Patrick Nolan - BorgWarner, Inc. James R. Verrier - BorgWarner, Inc. Ronald T. Hundzinski - BorgWarner, Inc..

David Leiker - Robert W. Baird & Co., Inc. Colin Langan - UBS Securities LLC Rod Lache - Deutsche Bank Securities, Inc. Noah Kaye - Oppenheimer & Co., Inc. Armintas Sinkevicius - Morgan Stanley & Co.

LLC Ryan Brinkman - JPMorgan Securities LLC Joseph Spak - RBC Capital Markets LLC Chris McNally - Evercore ISI John Murphy - Bank of America Merrill Lynch Rich M. Kwas - Wells Fargo Securities LLC.

Good morning. My name is Dan, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2018 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period.

I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference..

Thank you, Dan. Good morning, everyone. Thank you all for joining us. We issued our earnings release at 6:30 AM Eastern Time. It's posted on our website, borgwarner.com, on our homepage, and on our Investor Relations homepage.

Before we begin our call, I need to inform you 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 our presentation, we'll highlight certain non-GAAP measures in order to provide a clearer picture of how our core business performed and for comparison purposes with prior periods. When you hear us say on a comparable basis, this means excluding the impact of FX, net M&A and other non-comparable items.

When you hear us say adjusted, excluding non-comparable items, that means on a non-comparable basis. When you hear us say on a reported basis, that means U.S. GAAP. Now, back to today's call. First, James Verrier, our President and CEO, will comment on the industry followed by high-level overview of our Q1 results and full-year outlook.

Then, we will discuss some of our recent product wins. Then, Ron Hundzinski, our CFO, will discuss the details of our guidance as well as our results. Please note that we've posted our earnings call presentation. At the IR page of our website, you'll find the link in the Events & Presentations section beneath the notice for the call.

We encourage you to follow along with these slides during our discussion. With that, I'll turn it over to James..

We're going to continue to expect to book more growth and gain what we need to do from a business booking perspective for hybrid and electric; and we were really confident that our portfolio off products allows us to do that. So, we're very confident and comfortable in our product mix inside the company.

Let me move to slide 7 now and give you a little bit of a view of our Q1 results and our outlook for 2018. So I'll start with Q1 results, and I'd say overall I was very pleased. We came in with our organic growth above our guidance, as I said, in a slightly weaker market and solid incremental margin performance, which Ron will cover in some detail.

We recorded $2.8 billion of sales, which is a quarterly record for us and that's up 6.6% organically when you exclude FX and Sevcon. And again, this compares to our end market exposure of down 2%. Regionally came in pretty much as we'd expected. We saw very strong growth for the company in China.

We also saw positive light vehicle revenue trends in Europe and North America despite declines in industry volume. This light vehicle growth was supplemented by positive revenue trends in commercial vehicle off-road. From an EPS perspective, we delivered $1.10, which expressed non-comparable items.

And for comparison purposes versus the quarter last year, that's a 21% year-over-year improvement in our EPS, which is outstanding performance. Operating margin is solid at 12.2%. And again, Ron will provide more color and commentary on that. Let me switch to give you a little bit of a high level view for the full year.

Our organic growth rate is unchanged, but once again we're going to be increasing our EPS forecast, largely driven by FX, which again Ron will cover in his remarks. So, we continue to expect organic growth of 5% to 7% year-over-year in a market that is flat to up 1%.

And we still see our consolidated operating income margin expected to expand between 10 basis points and 20 basis points year-over-year. I'd like to move to slide 8 for those following along and just talk a little bit about some of the highlights of recent announcements.

And again, it was another strong quarter for us where we booked a lot of business across the portfolio in combustion, hybrid and electric. I'm just going to highlight three that you see on the slide here that I think were particularly important for us.

First one, you see, we were very pleased to win a 2018 Automotive News PACE Award for our S-wind wire forming process for electric motors and alternators. And for those of you that have listened to me talk about this for the last couple of years, I've spoken a lot about motors are not just motors.

There's a lot of technology in the types of motors that we're using, both from a product and a process design point of view. And for our perspective, this is strong validation of that from an external party. So very pleased with that one.

We also announced that we'll be supplying our eGearDrive transmission for two First Automotive Works Group electric vehicles. And we also have there, we're supplying our Electro-Mechanical On-Demand transfer case for the Ram 1500 4x4 pickup truck, which is a terrifically good program for BorgWarner. So again, the message is consistent.

This balanced approach of winning business and growing across all three propulsion systems for combustion, hybrid and electric remains on track and remains very strong for us. So let me take a few moments to close before I turn over to Ron. Q1 was a great start to the year for us, very strong performance both top line and bottom line.

We're feeling very confident about our full-year outlook, which will be another strong growth year for the company.

And really importantly from where I sit, the year-to-date new business wins that we've achieved across combustion, hybrid and electric continues to give me a lot of confidence in the long-term growth and balance across propulsion for the company. So great start to the year. And with that, let me turn it over to Ron..

