Welcome to the BorgWarner 2020 Fourth Quarter and Full Year Results conference call. [Operator Instructions]. 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, Sharon. Good morning, everyone, and thank you for joining us today. We issued our earnings release this morning. It is posted on our website, borgwarner.com on our home page and on our Investor Relations home page.

With regard to our Investor Relations calendar, we will be attending multiple conferences between now and our next earnings release. Please see the Events section of our Investor Relations home page for a full list.

Before we begin, 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 today's presentation, we 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 us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items.

When you hear us say adjusted, that means excluding noncomparable 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 markets. When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.

Our outgrowth is defined as our organic revenue change versus this market. Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Fred..

Thank you, Pat, and good morning, everyone. We're very pleased to share our results for 2020 and provide an overall company update. Starting on Slide 5. I'm very proud with our stronger-than-expected top line and cash flow performance for the year. With approximately $10.2 billion in sales, we were down about 11% organically.

This compares to our market being down approximately 17%. And so outgrowth was about 630 basis points for the year, which was ahead of our expectations going into the fourth quarter. For the full year, we saw our growth in all major regions. We delivered close to 15% outgrowth in China.

Our European and North American operations outgrowth were both in the low single-digit range. While our full year earnings per share declined year-over-year due to the impact of COVID-19, our decremental margin performance was in line with our expectations.

Importantly, our margin performance was achieved while preserving R&D spending to support future growth. We delivered very strong free cash flow of $743 million for the year. This represents a record for free cash flow generation for the company.

This is a testament to the intense focus we've put on improving free cash flow generation over the last few years. While managing the operation the operational challenges of 2020, we successfully completed the largest acquisition in the company's history and secured numerous business award for electrified vehicles over the course of the year.

Now let's discuss some of those new business awards. First, I'm happy to announce on Slide 6 that we have secured an 800-volt electric motor award, with a global commercial vehicle customer launching in 2024. This program will use 4 different variants of our latest airplane motor design.

Using our 800 volts rated machine, customers can significantly reduce charging time and achieve a higher power density through the 800-volt architecture, enabling an even brighter future for electric trucks and buses. I am very pleased with this program.

We will continue to focus on the electrification opportunities in commercial vehicles in addition to opportunities in our light vehicle market. Next, I would like to highlight another inverter win on Slide 7.

We are partnering with a major European OEM to supply our 400-volt silicon carbide inverter for the next-generation BEVs that are expected to launch in 2022. While I can't share the details of this program, I can tell you that this is our second largest inverter program to date.

This illustrates our ongoing innovation in power electronics as we're leading the market trend to upgrade from silicon to silicon carbide. This enables lower energy losses and drives higher efficiency. With the latest win, I would like to give you an update of our positioning in the European inverter market on Slide 8.

We've had tremendous success establishing ourselves in this market. When I think about BorgWarner's competitive advantages in power electronics, it's driven by first, the breadth of our product portfolio. This allows us to be faster and more effective at bringing products to market. Second, our ability to innovate.

We continue our innovations in part by our vertical integration strategy. We have in-house capabilities for power modules, integrated circuit development and software. I think that the last driver is our ability to leverage the electronic scale that we already have, especially in our engine control unit business.

The result is that we've secured significant new business award. On the chart on the right side of the slide, you will see the inverter programs we've secured with 3 large European OEs. As you can see, we expect that we'll be delivering around 1.1 million inverters in 2025.

As a result of the successes we're achieving, we're increasing our R&D spending in 2021 to support our continued innovation and new business awards in our power electronics portfolio. Kevin will touch on that a little later. Next, I would like to give you an update on the Delphi Technologies integration on Slide 9. Bottom line, all is on track.

Starting with Q4 results. The Delphi Technologies contribution to both revenue and operating income was ahead of our expectations. I'm seeing good progress across all the former Delphi businesses. The cost synergies related to the Delphi transaction are tracking in line with our plan, as Kevin will discuss later.

And the customer feedback remains very positive. In addition to inverter wins that I just highlighted, we won new businesses across the rest of the Delphi portfolio, including awards in GDA. My overall takeaway is that the integration is on track from all perspectives.

Before I wrap up on Slide 10, we are announcing our plan to hold an upcoming Investor Day on March 23. The event will be virtually broadcasted from the BorgWarner world headquarters in Auburn Hills, Michigan. It will provide insights into our technologies and into the acceleration of our positioning in an electrified world.

I look forward to interacting with you during the event. So let me summarize our 2020 results and our outlook on Slide 11. 2020 was an extremely challenging year in terms of the operating environment, and we've put the health and safety of our people first.

Even in this challenging environment, we delivered better-than-expected outgrowth and generated record free cash flow, and our bookings on BEVs are accelerating. We closed on the Delphi transaction. We're successfully integrating the companies, and we are on track to deliver the synergies as planned.

As we look ahead, we expect to deliver another record year of free cash flow in 2021, which enables us to continue to invest in the business to successfully position the company for the future. The demand for our efficiency improving products is growing, leading to a continued increase in our content per vehicle.

In fact as Kevin will highlight, when you look at our 3-year backlog, 45% of it is already coming from e-products. And finally, I'm excited about our long-term positioning as we look to capitalize on the profound industry shift towards electrification. We are winning.

We are ramping up R&D and focusing heavily on the acceleration of the company towards electrification. With that, I'll turn the call over to you, Kevin..

In China, we outperformed the light vehicle market by about 13%. Strong DCT demand continues to be a key contributor to our sizable outgrowth in the region. In Europe, our light vehicle organic revenue performed roughly in line with the market.

