available to you from your customers. I'm just curious on scheduled releases, what kind of information and lead time you're getting from your customers that hopefully can eliminate some of that variability in scenario planning, how much lead time you'd expect from them because it just seems like some of the stuff should be reasonably well communicated to you at this moment for the restart.

John, there is a wide range of potential restart dates and scenarios. We need to consider not only the date when we restart but also the level of capacity at which we do so. This is changing daily regarding both the restart date and production ramp-up. Therefore, there is still a lot of uncertainty in Q2 concerning volume.

Okay. But it would be fair to say that you're getting some communication on restart dates, but obviously, the uncertainty is still flowing down from the customer. So there's still tremendous uncertainty on what the level is going to be starting you need at this point. Is that a fair assessment?

I think the fair assessment is that we are in constant communication with our customers and, yes, we're following that very, very closely. And yes, things change; things do change.

Okay. Then maybe just a quick follow-up. I mean, the 26% detrimentals on the lower volumes towards the end of the third, I mean end of first quarter. It's very impressive as we think about sort of the pressure in the 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're lower in the U curve, maybe 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, we were pleased with the 26%. This is largely due to the cost restructuring actions we implemented last year, which we announced in April. These actions have helped us manage our decrementals effectively, and we are now reaping the benefits. This is despite the fact that we continued to invest additional funds in R&D and the drivetrain segment. Overall, considering the current environment, it’s a strong result. Given the rate at which production is declining year-over-year, it remains difficult to manage decrementals below the 30% range in this context. I believe this serves as a reasonable benchmark for how we should approach our decrementals in the future.

Good morning. This is actually Erin Welcenbach on for David. So my first question is just about if you can kind of walk us through what you're assuming in terms of the Q3, Q4 production scenarios that you put on your slide? What that means in terms of kind of the pacing the cadence of OEM ramp-ups in the back of the year? Any color on that?

We are considering various scenarios here. In the optimistic scenario, we expect a 25% decline for the full year, with a 53% drop in Q2, around 16% in Q3, and approximately 10% in Q4. The more conservative scenario might see slightly lower figures, particularly in Q2, as reflected in the charts John mentioned. Ultimately, the key factor is when customers resume and the speed of that resumption. While I won't detail individual customers, this provides an overview of our expectations on a quarterly basis.

Okay. That's helpful. And then just my second question is if you can talk about kind of the drivers of outgrowth in Q1? I mean, obviously, you mentioned a number of factors by region, but was there any impact on kind of stocking or timing benefits in terms of what you're shipping to OEM plants? And could there be a bit of a delay I got from what you're shipping in early Q2 as that production ramps back up? Thank you.

We don't think it's stocking. In Europe, our Engine Group was stronger with actually stronger diesel demand and stronger new small gas engine demand. China DCT was strong, and there was also strong growth from an emissions business standpoint. Our turbo business was pretty strong in North America. So that's pretty much what drove the significant outgrowth in Q1.

Hoping you could talk a little bit about how headcount might have changed from year-end to be...

Dan, I think we lost you.

Can you repeat your question, Dan? We lost you.

Yes. Good morning or good afternoon as some of you are in Europe. A couple of questions. First, could you comment a bit more on the decremental performance? Not only was it different between engine and drivetrain, when we think of the real production impact in the quarter, it was kind of the month of February in your China operations and then the second half of March in North America and Europe. So if you could give a little bit more color on the decremental margins, maybe ideally by geography, by division. If you don't want to go that far, at least kind of geographically? So if you begin to think through Q2.

I think I would give it more directly by the segments, the way we disclosed publicly. And in the Engine segment, you can see that the simple math says that our decrementals were around 20%. That's because the bulk of the cost restructuring actions that 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. In the drivetrain segment there, their decrementals came in the low 30s 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 they would have had the decrementals that are in the low 20s.

Okay. I guess what I was getting at is can we expect worse decrementals in Q2 because of your European and North American cost structure perhaps being less flexible than that in China?