Thank you, James, and good morning, everyone. Before I review the financial details, I would like to provide you some of the highlights as I see them for the quarter. First, as James has said, the quarter was strong and a solid start to the year. Second, organic growth was better than our expectations.

And I should note it was a record sales quarter despite weaker industry volumes. And finally, we are maintaining the organic growth guidance, but we're increasing our EPS guidance based on FX benefits. Now, as Pat mentioned, I will be referring to supplemental financial slide deck that is posted on our website, so I encourage you to follow along.

Let's turn to slide 10. On a reported basis, sales were up 15.7%. On a comparable basis, our organic sales was up 6.6%. Very strong performance compared to our weighted average light vehicle industry production for the quarter, which was down 2%. We saw a 29% growth in China against production market that was down 3%.

Europe revenue was up 7% compared to the 1% industry production decline in the quarter. North America revenue was up 3% versus the 3% production decline in the quarter. Commercial vehicle was a benefit, contributing about 100 basis points of growth. And diesel and gas mix in Western Europe was a headwind for us.

Now, let's look at the year-over-year comparison for operating income, which can be found on slide 11. Q1 adjusted operating profit was $339 million – this, again, was a quarterly record as well – compared to $292 million in Q1 of 2017. Our operating margin of 12.2% was a 10-basis point improvement year-over-year.

However, if you excluded the tailwind from FX and Sevcon, margins would have expanded some 30 basis points to 40 basis points. On a comparable basis, operating income was up $26 million on $157 million of higher sales.

That gives us an incremental margin of 17% in the quarter, which is a bit better than our expectations due to better cost performance and a lower headwind from our non-core emissions business. On adjusted provision for income tax basis was $85 million for an effective tax rate of 28% for the quarter.

I would also point out the year-over-year increase in net earnings attributable to non-controlling interest and the growth in this line item reflects our minority partner share in the earnings performance of our Chinese consolidated joint ventures. We do expect this to increase throughout 2018.

Earnings per share on a reported basis was $1.07 per basic share. On an adjusted basis, net earnings were $1.10 per diluted share. And as James said, that's an increase of 21% year-over-year. Now, let's take a closer look at our operating segments in the quarter beginning on slide 12. Reported Engine segment sales were $1.716 billion in the quarter.

Sales growth for the Engine segment on a comparable basis was 4.9% as demand for our light vehicle OEM products was supplemented by growth from our commercial vehicle sales.

I would note that we reclassified Sevcon battery charging business into our Engine segment as we believe this business is better fit with our commercial vehicle and aftermarket business, which primarily resides in this segment. Adjusted EBIT was $280 million for the Engine segment or 16.3% of sales.

On a comparable basis, the Engine segment's adjusted EBIT was up $16 million on $74 million of sales for an incremental margin up 22%. This incremental margin is a result of two factors. First, the segment was very strong in overall cost performance in the quarter.

And second, headwinds from our non-core emissions business were less than we expected going into the quarter. Turning to slide 13, Drivetrain segment net sales were $1.083 billion in the quarter.

Sales growth for the Drivetrain segment on a comparable basis was 9.2%, primarily due to higher strong DCT growth in China and transmission components in four-wheel drive as well. Adjusted EBIT was $121 million for the Drivetrain segment or 11.2% of sales.

On a comparable basis, the Drivetrain segment adjusted EBIT was up $13 million on $85 million of higher sales for an incremental margin of 15%, and this is good performance and reflects the successful ramp of new programs. Now, I'd like to discuss our 2018 guidance, which we have increased due to higher foreign currency tailwinds.

Turning to sales growth guidance for the full year on slide 15. We continue to expect organic growth of 5% to 7%. The Sevcon acquisition is expected to add $50 million to revenue 2018.

Currency is expected to be a $400 million tailwind now, that's up from $170 million, and total revenues now expected to be in the range of $10.77 billion to $10.94 billion. Next, I'll walk you through our operating income on slide 16. From a performance perspective, we expect mid- to high-teens incremental margins on sales growth.

Our consolidated operating income margin is expected to expand to 12.5% to 12.6%. I would point out that this margin guidance is in line with our guidance prior to the reclassification of a pension income adjustment, which is in accordance with the new accounting standard. And for those of you who are interested, it's FASB ASU No. 2017-07.

This is a 10 bps impact versus our original guidance, but with no EPS impact. To finish up the full year guidance, please turn to slide 17. EPS guidance range is now $4.30 per diluted share to $4.40 per diluted share versus $4.25 per diluted share to $4.35 per diluted share previously.

Like I said before, the increase is driven by the impact of larger FX benefit. This EPS guidance does include a $0.06 year-over-year EPS headwind related to higher minority interest and lower equity income. We continue to expect free cash flow to be in the $525 million to $575 million range.

The tax rate is remaining the same at 28% and our assumption for the dollar to euro exchange rate has been adjusted to approximately $1.22 from $1.18. Now, our second quarter guidance is on slide 19. For sales, we continue to expect organic growth of 7% to 9%.