In North America, we underperformed the market by approximately 3%, just as we expected, primarily due to the impact of the changeover of the Ford F-150.

And finally, our commercial vehicle and off-highway mbusinesses drove about 50 basis points of our outgrowth in the quarter as our China business more than offset declining commercial vehicle revenue in other regions.

Now some of the strong outgrowth we delivered in Q4 and for the full year, particularly in China, was a pull forward of 2021 outgrowth. That will have an impact on our expected 2021 year-over-year outgrowth. But on a cumulative 2-year basis, we're tracking right in line with our longer-term expectations.

So in the end, we're pleased with the strong finish of 2020. Moving past our backlog and outgrowth, you can see that the Delphi Technologies acquisition added a little more than $1.1 billion to our fourth quarter revenue. The sum of all this was just over $3.9 billion of revenue in Q4.

Now let's look at our earnings and cash flow performance on Slide 13. Our fourth quarter adjusted operating income was $448 million compared to $340 million in the fourth quarter of 2019. This yielded an adjusted operating margin of 11.4%, which was well ahead of our margin guidance of 8.8% to 9.6% for the quarter.

On a comparable basis, adjusted operating income decreased $7 million on $159 million of higher sales. Remember, we delivered outsized margin performance of 13.3% in Q4 2019, which makes for a tough year-over-year comparable.

If you look at the legacy BorgWarner margin excluding the impact of Delphi Technologies, we delivered just over 12% for the quarter, which is consistent with the company's historical top quartile margin profile. Then the Delphi Technologies business added $109 million to adjusted operating income.

This was well ahead of our expectations due to the higher-than-expected revenue and stronger underlying margins in the business. Moving on to cash flow. We're proud of the fact that we generated $197 million of positive free cash flow during the fourth quarter.

As a result of that, our full year 2020 free cash flow came in at $743 million, which was a record level for the company. With those strong cash flow results and with our confidence in the business looking ahead to 2021, we repurchased $216 million of our shares during the fourth quarter.

Let's now turn to Slide 14, where you can see our perspectives on global industry production for 2021. First, let me point out that our market assumptions now incorporate our view of the commercial vehicle and off-highway markets, given our increasing exposure to those markets.

With that background in mind, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of 11% to 14% this year. Looking at this by region, we're planning for North America to be up 22% to 25%. In Europe, we expect a blended market increase of 11% to 14%.

And in China, we expect the overall market to be roughly flat year-over-year, as growth in light vehicle production is offset by anticipated declines in the commercial vehicle market. Now let's talk about our full year financial outlook on Slide 15.

Starting with our pro forma 2020 sales, which adds back the $2.6 billion of revenue from the first 3 quarters of Delphi Technologies in 2020. As you know, those revenues were not part of our P&L last year, but in order to provide year-over-year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.

Building on that pro forma revenue base, you can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $1.2 billion to $1.5 billion. Next, we expect to drive market outgrowth for the full year of approximately 100 to 300 basis points.

Embedded in that outgrowth range is a roughly 200 basis point headwind from declining light-duty diesel and a 40 basis point headwind from an expectation of normalized market share in our China commercial vehicle business after considering outsized market share in 2020.

Based on these assumptions, we expect our 2021 organic revenue to increase 12% to 17% relative to 2020 pro forma revenue. Then adding a $355 million benefit from stronger foreign currencies, we're projecting total 2021 revenue to be in the range of $14.7 billion to $15.3 billion.

From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.0% to 10.5% compared to a pro forma 2020 adjusted operating margin of 8.3%. This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi-related cost synergies and purchase price accounting.

From a cost synergy perspective, our margin guidance includes $70 million to $80 million of incremental benefit in 2021. That puts us right on track to achieve 50% of our total expected cost synergies in 2021, just as we've previously told you to expect. One more point on our margin outlook.

It's important to note that this outlook is inclusive of a planned increase in R&D spending to 5% of revenue to continue to drive the growth we're seeing in electrification opportunities. That's fully baked into the guidance. So based on this revenue and margin outlook, we're expecting full year adjusted EPS of $3.85 to $4.25 per diluted share.

And finally, we have line of sight to delivering free cash flow of $800 million to $900 million, which is a significant increase over our record year in 2020. That's our 2021 outlook. Let's turn to Slide 16 to review our medium-term growth outlook. As I mentioned earlier, we expect light vehicle diesel to be a headwind to our outgrowth in 2021.

The largest portion of this headwind comes from the legacy Delphi portfolio. As you can see on the left side of this slide, we expect the impact within this business to be approximately $140 million in 2021. However, you can also see that this headwind is expected to lessen each year as we head towards 2024.

This is what we saw in due diligence, which simply means that it's in line with our original planning assumptions. Now let's move to the right side of the slide, where we profile our multiyear backlog. As you know, our backlog is a net backlog, which means it reflects increases in revenue net of decreases in revenue.

So the diesel headwinds from the left side are incorporated into this net backlog. And what you can see is that even with this headwind, we still expect to deliver 100 to 300 basis points of outgrowth in 2021.

Then as you look ahead to 2022 to 2024, we expect a combined net new business backlog inclusive of aftermarket growth to be approximately $2.8 billion. Importantly, we believe this 2022 to 2024 backlog supports our previously communicated midterm outgrowth for the combined company in the mid-4% range.

And there's one more critical point to note about this backlog. About 45% of this net backlog is driven by our e-products, 45%. We're winning business and positioning the company for continued growth in this area. So let me summarize my financial remarks. Overall we had a really solid year despite the headwinds resulting from COVID-19.