Yes. 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 the change in decrementals. I think just the challenge of operating with significantly lower production, the magnitude of that decline is really the driver of a decremental that's probably at a higher rate just like we experienced at points in time last year. I think this year it's even under more pressure. So something in that 30% range is probably the right way to think about us.

so for:

Brian, safety is where BorgWarner excels. We have extraordinary safety results from a PR and high perspective, and we're using exactly the same excellence that we have built in this company over the past decades to restart production with safety and COVID-19. We have done a tremendous amount of work to figure out how we would restart plant-by-plant, including exactly what you said: social distancing, which is possible but not always, and PPE. But also, it goes way beyond the production area. Also, it impacts the way people breakout, the way people do poses and so on and all that has been looked at. Our plant managers have done a terrific job, a wonderful job in getting our plants ready to restart.

And I'd just add to that, Brian, I think that part of the reason when we talk about the 30% decremental, it's a directional guide at this point. That's part of the reason we're not giving specific earnings guidance. I think there's a lot of variables when you have a revenue range that's from low-to-high $750 million wide. Some of it can be what is the operational efficiency in the plan, it can be what are commodity prices doing, what's happening in the supply base, are there struggles there? What additional cost actions might we take? So there's a whole host of things that I think we're going to be learning over the coming months that will ultimately impact what those decrementals are and how efficiently we operate.

Yes. Okay. Great. Thanks. Sorry about that. Two-part question: as you prepare to re-ramp. First, how would you assess the stability of the supply base?

I think we've lost Noah too.

I think we've lost Noah too.

I can answer regarding the supply base. We are clearly observing that the supply base is experiencing some stress. So far, we have not encountered any disruptions, but the crucial factor for our two suppliers will be their capacity to finance a production restart. We are implementing the best practices we have developed over the years in managing supply distress, but I would note that this situation may be on a different scale.

Sharon, we're ready for the next question.

Thanks so much, guys. I think we've had a couple of questions on the decremental this year. I know it's super, super early, but as we think about exiting the year, you guys used to give the rule of thumb that essentially the incrementals could be in the high teens when production turns essentially flat to positive. Could you just maybe help us through? I think a lot of us are trying to figure out the increased cost that comes when production restarts. So even trying across model sequential, incremental margins, do you think we'll still be able to achieve high teens into the low 20% when things get better sequentially in Q3 and Q4?

I think that's how we think about it in terms of the way we manage our incrementals and decrementals. Obviously, right now, we're in the process of managing decrementals in the challenging Q1, as well as Q2 will still be under even more pressure as you can see from our revenue chart in terms of what we're expecting from a production standpoint. Right now, we're in the process of managing decrementals, which means making sure we manage operational efficiency, supplier risk, and additional cost actions that we take to manage in that environment. That positions us as we start to see the rebound whether you're looking on an increment sequential basis or a 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. Just a technical question. When we try to look at and apply EBIT for the year, could you explain the working capital assumptions? Are you anticipating a working capital inflow, which we would expect due to the production decline?

That's correct, and we've already seen some positive trends in Q1 that are continuing into Q2 due to our favorable working capital situation. We typically maintain around 12.5% in terms of receivables, payables, and inventory. While we face cash flow pressure from decrementals, working capital provides an offset, which we are currently experiencing. In this environment, similar to what we saw in 2008 and 2009, inventory tends to be reduced more gradually. Nevertheless, we still maintain positive working capital when comparing receivables to payables, which is a significant advantage for us right now. Additionally, from a cash flow perspective, we are sticking to our planning assumptions, aiming to maintain our capital investments at last year’s levels. Thanks to our liquidity and free cash flow, we can keep investing in long-term programs to meet customer needs, although we will keep monitoring the situation throughout the year to determine if any adjustments are necessary. These are essential factors to consider regarding cash flow.

Thanks. Good morning, everyone. Kevin, just to follow-up on that point and to be clear, is that what's in your free cash flow guidance for the year, working capital is still a source? Because I would expect there to be some use of working capital as you have to ramp back up in the back half.