This is above our full-year guidance, primarily due to stronger year-over-year industry production. EPS is expected to be in a range of $1.09 to $1.11 including a $0.02 year-over-year headwind from higher minority interest and lower equity income.

This guidance is based on a 28% tax rate and incorporates $1.23 [to] €1 assumption or about $125 million revenue benefit year-over-year. So in conclusion, let me summarize quarter one. It was another strong quarter to start the year, as James and I mentioned earlier. Organic sales growth of 6.6% despite decline in industry volume.

The Q1 incremental margin of 17% was slightly better than expectations. And as we look at the remainder of 2018 and beyond, we see substantial opportunities to participate in impending electrification trend while our combustion-related business continues to outpace market growth. And with that, I'd like to turn the call back over to Pat..

Thank you, Ron. Dan, we're ready for questions..

Thank you. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Leiker with Baird. Your line is now open..

Hi. Good morning, everyone..

Good morning, David..

Good morning, David..

Two questions. First, a numbers question. The working capital number I'm guessing is distorted a little bit by currency and FX, but I thought reasonable amount here year-over-year.

Any thoughts on that?.

The only thing is this is a general trend in the first quarter. Working capital is needed to get into production after the fourth quarter where volumes ramp down, David. I would say that, year-over-year, we were not alarmed.

Our ratios of days on sale for inventory and receivables was pretty much payables, was a little bit of what we probably pay their bills a little bit quicker basically. And then the emissions as well probably had an impact on it. So, nothing alarming. We're still holding our full-year cash forecast..

Okay. And then, secondly, on the portfolio products that you're billing out for hybrids and EVs. I guess two different parts of this, one from the drive motor, the gearbox.

What do you need to do there? Is there anything you need to do there to broaden that product range at all and what the timing is of bringing those types of products to market? And then, secondly, as you're out there booking a lot of great new business, new contracts there, do you have any sense what your win rate or market share is of those programs that you're going after?.

So, David, this is James. I would say the first thought I would share with you, we're very, very happy with the technology that we got from a drive motor and a gearbox perspective and now obviously with the added power electronics capability we've got from Sevcon, that's just strengthened us.

So, we have a lineup of motors and we have a lineup of gearboxes that run the full range needed for hybrid and electrics. And actually that's why you can probably tell in my comments that we're booking really well. And so we're picking up the business that we need to and you're starting to see that flow through the press releases.

I can have Pat, actually, David, give you the amount we've actually secured this year on eGearDrives and motors because of some specific data. But I would say in general, if I look back six months ago to the Investor Day, David, on what we'd hoped to book around hybrid applications and electric, I would say we're ahead.

I don't have a number to give you in terms of revenue or percentage. We can work on that with you, but I would say directionally we're absolutely running ahead of where I thought we would be both in terms of win rates, absolute bookings, and dollars.

I just don't have that specific info with me, but we're definitely doing well, and we have the portfolio needed. I don't need to go and add anything beyond what we've got to keep – to deliver on the growth that we've got out there..

Okay, congratulations. Congratulations on the (00:23:44) contract..

Yeah, thanks..

Or award, yeah..

Yeah. Thanks, David..

Thank you. Your next question comes from the line of Colin Langan with UBS. Your line is now open..

Great. Thanks for taking my questions..

Hey, Colin..

Any color on how much diesel mix as a headwind within the quarter? I know it looked pretty bad, so I was – want an update there and if you could also maybe update the dollar exposure, I think you've said in the past like 80 cents on the dollar gas-diesel ratio?.

Yeah, Colin. So for the quarter, it was 760 bps year-over-year shift from diesel to gas for the quarter. And for the full year, we're estimating about 500 bps full year, year-over-year 2017 to 2018 diesel to gas mix. And for every 100 bps it moves, it's a net revenue impact for BorgWarner of about $20 million to $25 million.

Did that help you?.

No, it's very helpful.

And that – when your initial guidance was a 200 basis points to 300 basis points decline, so is it a bit worse?.

Yeah, 300 basis points to 400 basis points is how we started the year, Colin. So, we're trending a little worse than what we'd expected because we've now shifted to about 500 basis points to 600 basis points. And like I said, the first quarter was 760 basis points down. So, that's kind of where we're at right now..

Okay, I just like to add some (00:25:13). That's what the market is doing. We're not seeing, again, in 2018 the full impact that we did, the same thing happened to us in 2017. The market's moving faster than what we're actually experiencing in our business..

Yeah. Got it..

Colin, one of the thing not to overdo – these things drive you crazy, but obviously we're talking light vehicle here, just to separate the commercial vehicle aspect..

Yeah..

And actually, the irony of this which is kind of cool for us is that strength in commercial vehicle is pretty much offsetting that light vehicle diesel shift. So, that's why we're delivering the outcomes we're doing..

Got it. And any thoughts on the potential for the U.S.

fuel economy fares to get pushed out? Do you think that helps your Engine product and then maybe they have a longer life? Does this really make a difference to your business? Any color there?.

combustion, hybrid and electric. What happens for us is with the different OEMs, the mix of hybrid, electric and combustion will vary a little bit depending on the adoption rate and the climb with the standards. But for us, net-net, we're growing independent of that shift or slowdown or acceleration of standards..