We delivered 630 basis points of market outgrowth and $743 million of free cash flow. Not only did these results significantly exceed our most recent guidance, they also exceeded the guidance that we provided in January of last year prior to the pandemic.

Now as we head into the new year, we're focused on leveraging our financial strength to drive continued long-term profitable growth in the business.

In 2021, that means we'll be keenly focused on delivering on our near-term financial commitments, successfully integrating the Delphi acquisition, and continuing to make the necessary investments to win electrification business that will secure outgrowth and financial strength long into the future.

With that, I'd like to turn the call back over to Pat..

Thank you, Kevin. Sharon, let's open it up for questions..

[Operator Instructions]. First question comes from Chris McNally with Evercore..

Fred, if I can ask two questions on EVs. The first is around market share. Really appreciate the color on the 3 big inverter wins with the units attached.

And I know you can't give explicit numbers, but sort of if we work into what that means on a market share basis, assuming you have some Asian wins as well, you could be getting roughly a 20% share of the outsourced business.

Would just love some color about the competitive environment, because that would probably put you in the top 3 external suppliers. And obviously there's a lot of players here. It's not only inverters. We obviously have a heavily competitive in-source for motors and drivetrain.

So if you could just talk about the competitive environment for e-business right now?.

Chris, we're definitely a leader in this field, and I feel really good about the progress. I see -- I feel really good about the momentum. I feel really good about the fact that the technology that we got with Delphi is really strong, high-voltage silicon carbide, driving efficiency. And I feel really good about the combination.

We bring financial strength and customer intimacy, and we're booking business. And so the positioning is strong. The customer feedback is positive. I'm kind of happy where the company is right now and more to come..

That's great. We received a lot of questions about this idea of sort of the legacy OEMs, right? I'd put maybe three European OEMs in that camp versus this next gen of startups.

Could you talk about just what does it like to win business on the startups? Are you seeing them at a similar proportion of in-sourced first outsourced, just because it's such a new environment for everyone involved?.

Yes. We are working with both, right, both the legacy OEM, as you call them, and new startups. We have actually been pretty successful towards those 2 customer market segments. Obviously, in our business, we are in the business of long-term relationships.

And that solid foundation that we have and the solid customer intimacy that we have across the world -- certainly matters..

And if I could just squeeze in one last one on the profitability ramp of EV. I mean clearly there's a lower margin on any new business, any new backlog.

But I guess everyone is very curious about -- since this is a much longer and much more aggressive ramp on EVs, can you talk about how does the EV business start to really flow through 2022 on? How much it may be sort of a degradation to margins? Or a rule of thumb for when EV business may actually reach corporate levels of profitability?.

Yes, Chris, this is Kevin. I'd say I mean keep in mind as we talked about in the past, we stay focused whether it's a legacy, I'll call it combustion business, or it's our new EV portfolios, that we drive toward a return on invested capital target consistently across those types of businesses.

But obviously as we're in ramp-up mode for a business like our EV portfolio, we're investing a lot more in the front end, and we're not at steady state yet from a revenue perspective. So those ROIC targets are over the life of the program, but the cost tends to come in at the front end, particularly from an R&D perspective.

And so just as you saw, we talked about today ramping up our R&D to 5%. Some of that is contemplating -- it's really contemplating the increased investments we're making in that EV portfolio as we're securing new business wins. So that does become a headwind to margin in the near term on a discrete basis.

But overall we're managing that within our portfolio, and you can see that in our margin guide. I mean the 10.0% to 10.5% contemplates that increase in R&D. And you see our backlog is getting skewed more and more toward e-products, which is great. We feel great about that.

And we still remain on track for our 2023 margin target, with all that considered, of delivering over 11% operating margin. So it's obviously a business we're investing in. It creates a little pressure on margins, but we're managing that across the portfolio, and right on track to deliver with our long-term margin targets..

Next question comes from John Murphy with Bank of America..

Just a first question on the change in segmentation.

And I'm just curious as you look at the new four segments, now that you've carved off or identified fuel injection and aftermarket as separate segments, are those maybe more separable and potentially could be up for sale over time, as it might be much slower growth than the other two segments?.

Yes, I guess that's not how we're thinking about it. I mean we look at those businesses, they're businesses that, from an accounting perspective, needed to be reported separately. And that's part of the reason that they reported that way. And our focus is really on growing the profitability of those 2 portfolios.

As you look at the FIS business, as Fred talked about in his remarks, we're seeing wins in GDI, and we see some real growth prospects in that business along with the leading positions that, that business already has. I think as we look at it, we see opportunity to improve the profitability of that portfolio, and that's really the focus there.

And from an aftermarket perspective, we feel good about the margin progress that we saw in that business in the fourth quarter. And we would expect to continue to drive margin performance in that business. So that's really how we look at those right now..

Okay.

And then just a follow-up, Kevin, if we think about -- I just wondering if you could give us some color on what you think about what's going on the chip disruption, what it means, shortage and the disruption in production as a result of that? Should we think about any kind of lost sales decremental? And then also just on the outlook, I mean I think you're being very humble in the performance in the fourth quarter, because the F-150 being down really matters.

Just how do you think about sort of the bounce back up as that gets up and running and the impact of mix on the F-150, and maybe more generally in the industry remaining pretty positive through 2021?.

John, what we see is certainly some kind of disruption, mostly in the first half. The second half recovery is currently unknown. What we have put in the low end of our guidance, John, is a net production impact greater than 1 million vehicle, and that's reflected in the low end of the guidance. That's for the full year..