Yes. I mean when you ramp back up, but they use by net-net we're down on a full year basis and in each quarter of the year, and so that all allows it to be a pickup when you look at each quarter, as well as the entirety of the year. Working capital is going to be a positive for the year; that's our expectation.

Okay. Thank you. And then maybe just on the quarter. And I know this is all sort of prior guidance because it's thrown out the window here. But your backlog I think previously was $400 million to $430 million; we can mark that down obviously for sort of industry volumes. But in the first quarter, really strong, I think, over $300 million you guys showed. So did that come in better than you were initially planning, is some of that timing, or maybe you could just talk a little bit more on how some of that backlog rolled in?

Joe, I think we're very happy with Q1. It was better than expected. We don't think that it's a pull forward of backlog, but we're not willing to assume that this outgrowth is going to continue at this point. We are watching, especially the diesel demand that was strong versus our assumption in Q1; we're looking in great detail at the China outgrowth.

Okay. Fred, could you remind us what Borg has done in the past regarding supply stress? How would you support your supply base to ensure it, if needed? Would that involve changing payment terms, potentially accepting demand changes, or are you hoping that some businesses will receive government assistance?

We're utilizing the same strategies that we've employed in the past two years when we first addressed the challenges within some of the supply networks in Europe. We have expertise in risk management and are aware of all the options available to us. What is somewhat different now is the potential for government support, which we will take into account as we determine our actions and approaches. It's crucial for us to maintain close relationships with our suppliers and customers to understand developments and coordinate effectively.

Just curious, does the current environment affect the timing of your SG&A and COGS, your restructuring savings at all, relative to the cadence you outlined last quarter? Is there a delay or possible acceleration in what you can achieve?

I don't believe there is any significant change in either direction. We will keep providing support for the restructuring efforts we discussed during the January call. In this current environment, there may be some minor timing fluctuations, either advancing or delaying actions slightly, but overall, there is no material change from our January guidance. We are still on track with that plan. The positive aspect is that our earlier restructuring initiatives were aimed at proactively managing unforeseen risks to preserve our margin profile. Although we couldn't predict COVID-19, it has become one of those unexpected challenges, and the encouraging news is that we took steps to ensure we could maintain our long-term margin profile through those actions.

Got it. That's helpful. And just based on what you're willing to share, can you just walk through the rationale on the acquisition amendment, the 5% reduction on the conversion rate? Just curious what led you to that number maybe from a valuation standpoint? I mean clearly compared to the original timing of the announcement, the world has changed pretty dramatically beyond just 5%, let's say. So any color there would be helpful.

Yes. First, I want to emphasize that we remain confident in the strategic advantages of this transaction, and we all see the long-term potential of combining these two companies. The consent agreement we signed today is meant to address an issue with an operating covenant. We believe the amendment gives Delphi the necessary flexibility to carry out its financial plan in the current environment while also shielding us from any unforeseen downside risks. The reduction in the equity exchange ratio we agreed to is designed to offset the additional risk we are taking by granting this covenant relief. It's important to note that the financial performance of all companies in this environment, including BorgWarner, Delphi, and others in the sector, has faced pressure, and our stock prices reflect that. Given that this is an all-equity transaction, the influence of the equity purchase price has already been altered by the current conditions we are experiencing. That sums up our perspective on this matter.

Okay. Well, fair enough. That's helpful. And just last one, on the strong diesel demand in Europe. This is a follow-on to 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 that carryover there?

Yes, we are examining this closely. I wouldn't describe it as a trend. We're conducting a detailed study, but we haven't observed this in registration. It may relate to the varying sizes of diesel, and we are increasingly focused on larger diesel engines. However, I believe this isn't a trend we are prepared to rely on at this point. In fact, the penetration rate for diesel was about 5% lower in Q1 2020 compared to Q1 2019. While changes have occurred, we are not yet ready to consider this a trend.

Hi, good morning. First question here in the clarification around the backlog outlook. So is it close to $350 million in the first quarter? Is the right way to look at the full year outlook, the outgrowths market is essentially the backlog, in which case it would be left at $400 million to $500 million or so? So are you assuming no limited amount of new business over the rest of the year, and if that is the case, is that a result of delays or things that you're seeing? Or is there an element of conservatism in there?