Got it. All right. Thank you very much for taking my question..

Thank you, Colin..

Thank you, Colin..

The next question comes from the line of Rod Lache with Deutsche Bank. Your line is now open..

Good morning, everybody..

Hey, Rod..

Good morning, Rod..

I had a couple questions. First one, I just want to apologize just given the number of companies that have reported today, I should have dissected this already, but your full-year guidance change basically appears to reflect the upside from Q1 when I look at the earnings per share.

Can you just clarify, for the rest of the year, it sounds like you raised your FX assumption, but did you offset that with downward revisions to diesel mix or something else?.

No. We're still concerned about our emissions business going forward. They had one great quarter and they gave us good tailwind. I'm not in a position. I don't think we are as a management team to say it's going to continue the headwinds going forward, Rod. So, we're just going to watch that business quarter-by-quarter until we sell it..

Okay. And that was actually my second question, just on that emissions business.

How much of a drag was that at this point and what's your timing on resolving this?.

So going into the quarter, we anticipate it would be about a $5 million per quarter headwind for the first two quarters and then it would kind of even us up out in the back half of the year. We didn't see all the $5 million headwind in the first quarter, Rod. Now, that's not to say – we're cautious. They did very well and we're all supporting them.

But to have that flow through for the year here is premature..

Rod, and maybe I can just give you a little bit of an update on what we're doing with the business more strategically. So the plan obviously was to sell and divest the thermostat and pipe, non-core product lines, and that's moving along as planned, Rod.

So what that means is we've used the first quarter to really get some of the ground work done in terms of marketing the business. We'll be moving into that over the next 60 days. And I would say, our early thoughts are it's a good opportunity and a good business for somebody. We're not the natural owner or the best owner for that business.

But I would say we're comfortable, and I think we'll get a sale. We just need another quarter to go through the process, frankly, of engagement with potential buyers, and then I think we'll know more. But we're encouraged by early interest in terms of being able to move that business out of our portfolio as we go through the year..

Okay, thank you. And just one more if I could just slip this in. It sounds like there's a pretty significant pickup in electrification and other technologies that are being added to comply with the regulation, particularly in Europe.

Was wondering if just from your perspective in speaking to customers, are you hearing about anything more strategic vis-à-vis their plans for Europe? There just seems to be a little bit more of a recognition that some segments are structurally challenged. And it's hard for your customers to pass along some of these cost increases.

What do you think that might mean for you, just in terms of the volumes or those relationships over time?.

Yeah. It's a good question, Rod. Our view is, I would say generally from certainly where we were six months or a year ago, the pace and acceleration towards electrification has increased in Europe for sure. I think an element of that obviously is the transition from diesel to gas of course is accelerating that for obvious reasons.

I would say too each OEM is kind of looking at it, what is best solution obviously for them uniquely with their portfolio. But a couple of things that are fairly consistent. The march to 48-volt technology continues to gain momentum, and we see that 48-volt mild hybrid technology is the prevalent solution or a growing solution, if that makes sense.

I would tell you, our quote activity in that space is intensified. And that's obviously great for BorgWarner because we've got clutching and motors to help provide that solution. And then EVs are obviously in scope too.

That varies a little bit by OEM, particularly on the fleet size and the fleet mix, right? But net-net, the march is definitely getting faster. It's getting stronger. And I would say 48-volt mild hybrid is surfacing to the top. And EVs, if anything, are getting pulled forward.

And they're all having to adjust quicker than they thought they would because of the diesel gas mix shift, if that helps you..

Great. Okay, thank you..

Thanks, Rod..

Your next question comes from the line of Noah Kaye with Oppenheimer. Your line is now open..

Good morning. Good morning. So on the organic growth, you outperformed your own prior expectations by 200 bps for the quarter at midpoint, even despite the diesel headwind and the lower industry production.

I think we have some of the elements of it here from your prepared remarks, but can we just pin down really what were some of the major contributing factors leading to that higher organic growth versus the outlook?.

Yeah, sure, Noah, this is James. The two things that I would say are the most meaningful, as I mentioned in the prepared remarks, commercial vehicle was a little stronger. If you remember, we came into the year with a view that really no growth for commercial vehicle for us. And we saw some growth there in commercial vehicle.

So that contributed probably 100 bps of, let's say, the better performance or stronger growth. And then I would just say the overall view of the backlog in terms of launch was a little stronger, and that's a mixture there, Noah, some of the programs maybe came in slightly quicker, some ran a little faster than what we'd started into the year.

And I would say those are the two kind of primary drivers of what allowed us to get a little bit higher than our organic growth, if that makes sense to you..

Yeah, no, that's very helpful. And then, the China show – the China Auto Show that's ongoing, clearly, the EV models are being showcased here, right, ahead of the quota requirements that are going to kick in. And then we've had the announcement around ownership liberalization.