That's helpful.

And then on the mix, particularly around the F-150?.

What's your question on the mix?.

No, I mean it was a benefit for most in the industry in the fourth quarter and through most of 2020. But obviously you got dinged a bit with the F-150 being down in the fourth quarter, so your performance was probably even better than it looked.

I'm just curious as you think about mix going forward in the 2021 guidance, how strong is mix going to remain? And particularly with the ramp back up in the F-150, how big a benefit will that be?.

Yes. I mean the F-150 will definitely help us from just an overall revenue outgrowth perspective. It is the reason that we underperformed in North America in the fourth quarter. I want to say it was probably around a $25 million, $30 million type of revenue impact on us.

So we would expect obviously that headwind to abate and that be -- not be an overhang on outgrowth as we look ahead to 2021..

Next question comes from James Picariello with KeyBanc Capital..

Just on the Delphi upside in the quarter, what were the primary drivers of that relative to your outlook? And because cost synergies and purchase accounting obviously came in as expected, just curious what drove that.

And then can you dimension at all what's baked in for the full year guide related to Delphi's inorganic contribution?.

Yes. On the fourth quarter, I mean we were pleased with the results that came in from Delphi, both from a top line perspective and from a margin perspective.

The biggest upside that we saw in terms of revenue being up effectively from the midpoint of our guide by about $145 million really came in the fuel injection and the legacy powertrain products portfolio.

And so we are pleased with that performance, because that also actually helps from a margin perspective, because those are two of the stronger portions of the business from a margin contribution perspective. So that's a big driver of what caused us to generate some upside.

I'd say also it's probably fair to say we were one month into the -- owning Delphi and just starting to really get our hands around some top line and bottom line drivers in the business.

And so we did make some cautious assumptions as we gave Q4 guidance with respect to the Delphi portfolio, and those proved to be too conservative at the end of the day..

Does that conservatism carry through to this year and related to the accretion framework that you laid out a few months ago?.

Yes. I think with respect to 2021, we feel really good about our ability to deliver on the guidance that we're giving, with the outgrowth of 100 to 300 basis points in totality, which basically assumes that Delphi outgrowth flat to actually slightly negative because of that diesel headwind.

So we feel good about our ability to deliver on that outgrowth for the year, to deliver on that improving margin profile, the 10% to 10.5% in totality for the company, and delivering strong cash flow.

And in terms of what that means for us as we look to 2021 and even beyond, we think we're right on track to deliver the greater than 11% operating margin as we progress toward 2023..

Okay. Got it. And then just to clarify, the 45% of your $2.8 billion backlog tied to e-products, that excludes hybrid, correct? That's just battery electric? And then for the free cash flow strength, clearly apparent in the guide. The company already repurchased $216 million this past quarter.

I mean how should we be thinking about the buyback effort for this year?.

So it includes a little bit of hybrid when it comes to high-voltage plug-in hybrids that are new energy -- under the new energy vehicle credits in China. That's a very small portion of the 45%.

Kevin, do you want to take that?.

Yes. In terms of -- I mean as we look ahead to capital allocation priorities in 2021, I would tell you that we are actively exploring several M&A opportunities that we think accelerate our position and growth in electrification. And I would say that is a priority for us as we look into 2021.

From there, we'll assess our buyback capacity through the course of the year based on how those M&A opportunities materialize. But our focus is definitely shifting towards more aggressively deploying capital to support growth initiatives and positioning in electrification.

You can see that both in our R&D investment stepping up to 5% this year, and you'll see it as we continue to pursue M&A opportunities..

Do that supplement some of the $1 billion buyback target?.

I'm sorry, say that again?.

With the potential M&A, that would supplement the $1 billion targeted buybacks? Or it doesn't....

It doesn't supplement. It's just it's how we look at deploying the $800 million to $900 million of free cash flow this year that we expect to generate in 2021. Our priority is going to be really focused on some of these M&A opportunities that improve our positioning and growth in electrification.

In terms of the $1 billion program, we remain committed to the program, as you can see by the evidence of what we did in our Q4 repurchase activity. But as it relates to how we're looking ahead here in '21 and beyond, we're definitely focused on exploring some of these key M&A opportunities that we're pursuing..

[Operator Instructions]. Next question comes from Rod Lache with Wolfe Research..

Yes, why don't I first ask you about the backlog data that you show on Slide 16? Have you historically included aftermarket in that backlog forecast? I know that last year, you had, over a 4-year period 2.5 billion to 2.6 billion prospectively. Now it's 3.2 to 3.4.

I was hoping you can give us some of the pluses and minuses as you look out as far as how much Delphi contributed, what backlog contributed, and what kind of headwind you've got from combustion technologies..

Yes. I guess the -- I mean the backlog has always included all of our revenue relative to the measurement of our market performance. And so as you look at this as well, it's included on the same basis.

I mean it's a much smaller piece of the backlog than the rest of it on the OE side, primarily because our focus on the aftermarket business isn't necessarily driving rapid growth. It's making sure we sustain strong levels of profitability..

Okay.

And how much did Delphi contribute to this backlog?.

We don't have it broken down, I think, by -- we're trying to get away from the idea of Delphi versus not Delphi.

But overall when you look at this, 4.5% outgrowth is what's effectively implied by this 2022 to 2024 backlog, which I would tell you is directionally consistent with what we provided a year ago when we talked about 4.5% or mid-4% outgrowth across the combined portfolio, which had the legacy BorgWarner more in that 5% ZIP code and the legacy Delphi with some of those near-term headwinds in diesel, more in that 3%.