We don't see major delays. I would say that our outlook for the remainder of the year is largely in line with the prior growth rate we discussed of 150 to 250 basis points.

Okay. But what was my math, I don't know if that one is to chime in. Was my math right? Is the front or the $397 million through $487 million in the 2020 outlook, is that comparable with the $333 million did in Q1, or was that a different thing?

Emmanuel, I'll take you through the backlog math offline, but just mathematically, the way to think about it is the outgrowth through the remaining three quarters, the average will be that 1.5% to 2.5% that Fred referenced, but it's in line with the prior guideline.

Okay. Understood. And then I get just more intermittent basis; it's encouraging to see no, you're not seeing any delays as well to see the strongest growth in the first quarter. So from a high-level point of view of using they could be any structural changes in the pace of adoption of various powertrain technologies post-COVID; could there be some automakers pulling back in the electrification if they're not under mandate, let's say North America, or vice versa? Could there be an acceleration of some other technology there? Do you see anything changing in the mid-term midst of powertrain as a result of COVID?

The first thing I would mention is that our strategy of maintaining balance across combustion, hybrid, and electric (CH&E) means that the pace of change isn't a major concern for us. In China, we are not experiencing any slowdown in electrification programs; in fact, things are advancing rapidly in that area. In Europe, regulatory requirements for CO2 emissions in 2025 and 2030 are driving more electrification, and that’s clear. When looking at specific countries, some electrification initiatives are considered essential. In the U.S., the transition may take a bit longer, but the country will benefit from our advanced combustion technology, which is making engines cleaner and more efficient. Globally, we expect to see electrification accelerate growth for BorgWarner while also providing effective combustion products, satisfying customers who prefer to extend the use of combustion technology.

Great. Thank you for taking the question. Looking at the exchange ratio here with Delphi, I understand that it compensates for the additional relief that Delphi is looking for. But on the other hand, you mentioned that you don't expect to be executing on the share repurchase program in the near term, and part of that transaction was adding some additional share buyback. So just trying to think through the implications for share buyback and why you didn't try to take that into account with the exchange ratio?

I mean with respect to the share buyback, we remain committed to the billion-dollar program we announced back in the end of January. I think all we're saying is that in the near term, in this environment with all the uncertainty 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. We're subject to a number of blackouts anyway, and the environment we're operating in as a result of where we stand and 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 to the billion-dollar program.

I think we have time.

First, we've seen others go their own share buybacks and dividends to preserve cash. What's the rationale for why you maintained your dividend? I mean I saw you had zero buyback in the quarter, but you had the dividend in place, so why keep that?

Yes, I mean ultimately the dividend is the decision of the board of directors, but I think the way we as the management team think about it is the dividend is the commitment that we make to returning free cash flow to our shareholders, and generating $146 million of free cash flow in the first quarter with an outlook that suggested even under these difficult revenue scenarios that we're going to generate positive free cash flow 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 over to shareholders. Undoubtedly, that's a decision the board will continue to monitor each quarter as it looks at the environment and sees how things might be changing. But I'm sure that was the calculus that went into it.

Great, thanks. And just a follow up on the deal with Delphi. Assuming everything goes forward, you'll close the deal in a different world than what we saw at the time of the deal announcing. Delphi is probably going to be coming in with higher leverage, though. How does the higher leverage ratio change the way that you think you will operate the go forward entity? Is there maybe where you're going to have to be more aggressive on the restructuring or would you have to adjust spend in different areas? So how does leverage change the tie in for how you think you may need to operate to go forward entity?

Keep in mind when Fred talked to the slide, what we agreed to with Delphi as part of this consent agreement is to put a limitation on the amount of debt that can be outstanding at the closing. In the grand scheme of things, when you think about that potential for incremental indebtedness, we don't think it materially alters our view on the expected leverage ratio or the financial prospects of the combined company.

With that, I'd like to thank you all for your time and your good questions today. With that, we're going to wrap up the call, and stay safe. Sharon, you can close the call.