And I was just wondering kind of what's your view of the potential impact to the business. Obviously, local content requirement on batteries, that doesn't impact your ability with your products to play in the market.

Would this at all help you to increase your market share in electrification? How to think about that effect?.

Yeah. I'd give you a couple of thoughts, Noah. So first off, I think you know this, that China is a major growth engine for us as a company and actually has been for the last year or two, for sure, and continues to be very strong. It was over 30% of our backlog that was derived from China.

The other data point I would tell you is we have seen over the last two or three years the fastest adoption of pure electric, battery electric vehicle technology has been in China, and we've been right there with that.

If you look at some of the eGearDrive announcements that we've made over the last few quarters, that's evidence that we're strongly in there. We've obviously also launched our electric drive module, which is a combination of both the motor and the gearbox.

And then the other thing I would share, Noah, that you may find useful is what we find particularly with the domestic OEMs adopting technology at a very fast pace. They really do rely quite heavily on propulsion system partners such as us.

And the reason for that is we bring all of the discrete technologies and can put them together as a system for them. And that's what we've seen in some of our bookings and some of our win rates. So we found their adoption is aggressive and their reliance on partners such as us has been very strong.

So all of that put together, we see tremendous EV growth in China. We're right there with them and we're seeing also more and more adoption of hybrid technology where we're also there. So, this is all super positive for BorgWarner and good for China as well, Noah..

Thanks very much for the color..

Thank you..

Your next question comes from the line Armintas Sinkevicius from Morgan Stanley. Your line is now open..

Good morning. Thank you for taking the question..

Good morning..

You've made a lot of progress towards becoming propulsion agnostic. But when I look at the slide from Detroit or the Investor Day where you have the content per vehicle and the participation rate, the content per vehicle is going up as we transition to different architectures. But your participation is trending lower.

I know it's early days, but can you help me think about where – how you think about being propulsion agnostic? And, in my mind, it would be where the content per vehicle times the participation rate starts to even out. And it's certainly moving in that direction.

But do you see that ultimately as being the equilibrium? And if so, what are the factors to get there?.

combustion, hybrid, and electric. From a combustion perspective, in a flat to declining marketplace of combustion over the next few years, we generally grow at about 5%, okay? So, that's primarily through additional content as they advance the technology in combustion-powered products. So, that's what's driving that growth.

On hybrid, we're actually increasing obviously our content per vehicle and the participation rate continues to grow. And that's coupled with two things. One, that the carryover of use in our combustion products in addition to the hybrid product. So, on hybrids, we grow both content and participation rate.

And on electrics, what you may be thinking about on electrics, if you go back a year or so back to 2016, our content per vehicle was exceptionally high. We were in the 600s and that was driven by we were only really shipping one single product called transmission.

And as we adopt an array of products, that content per vehicle actually comes down and narrows itself out, but our participation rate is going up from about 3% to 26% over the next two or three years. So, when you net all of that together, you net all of that together.

We're going to end up with the combustion content per vehicle in the low-200s and hybrid content per vehicle in the mid-200s and the electric in the high-300s, so it's pretty consistent. And participation rates will be about 50% on combustion, mid-20s on electrics and mid-30s on hybrids.

So, does that help you a little bit? Otherwise, I know Pat can give you the multiplier..

It does. No, this is helpful. And then, Pat has been helpful as well.

Just when I think about the transition electric, where you see the equilibrium on participation rate for yourselves? Do you see it sort of not by 2020, but sort of further out, do you see it higher than the mid-20% range and what do you need do to get there?.

Yeah, we'll climb beyond the mid-20s. I mean the mid-20s is a great number for us considering we're coming from 3% just a couple of years ago..

Yeah..

But we'll get to that mid-20% and we'll climb from there. Absolutely, we'll climb from there because we – I have portfolio across the space, whether it's transmission, power, electronics. We will continue to climb. We don't have a definitive number of where that will settle out.

But intuitively, if you think about it intuitively, why would there be any less participation on an electric than it would on a hybrid or a combustion? And I don't think it will. It's just a function to me of when we get there..

Okay. Well, thank you so much for taking the question..

Thank you..

Thank you..

Your next question comes from the line of Ryan Brinkman with JPMorgan. Your line is now open..

Hi. Good morning. Thanks for taking my question..

Morning, Ryan..

Maybe just first regarding the modestly lowered EBIT margin guidance for the year. Thanks, Ron, for the comment on the economy impact. I imagine the FX tailwind to revenue was also diluting the all-in contribution margin.

Are there any other factors that play such as a decision to spend more on investments electrification, other technologies to drive future sales growth or is pretty much accounted for by those other factors?.

It's accounted for those other factors and we are still maintaining our incremental margins right in the mid-teens, so no. It's those two of the factors, FX and then the reclassification of the pension..

Got it. That's helpful..

And, Ryan. Sorry, Ryan. Just – I just – Ron's right on, of course. But I just want to reiterate there is absolutely no spend slowdown at all in R&D. We continue to get at that pace of 4% or more across both – across over the portfolio. So, yeah, I don't want you to think we're touching R&D. If anything, we'll spend more not less..