I'd say we're not breaking it that way anymore, but directionally, I'd say that's a fair way to think about it. But as you look ahead, Delphi is probably a little bit more of that backlog because now we're looking at 22% to 24% as opposed to 21% to 23% where there was a little bit more of that diesel headwind..

Okay. And just secondly, you did north of 11% margin in the quarter. And I'm wondering if that says anything about your longer-term 2023 target of 11%. I think that you'd be annualizing it at more than the $15.5 billion or so that you annualize at in Q4.

So is that starting to look conservative? And if you could just repeat, did you say that inorganic or strategic actions might include divestitures as well? Or you're simply looking at more acquisitions?.

Yes. I guess on the -- when you look at the Q4 performance, we're obviously really pleased with the fact that we delivered 11.4%.

And now that's an annualized revenue of $15.7 billion, so obviously higher than the run rate that we're walking into here in 2021 where at the midpoint of our guidance 15 and actually 300 million of that is even driven by currency. So Q4 is really about $1 billion higher annualized revenue than where 2021 is x foreign currency.

But I think directionally, you're looking at it the right way.

We feel that between the incremental synergies that we expect to deliver even beyond 2021, which is another $85 million, with the additional margin improvement that we're driving in certain portions of the legacy Delphi businesses in particular, and with the revenue growth inclusive of that backlog we just highlighted and our ability to convert on that, we feel very comfortable with our ability to deliver on that greater than 11% margin in 2023.

And then on the other question you asked around M&A, I was actually speaking more to the acquisition side, but we do have an active portfolio management process. And I would say we're spending a lot of time thinking about that as we look ahead.

Because I think you should expect that, that will be a more active part of what we're looking at on a go-forward basis. But my comments really were focused on some M&A activities -- opportunities that we're looking at that could utilize cash flow that we're generating this year..

Next question comes from Dan Levy with Crédit Suisse..

First, I wanted to ask on Delphi. You've had the Delphi result. I believe the margin they just posted in the quarter was the best quarterly operating margin for Delphi since 2018.

Maybe you could just walk us through some of the moving pieces that drove the recovered margin in Delphi? Was it just restructuring paying off? Is it good mix? Any color would be helpful on the Delphi piece, which obviously came in much better not only versus what you were talking about in your guidance, but versus what we've seen in the recent years..

Yes. I mean I think the first thing you look at when you look at the Q4 performance, which was in the upper 9% margin range for that as a stand-alone business, I mean keep in mind, Q4 was a really strong revenue quarter, going back to the highest levels relative to maybe a couple of years ago.

So $1.1 billion in the quarter, on an annualized basis almost $4.5 billion, so that's a pretty strong level of revenue. And part of the upside that the business was seeing there came in some of the portions of the portfolio that have had historically stronger margins. So I think that's an important piece to keep in mind.

That said, I think the restructuring actions that the company had been taking pre-closing and that we're continuing on a post-closing basis will continue to support that margin profile. But remember, we're continuing to offset that headwind that's coming from that legacy diesel business.

And you see from my slides that in 2021, that's expected to be about $140 million revenue decline. And that comes with some outsized margin because it's a strong margin performing piece of the portfolio.

And that's where the restructuring actions that we're continuing to execute that legacy Project Pioneer are helping to mitigate the impact of those headwinds. But overall when you look at it, it was strong margin and getting some tailwind from some of the cost performance actions that the business has been executing over the last couple of years..

Okay. And then just another follow-up on Delphi. You've had now Delphi under your roof for a quarter. Maybe you could just give us an update, I guess similar always to the line of questions from some of the prior folks, an update on your restructuring programs. You have your own core restructuring program.

This is being one in parallel with Delphi's restructuring program, Pioneer. How long before we could see maybe incremental restructuring actions? Does that contemplate -- maybe you've talked about there's an ongoing portfolio process, but more on head count, footprint, et cetera.

I mean how long before, I guess, we start to really see, I guess, a steady-state BorgWarner with everything fully cleaned up?.

Well, I....

So what I would say is restructuring is part of what we do, and we always want to do that in a position of strength. We did restructuring, we are on track. Delphi did Pioneer, we are continuing that, we are on track. And on top of that, we have the synergies, and also we are on track..

And potential for additional actions? Or....

Yes, I think we're really focused on completing the actions that we're already in the midst on. The restructuring program that we announced about a year ago on the legacy BorgWarner side is going well. And we have more actions that we're executing on as we go through '21 and 22, so we're focused on executing that.

Project Pioneer still has some more work to do predominantly in 2021, and we're going to continue to execute that program through '21 and a little bit into '22. And then we have the cost synergies that we're executing on.

So we have a lot on our plate right now already that we're really focused on delivering on, and we would expect those to be completed over the next couple of years. And then we'll take stock of where we are and if there's anything else we need to do at that point..

Next question comes from Emmanuel Rosner with Deutsche Bank..

I was hoping to follow up a couple of questions, again on the backlog.

So maybe tackling it from a different angle, what I'm trying to understand is really what pieces are growing sort of like at what pace? And what pieces of the business are sort of either slowing down or fading? So if I take last year's backlog, which was on a BorgWarner stand-alone basis, I think for the half year 3-year period, it was 2.1 billion, which was about 700 million a year.

Now you're [indiscernible] you're talking still about 700 million a year or so, $2.8 billion over the 4 years. But obviously in the meantime, light vehicle production has gone worse in terms of the outlook, but you also integrated Delphi within it.