Very helpful. And then just, James, I recall you saying a couple of years ago before Sevcon that you'd be happy to make a number of power electronics acquisitions whenever you – if you could.

I'm just curious what other like power electronics capabilities exist out there that were maybe not addressed by the Sevcon acquisition that you could be potentially still interested in acquiring?.

Yeah. I would say it's probably similar stuff to what we – what Sevcon brings, but just more of it, more scale, more engineering capacity, more engineering capability is really the key. We're happy with what we've got. We're doing good.

But as we're marching towards an $11 billion company and growing at the right we are, we're becoming a big company and it's a lot of activity we're managing. And if we can add more capability, more capacity, Ryan, it's only going to help us.

I don't need to add other discrete products, if that makes sense to you, to the portfolio to deliver on the growth targets. We can do that with what we've got plus Sevcon. It would just be more of it, would be good, if that makes sense to you..

Okay. Great. Yeah. No, that's great. Thanks. And then just the last question for me is, in the past, I think you've talked about like a breakout of the alternate powertrain mix in your backlog or for the industry as a whole. We see the IHS figure, kind of 5% to 6% DAV penetration in 2028. I think this is as far as they go.

Just curious given all the anecdotal evidence and announcements we've seen from automakers over the past – even over the past six months or so, if you see anything shifting in your conversation with automakers, are your conversations still mostly tied to discussions around hybrids and NPFs?.

Yeah. So, couple of thoughts, Ryan. One, obviously, as we get closer to – as we're getting into invested, I will do a refresh on that for you and give you the outlook of vehicle architecture breakdown based on IHS view and our view and others.

Fundamentally, we've not seen a huge change from 6, 9, 12 months ago other than I would say the adoption or a push for 48-volt model hybrid. It continues to be strong and continues to get pushed not just in Europe, but different parts of the world as well.

And you see a lot of announcements on pure electrics, which I think we're paying a lot of attention to. So I wouldn't say there's been any meaningful big shift. I would just say we're getting close to those dates now, so there's a lot of drive to get these technologies in place and implemented.

I think it's more that has changed a little over the last year. We're getting closer to implementation date, but 48-volt model hybrid coupled with some battery electric and then optimization of combustion is the primary drives that we're seeing in the business..

Great. Very helpful. Thanks for all the color..

All right. Thank you, Ryan..

Your next question comes from the line of Joseph Spak with RBC Capital Markets. Your line is now open..

Thanks. Hello, everyone..

Hey, Joe..

Hey, Joe..

So just on the diesel commentary, I know you said the market was down, I think, 760 basis points. Within that, one of the things we observed was sort of the smaller Engines declining at a faster rate than the larger Engines.

Are you mostly aligned with sort of the industry mix or did you perhaps outperform or underperform based on your mix?.

Yeah. So, yeah, Joe, this is James. The 760 basis points is the right number for the quarter. And you're right, it's biased to small. Vehicles are switching from out of diesel quicker, much quicker. We've seen that trend over the last 6 months to 12 months. On average, Joe, it we're slightly weighted to the larger vehicles.

I mean, I don't have any specific data point, but I would say generally we're a little more weighted to larger vehicles than smaller vehicles. So, we don't get as impacted as much in the average. We do a little better than the industry average because of that slight bias for us on the larger vehicles..

One thing I will add, James – I'll add one thing, Joe, is if you're looking at the impact we actually experienced in Q1, it was in line with our guide of 300 basis points to 400 basis points. That's what we experienced, okay. We didn't experience the 760 basis points for the quarter..

Okay. So, the drag to sales in the quarter was 300 basis points to 400 basis points, but then you also made a comment that commercial vehicle offset that. So, the inference is that commercial vehicle – and so (00:46:32) none of the two was in line or you're in line because you were expecting the zero on commercial vehicle..

Right..

Yeah. Yeah..

What happened is commercial offsetting the guide that we thought we were going to experience and we still performed better than what the market did..

Right..

Okay?.

Okay. The second one is just – so, I appreciate the comments on 48-volt and that makes a lot of sense given some of the near-term targets that the automakers have to hit.

But presumably because of your capabilities, you're also involved in a lot of discussions with the automakers about where they go after, and I guess I'm curious about those conversations for sort of the next gen.

Like, what are they thinking there? And I guess the reason I'm asking is, it seems like 48-volt could be this really strong growth, mid-term solution. But ultimately, it seems like maybe it gets transplanted by some of the other technologies in your other content..

Yeah. Let me say, if I can help with that, Joe. The first thing I would say to you is, we are absolutely involved in those discussions across the – around the world, so to speak, with all the automakers, which is interesting because we get a unique view of pretty much what all the automakers are doing.

And the very conversations that we're having are, what is the optimal mix of propulsion technology for their range of vehicles both now and also through 2025 and even beyond 2025. The general trend that we see is, obviously, they all have their own unique mix. But what we're generally seeing is that all of them are looking towards a balanced fleet.

So, we're not seeing a lot of will hybrid be an interim solution to use an example and everybody switching over to pure electrics. We're seeing even in a sustained period to 10 years out that they'll have a mix of really advanced combustion technology, which continues to get advanced pretty aggressively.

There will be a certain mix of hybrid and then there will be some – generally some EV portion of that fleet. So that's what we're consistently seeing. We're not seeing people jump into two of the three architectures as an example. And I would also point out, I think you're right, 48-volt hybrid is a sustained solution.

We don't see that as an interim fix, so to speak, to go to electric. Within the 48-volt mild hybrid architecture, the P2 solution, which is basically putting the motor between the engine and the transmission, seems to be a prevalent trend. We see that very, very clearly.

And I would say the investment in continuing to advance combustion to engine technology is still very strong. Sometimes we hear a myth that that's not happening. It's not true. There's a lot of investment and a lot of advanced technology that we're discussing on pure combustion.

So the difficulty is, Joe, it varies OEM-by-OEM and region-by-region, but those are some of the high-level trends that we're seeing, if that helps you..

Yeah, no. That is helpful. I guess just one quick follow-up because you mentioned the sort of P2 configuration.

Is there sort of a motor configuration that is generally more favorable for BorgWarner than the others? Or are you pretty agnostic between the different – where they place the motor?.

No, what we're finding, Joe, and maybe the reason, just for those on the call, of why the P2 solution lends itself very, very well, is it gives the OEMs the opportunity to use the current engine and transmission configuration that they have and basically put the P2 model in between, which then gives them flexibility to use that engine transmission as a combustion vehicle or a hybrid vehicle.

What's pretty unique for us, and this is pretty interesting, is if you actually list the companies in the world that understand engines, transmissions, clutching, motors and electronics, which are all the five elements needed to pull off a P2 mild hybrid solution, there is BorgWarner and I'm not sure who else frankly.

So all of that, that's the competitive advantage we're bringing. And we have a range of motor technology, Joe, so we can – we have different motors. And it varies again on the needs and the specific uniqueness of the application.

But because we understand the clutching and we understand the transmission and the engine, we know how to scale or adjust the motor for that particular application. And that's why we're gaining a lot of traction there and doing really well..

Great. Thanks. That's helpful..

Your next question comes from the line of Chris McNally with Evercore ISI. Your line is now open..

Thanks. Hey, guys, I really just wanted to discuss a little bit about the high-voltage industry outlook maybe more in detail and specifically the power electronics. Now that you have Sevcon for the last two quarters and you had a strong interest from the OEM. So, two questions.

The first is on really the bundling of the electric motor and power electronics. If you can give any qualitative or just some guidance for how much you're seeing those two bundled together as opposed to sort of bid out separately amongst different suppliers. And then, the second on insourcing.

I think you gave some comments last year that you thought on the electric motor side, that it was going to be about 50% insourced from OEMs. And we really don't have a good industry check on power electronics, outside of Tesla. It seems like most OEMs are going to outsource, but any color you can add there would be great..

Yeah, let me take a shot at that for you. So I'll start with the – let me start with motors, so let's start there. And you're right, Chris, our assumption was about 50% would be insourced and 50% outsourced by the OEs. And of that 50% that was outsourced to suppliers, we'd probably pick up about 15% thereabouts of that market share.

I would say the two things that I've seen since we talked about that is, I think the 50/50, in versus out from the OEMs, I think, is pretty consistent. I'd just say that's still a pretty good assumption. If I had to do the over/under, I think they'll do a little more out. He's just changed his view.

And our ability to win that 15%, I'm feeling incrementally more positive and more comfortable about. And I think we're probably running a little ahead of that. It's still early in the race, Chris, but I would say – directionally, I would say that's where I would go. So that – I would say that.

On power electronics, I agree with your sentiment that we – the OEs are generally leaning to outsourcing power electronics for sure. And then I would say in terms of your other thought in terms of the bundling of the package, that varies a little bit by the OEMs.

I would say, generally speaking, the Chinese OEMs are much more lending themselves to bundling the whole thing, and we're seeing that play out pretty strongly. Europe, North America probably a little more less so.

But I will also say the other very critical point is, you, as a supplier, if you're going to compete, you need to understand all of those things and how they interact. That's what I've heard loud and clear from the OEM. So don't come to me with a transmission motor combo and not understand the electronics needed.

You have to understand that even if it's outsourced and bid separately, Chris, if that makes sense. You got to understand the system, you got to understand the interactions and that's where we bring the value. So hopefully that gives you a little bit of a sense from what you're thinking about..

No, James, that's fantastic. And do you think, just as a quick follow-up on the bundling, I mean when you're going to the OEMs, is there a very strong value proposition that, if we are able to do both or able to offer x in terms of savings or efficiency because of essentially the design of what is the critical components in an EV.

Or right now that value proposition is only so-so, not just for yourself, but for the industry, that combining those two, you're not really gaining a lot of efficiency?.