And so can you please give us a sense of in your backlog, how do you sort of shake out with a similar level of, I guess, revenue outgrowth? What are the puts and takes within that?.

I would say, Emmanuel, that the backlog is in line with what we discussed over the past quarter, leading to outgrowth to south of 500 basis points. I'm very, very happy with the fact that, as we discussed before, 45% of that backlog is on e-products. And the rest is all-wheel drive and turbos and a little bit of emissions.

But 45% pure e, except those products that go in high-voltage BEV in China, which is small within that 45%. This is a very, very good performance. I think it speaks volume to our ability to win one. And it speaks volume to our ability to deliver growth in this growing segment, leading to additional content per vehicle in this segment.

So I feel pretty good about where we are..

And just one thing to correct, Emmanuel, the $2.8 billion we display is a 3-year number, just 2022 to 2024..

Okay, yes. No, that's that makes sense. And then I guess one way you used to break it down as well the backlog was maybe is versus hybrid versus EVs, I guess across technologies.

So would you have a similar breakdown for your current backlog?.

So we don't -- again, 45% is in e, okay? And the rest is either in CE or in H, but 45% of the backlog are products that translate into BEV..

And then on a net basis if you're referring to how we've broken it out a little bit, electrification including hybrid, over 100% of that net backlog on a net basis is coming from hybrid and electric.

But we're really starting to focus more and more as we talk to you about the e-products, to make sure you have visibility on the e-products that are really truly applicable to the battery electric vehicles. And that's the point of this 45% of the backlog that we're really focused on.

But over 100% of the net backlog is effectively hybrid and electric vehicles..

That's right..

Okay. Great.

And then as a follow-up, the R&D needs towards electrification going to 5% of revenue, you view it as a sort of new steady state or multiyear state? Or is it sort of like an initial larger investment?.

Yes. We expect as we look ahead that our R&D is going to be at that level, 5%. Maybe even a little bit higher than that 5%, to the low 5s as we look out over the next couple of years, and still in line with our ability to deliver on our margin targets as we look ahead to 2023.

So I think you should think from a planning perspective, because of the momentum that we have and the wins that we're seeing in the marketplace in electrification, that we're going to continue to invest more aggressively, probably in that 5% to even upwards of 5.5% range over the coming years..

Next question comes from Noah Kaye with Oppenheimer..

I'm glad we got to touch a little bit already on cash flow. Because the free cash flow performance was very strong, and the guide is very strong compared to consensus. So can we talk a little bit about the CapEx component of that 4.5% of sales, I guess? Near the low end of the historical range after you conserved CapEx in 2020.

Can you give us a little bit of color on what drives sort of this relatively low CapEx level? Are there fewer product launches this year? When, if at all, would you see that reverting back towards sort of the 5% or 5.5% level?.

As you look at us over the last few years, I mean I know we've talked about being in that 5.5% range or even progressing toward 5%. I think you can see over the last few years, we've actually been more in that mid- to high 4% range.

And as we've really scrubbed our planning and looked at that on a go-forward basis, I think we're probably going to be in that 5%-ish range on a go-forward basis. This year a little bit lighter, but it's actually pretty comparable to the types of CapEx investment we've been investing over the last few years.

So I think for this year, you can see it's kind of in the 4.5%. Maybe it will trend up a little bit higher towards the upper end of that guidance range, we'll see. But I think as you think about planning ahead for the coming years, it's probably in that 5% ZIP code is the right way to think about us..

And then maybe a follow-up question on the M&A landscape and opportunity, really what you're looking for here. And I think the company has talked in the past, and particularly after announcing Delphi, about pretty unmatched capabilities around integration and a broad portfolio for powertrain electrification.

So at this point, as you look at M&A needs, would it be more about competencies or about scale? Can you help us understand what the priorities might be?.

So no, the -- Delphi, I'm very happy with Delphi. Delphi was done to gain scale in power electronics, electronic software predominantly. And now we can think about -- and the combination is on track. You heard me saying that the team is really strong.

Now it's time, with this new base with this new portfolio and technology breadth of -- breadth, it's time to accelerate. And as I mentioned, the strategy will be shared at Investor Day. We're not looking for -- we don't want to disturb the Delphi integration.

And we will focus into technologies, we will focus into technologies that allows us to stronger in all the elements that -- where electrons go in a battery electric vehicle be it PassCar or commercial vehicle. That's the -- that would be the clear target around technology.

And the Delphi integration is a key focus, and we're not going to disturb that..

Free cash flow....

And those two things, the two questions are linked to each other. Free cash flow is a strong enabler of us being able to do what I just said. And our focus on free cash flow since about 3, 4 years ago has been the right thing to do with that strategy in mind..

Next question comes from Ryan Brinkman with JPMorgan..

Regarding the announcement of the 800-volt electric motor for commercial vehicles, can you talk about the 4 different variants? Do they have different use cases? What kind of commercial vehicles will the motor be used in? And how are you thinking about the potential for other commercial vehicle OEMs to potentially use this motor? Are you able to provide an overview of the different products that you supply into or could supply into commercial vehicles to facilitate electrification? So there's this motor.

I think there's some thermal management.

But are your silicon carbide inverters or other products for the light vehicle industry also applicable for the commercial industry?.

All the products that we do for PassCar are available for commercial vehicle. The different variants are going to be used for different power demand and functional demand from our customers. It is a family of product that can be translated into other types of commercial vehicle demands. On top of those motors, we have motor controller.

You know that we are also into the commercial vehicle battery pack area. And so we are -- this market segment is really important for us. The electrification of those vehicles will also, we think, be profound, and we're ready..

Okay. And I see you have incorporated in your guidance global light and commercial vehicle production up 11% to 14% in '21 weighted for your geographies, which is seemingly more conservative at the midpoint versus IHS' mid-January expectation for plus 14% for light vehicles globally.

But at the same time, maybe a bit more optimistic than some supplier peers have assumed, given the semiconductor shortage issue, which I thought I heard you quantify at about 1 million units.

Are you able to tell us what your outlook is for global light vehicle production that rolls up into that 11% to 14% across light and commercial end markets weighted for your geographies? And I'd be interested to know too if you expect any direct exposure to the semiconductor issue, I don't know, in your power electronics or any of your other components.

Or if you're just looking at it for more of an indirect impact from lower customer production at this point..

Ryan, with respect to the specific market assumptions that we're using in the breakdown by geography even of light vehicle, commercial vehicle and in total, we actually included a slide in our backup. it's Slide 21 in the appendix materials to help you have that visibility.

So our global weighted light vehicle market range is 12.5% to 15.5% growth in 2021, which that's the portion for light vehicle. Commercial vehicle global weighted is 3.5% to 6.5%. That blend gets you to the 11% to 14%..

I see, super helpful.

And on the semiconductor issue, do you think it's just indirect or any direct exposure?.

So we have direct exposures since we are delivering a vast amount of electronics systems and subsystems. We've been jumping through hoops over the past 2, 3 months to keep everything going. So far, so good, I would say, from a direct exposure.

And overall, we are including, in the low end of our guide, an impact of slightly more than 1 million vehicle for the full year. That's the exposure that we see on the low end of the guide, being direct or indirect..

Next question comes from Luke Junk with Baird..

I wanted to ask first about post-Delphi customer conversations. So I assume based on the time line that you've put out, you've probably completed most of those meetings at this point. And Fred, just wondering if there's any additional color you can provide on the tone of those conversations versus your expectations going into the process.

You said that customer feedback is very positive, and yes, just wondering if you could expand on that..

Yes. It's very positive. I would -- so yes, we've covered more than 75% of all customers on the planet being PassCar and CV. I see 3 areas of synergies. First, when Delphi brings technology that we didn't have, for example silicon carbide, BorgWarner's booking.

When BorgWarner brings financial strength and customer intimacy, which is an example of one of the product that I alluded to in my prepared remarks, BorgWarner is booking. And the last combination that exists are product combination, a system combination. And obviously this will take a little bit more time, but BorgWarner will be booking..

Great, and then if I could ask another customer-related question, specifically regarding U.S. emission standards. So now that the Biden administration has been in place for a month, we're seeing sort of the lawmakers back away from their support for the Trump-era emissions rules.

And I'm just wondering, has that changed yet at least your conversations around turbochargers, GDI, et cetera, specific to the U.S.?.

We're not seeing any impact to our discussion to our discussion with our North American customers. And from a product portfolio perspective, from a technology perspective, we are ready to accelerate at the pace they would like to accelerate.

We're already with great technologies leading to very, very good efficiency gains in battery electric vehicles..

Next question comes from Joseph Spak with RBC Capital Markets..

One more maybe crack at the backlog. I think previously, you talked about 3% combustion outgrowth, 10% on hybrid, 17% on electric. What does that look like now under the new backlog? Recognizing there's a bunch of moving pieces, both with customer plans and hybrids, but also the integration of Delphi..

For today's meeting, we weren't going to go through that in detail. We wanted to give a profile that made sure you understood how we're tracking toward our midterm outgrowth performance. And we still expect to be in that mid-4.5% range, just as we talked about a year ago.

I think the big-picture items that we wanted to make sure you're aware of coming out of today are the fact that 45%-plus are in e-products, and we continue to have the greater than 100% of the backlog on a net basis in hybrid and electric.

But today we're not going to be breaking down anything further than that from a combustion, hybrid or electric perspective..

Okay. Maybe just as a follow-up, and recognizing we'll probably hear more about that later. Like one thing you did sort of update, right, was the addressable content. Because I think the last time you gave those numbers were pre-Delphi. So now looks like on electric, it's like 2.4k. And before it was I think just under two.

And on combustion, it's a little bit over 900, and it was 600 before. So a couple of hundred bucks higher on each. You also used to give like an average CPV content. And I think that assumed your participation rate of about 1/3 on electric.

Can you let us know if that has changed at all? Is that still roughly what you think you can get post-Delphi? Or have the numbers changed, especially with some of the inverter stuff you were talking about?.

Yes. I think back on the content per vehicle opportunity that we talked about on the earlier slide, we've actually put those numbers out here a couple of months ago. So they're consistent with what we've been sharing for the last couple of months, which contemplated basically combining the legacy BorgWarner and Delphi content opportunities.

When you look at the electric side, you can obviously see the number has increased quite a bit. Before, we did have inverters in there because we had capability inverters in inverters even prior to Delphi. But we didn't have it at scale and with the technological leadership position in light vehicle that Delphi has.

So I think the probability of us delivering on that content opportunity has increased. And then the dollar amounts actually increased because of some of the other power electronics capabilities, in particular that Delphi brings to the table.

And so as we talk about possibly peeling back the onion here or giving a little bit more data, I think you should be on the watch for Investor Day. And we'll give more color to how we expect the business to be evolving over the coming years..

Next question comes from Brian Johnson with Barclays..