Yeah. Again, I would say there is a little bit, Chris, OEM-to-OEM. But here's the way I think about it, is if you've got the capability to do all, you're in a much, much stronger position. You really are for two reasons.

One, you can understand the tradeoffs between the different pieces of technology, but also if you've got the capability to offer it, insource to offer it, to supply it, you have an advantage. So it's still early, Chris.

To be fair, it's playing itself out, but I would say in general you're way better off if you've got all pieces of the puzzle as opposed to only certain bits of the puzzle..

Great. Thanks so much..

Thank you..

Thanks, Chris..

Your next question comes from the line of John Murphy with Bank of America. Your line is now open..

Good morning, guys..

Hello, John..

Hello, John..

Just a question, I mean, on the Drivetrain business.

Ron, when you were kind of going through the walk, you were talking just about how you'd benefited from mix there and what we're hearing on four-wheel drive, what we're hearing from the automakers is an increasing focus on crossovers and trucks in relation to potentially cancellation of many car program.

Just curious as we think about the Drivetrain business, what kind of potential upside you see as we see the shift towards more crossovers and trucks that will have a lot more four-wheel drive or at least All-Wheel Drive toward transfer capability?.

I'll start, then maybe James would follow up. It's not just about transfer cases. It's also about coupling, so we have the coupling business. So, we see good growth in the first quarter in the coupling business in Europe, for example, and in China.

So in the U.S., we all think about the trucks and the transfer cases, but it's not just about transfer case. It's about couplings as well. Do you want to add anything....

No. I think that's a good perspective.

The only other thing I would say, John, it's not directly related to your question is, not to beat a dead horse here, but this notion of having the broad elements of Drivetrain, all the key pieces of Drivetrain in addition to the Engine piece is a huge competitive advantage because you can understand both parts of the vehicle.

That's a big advantage for us..

But I mean, simplistically, directly from a pass car to a crossover to a truck, I mean, what is the content potential for you in Drivetrain just sort of on a more traditional standpoint?.

Yeah. I mean, the biggest thing that moves the needle is the transfer case. So, that's the biggest shift for us, if that makes sense, John. So think of the other key pieces here. We have pretty much equal content of transmission across the vehicle, but transfer case is obviously an additive to trucks and obviously four-wheel drive applications.

So, that's the biggest shift you see. We see – the rise in China of more and more and more SUVs is calling on more functionality for All-Wheel Drive or four-wheel drive and also calling for dual-clutch type applications because they're better equipped in an SUV. So, we're seeing some of those trends, if that makes sense..

Okay, that's helpful. And then just a second question, can you just remind us what your commercial vehicle exposure is there because it sounds like the market is running a whole lot hotter than flat or is going to run a whole lot hotter than flat this year. I'm just trying to understand what the potential upside is from that as well..

In China, John? You're asking about China?.

No, more North America, but also potentially China as well..

So, CV is about 12% of revenue, total company, and it's about a third in the North America, a third in Europe and the other third is split between China and Brazil, weighted to China. And about total CV, about two-thirds is over the road and about one-third off-the-road.

Is that helps?.

And profitability on that, if you guys – would you guys do, is that sort of a round corp average or is there a higher profile there?.

Yeah..

It's round corp average..

Okay. Great. Thank you very much..

Thanks, John..

We have time for one final question and that question comes from the line of Rich Kwas with Wells Fargo. Your line is now open..

Hi. Good morning, everyone..

Hey, Rich..

Hello, Rich..

Just a couple here for 2018 on the guide. So, implies second half organic growth slows down, production comps particularly in North America get easier.

Is that backlog timing or anything we should be reading into with regard to conservatism?.

I don't think it's anything to read into. It's early right now into the year. We're only five months in – four months in, Rich.

I don't think there's anything to read into that at this point, okay?.

Okay. And then on the equity and affiliates..

Yeah..

So, that number is going to be a headwind. So, it's going to be down year-over-year. That's, I think, related to – you have Korean and Japanese joint venture.

There's something else there not just production or is there programs or what's driving the lower contribution?.

So, I call that leakage, basically. So, there's two elements to loan line that we want to make you guys focus on. There's affiliates and then there's the equity, right. Both of them are headwinds.

One of them on the joint venture is what's happening is, as we make more money in those joint ventures, we have to give them more money because we don't have 100% ownership. So, that will increase. For example, the dual-clutch transmission for the Chinese OEMs is a good example. So as we do better there, we have to give our partners.

And then we are seeing startup in NSK-Warner expansion plans, and we're anticipating that this should go through some cost issues as they expand their business..

Okay. So that was the one I was looking for, I understand the DCP piece with minority interest (01:01:04)....

All right, yeah. So, it's basically the expansion of NSK-Warner partnership that we had over 50 years..

Okay. So, there's some investment going on there, okay..

All right, yes..

That's great. Okay, that's all I had. I appreciate it. Thank you..

All right..

Thank you, Rich..

Thank you, everyone, for your very good question today. Dan, you can now conclude the call..

Thank you. That does conclude the BorgWarner 2018 first quarter results conference call. You may now disconnect..