Yes. Rather than doing some random housekeeping questions, just want to clarify on your strategy. I'm not going to ask you, but I'd love to hear within your backlog how much is e-motors versus inverters.

But you put out some interesting slides in December after our [indiscernible] discussion about what's in-sourced, what's outsourced in e-motors versus inverters. So in the e-motor world, you talked about 50% being in-sourced, 50% outsourced. Kind of a couple of questions.

Do you have any update on that based on what you're seeing in the market? And then second, with this CV win and obviously with Kevin's background in CV, is that where -- and given most, if not all, of CV motors are going to be outsourced, do you see more pivot to the commercial vehicle sector? And then kind of third, within that, Meritor and Dana talked a lot about integrating the motors into the axle set.

This looks like something you could put under the hood of a freight line or something and just drive through the traditional transmission. So just maybe technically how that product works would be helpful as well..

Brian, our view of in-sourcing versus outsourcing has not changed from what we presented in December. And our view that our family of motors can be applicable in both PassCar and CV has not changed either. And so we started booking some CV business a few years ago, and this one is certainly getting it to another dimension.

But we've always planned our product portfolio across PassCar and CV and learned from those two market segment to be at the forefront of technology and reliability..

And in terms of being in the axle versus away from the axle?.

For us, it doesn't really matter if the motor is away from the axle or in the axle. You will always need for very high-power density motor with a very smart controller attached to it.

What we're saying is that more and more customers not wanting to be in the middle of the motor on the motor controller, and I think those synergies are going to make our customers' life easier going forward as we are able to have a great motor and a great motor controller supplied -- developed and supplied together..

Next question comes from Adam Jonas with Morgan Stanley..

One question, one follow-up, first on asset write-downs. Auto companies have been announcing plans to aggressively decommission ICE tech, and some are planning out, right, to stop sales in the next 15 years.

So I'm wondering if you see scope for this to trigger some asset impairment or write-down of some of your long-lived IP and assets to reflect the curtailment of their useful lives? Are we at a point where you could run such tests past your auditors? Could we see potential write-downs in the next year or 2? And at the same time, could BorgWarner be compensated by OEMs for the curtailments, given the upfront R&D investments you made that may not -- all the advanced ICE tech that might not get the full engineering cycle behind it?.

Yes, I think as we look at it at the moment, we don't see any sort of accelerated asset write-down. I mean the bulk of the investment we make when it comes to Capex, for instance, is depreciated over the life of the programs. And so we're really supporting programs and amortizing on that basis.

And then just keep in mind, some of our core businesses are continuing to grow even in the ICE space as we see some movement towards hybrids, whether you think of turbos and VCT and EDR. But again, the basis of the way we depreciate assets is predominantly over the life of the programs that those assets are there to support.

And then when you think of footprint, remember, we are predominantly an assembly model business in terms of our manufacturing footprint. And so we actually can leverage using that footprint in different ways as we look ahead if we need to pivot..

light vehicle, CV, net backlog, plus aftermarket. I just want to confirm because it wasn't -- I think I know the answer, but just wasn't quite clear that there was no definitional or scope change from the previous way you described the backlog to now. And then I'm curious how much aftermarket growth contributes to the mid-4% range.

What would that be if it didn't have that extra part to the right of the ampersand?.

Yes. Good questions, Adam. I mean the -- in terms of the way that we're calculating the backlog, the one thing that's changed is the way we're measuring market.

Because commercial vehicle has become a much bigger part of our portfolio, especially with the Delphi acquisition, we're now using market assumptions for commercial vehicle in addition to light vehicle and then comparing our organic revenue growth against that weighted market. So that is one change that we have in the measurement.

The backlog then has always included aftermarket as from a dollar perspective in totality measured against those markets. When we measure the outgrowth, though, what we do is we're measuring the outgrowth, but we're excluding aftermarket as a measure of that outgrowth against the markets.

Because we're really measuring against the OE markets, and we're measuring the revenue that we're generating. So when you see that mid-4% range, the math actually doesn't include any tailwind from aftermarket in the mid-4% range, but the backlog is comprehensive..

We have time for one final question, and that question comes from David Kelley with Jefferies..

And maybe just a follow-up on the inverter discussion, I believe you had previously noted 4 billion or 4-plus billion addressable inverter market by 2025.

We were just curious as to how much of that, in your view, is likely to be tied directly to silicon carbide? And also curious to hear your thoughts on how the competitive landscape might shift as the inverter market appears to be transitioning to silicon carbide..

So we're leading the market with high-voltage and silicon carbide. And in our world, it's all about efficiency. And it's certainly a fact that high voltage and silicon carbide enables lower losses and higher efficiency. And we're laser-focused into enhancing this technology to the highest possible level.

And I am -- and I'm very happy with what we're seeing. The fact that we have vertically integrated power module, ASICS, software development is also an advantage that we have that the customer also values quite a bit..

Okay. Got it. And then maybe just one quick follow-up, I believe Delphi had established a partnership with Cree as the silicon supplier for 800-volt silicon carbide inverters. That was prior to your acquisition.

So I guess a, is that partnership still at play here? And also, are they the supplier for the 400-volt transition you referenced that should be a big part of some of the growth go forward?.

The relationship still exist. I will not comment about sourcing of the silicon carbide, but the partnership with Cree has not changed and is being nurtured..

Thank you. With that, I'd like to thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or ready. With that, Sharon, please close the call..

That does conclude the BorgWarner 2020 fourth quarter and full year results conference call. You may now disconnect..