博格華納 (BWA) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to this BorgWarner third quarter results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations and Communications, Ms Mary Brevard. Please go ahead.

Thank you very much, and thank all of you for joining us today. You should have copies of the release which was issued earlier today before the market opened. I hope this works well for you. This is new for us, this timing. We’ll continue to release before the market opens. A number of you told me you preferred that to releasing after the close. And the press releases are available on the internet, the SPR newswire (Company News Oncall), or on our own home page, if you haven’t seen it.

I also wanted to let you know that we will be presenters at the Cabelli conference on November 5th, where we will announce our new book of business for 2002 through 2005. In addition, we’ll be participating in the Robert W. Baird conference in Chicago on November 12th, the Merrill Lynch Automotive Ideas Summit and the JP Morgan Small Cap conference, both on November 22nd.

Before we begin, I also 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 here today.

Moving on to our results, joining us today are John Fiedler, our Chairman and CEO. He will be providing comments on the quarter and the outlook for next year. George Strickler, our Chief Financial Officer, will be discussing operating results. Also with us today is Tim Manganello, our Chief Operating Officer. With that, I’ll turn the call over to John.

Thank you, Mary. We had another great quarter. All of our groups performed well. Sales were up 22%, and we paid down debt. When we look at what is driving our record results, I’d like to point to two things. The first is the benefit of our global customer base. And the second is stronger volumes in new business than we anticipated. Obviously, these two are connected. Our growth is coming from customers like Honda, Hyundai, Volkswagen, Renault and PSA. And it is coming in volumes stronger than we anticipated, stronger than the $200mln in net new business that we predicted for this year. It is probably closer to $300mln, pulling some volume increases forward into 2002 from 2003.

In general, we have technology for the fastest-growing parts of the market, which grow a sales increase of greater than that in the global auto market. During the quarter, we announced our first engine management business with Hyundai. BorgWarner [MorrisTec] will supply complete timing systems for several applications of Hyundai's gasoline engines, with the total volume of timing systems across several platforms expected to exceed one million units.

In support of our growing business relationship with Hyundai, we have established [MorrisTec] Korea, near Seoul. Hyundai is a major success story for BorgWarner, as they are demonstrating that a good power train can also be a good value. In another real breakthrough for us, we received our first order to supply variable cam timing units to a major North American OEM. Our patented technology will be incorporated into a new family of V6 engines, scheduled for introduction in 2005. These cam-actuated systems will be used in small- to medium-sized passenger vehicles. The order represents a major step in the expansion of our growing engine management business.

I also want to update you on two other subjects of interest. First is the turbocharger issue with Honeywell. Let me remind you that this issue relates to one model and one customer. As we’ve announced since our last call with you, we have made an agreement with Honeywell that allows us to continue to ship the turbocharger in question through June of next year. In the meantime, we are working with our customer on design improvements that we expect will further distinguish our product from that of the competitors. We continue to defend our position in the courts, but are focused on a long-term commercial solution. The second subjects is our discussions with GM about their new venture gear operations in Monsey, Indiana. On this front, there is little to report. Regardless of the outcome, however, we continue to work with GM on winning new four-wheel-drive business.

Now let's look at next year. Unlike many of you, we are not pessimistic about next year. With out growth in Europe and new business among the Japanese and Korean automakers, we expect to achieve our growth target of 8% to 11% in sales, and 12% to 16% in earnings in 2003. Our pipeline of new business for 2003 through 2005 is expected to provide the platform for this growth.

I am also not overly concerned about the possibility that the North American vehicle production will be down, perhaps 5% next year. We take a broad view of the global market and expected it to be stable overall. Our message is that, with our global diversity and technology, we can continue to grow in this slow-growth industry. And on that positive note, I will pass this call over to George.

Thanks John. We had a very good third quarter, continuing our performance trend. For the quarter, we earned $31.9mln, or $1.18 per share on sales of $684mln. Earnings were up $13.5mln, or $0.48 per share for the same quarter in 2001, on a 22% sales increase. If we exclude the impact of goodwill amortization from the 2001 results, the income increased $6.9mln, or 28%.

We experienced solid market conditions, with North America up 11%, Europe up 2%, and Asia down 2% in light vehicle production. So, our growth was greater than the overall market. Our planned growth by geographic area and new applications and customers continues to drive our position in the growth segments of the market, and accounts for our better than market performance.

Our gross margin for the quarter was 18.7%, down from the 19.4% from the third quarter of 2001. The margin was negatively impacted by 1% due to recognition of $6.5mln of the overall $25mln agreement with Honeywell, regarding turbocharger technology. Without that charge, the gross margin would have been 19.6%, continuing the trend of gross margin increases over the prior year. The gain was not as strong as we’ve been experiencing in recent quarters, due to the ongoing mix change. As we noted in the second quarter, our mix continues to experience significant growth with our torque transfer business, which operates at lower margins, due to purchase content in their products.

Selling, general and administrative expenses were 10.7% of sales, versus 10.6% last year. Research and development spend was about equal year-over-year, at $29.6mln and $30mln respectively. The increase in SG&A is the result of higher healthcare and risk management costs, as well as the impact of lower earnings on our pension investments. I will touch briefly on this topic later.

Our period earnings are up $1.2mln, versus last year, NFK Warner continues to perform well. As a result of the above, earnings before interest and taxes for the third quarter were $54.6mln, an increase of $20.9mln over 2001. And after adjusting for goodwill amortization, the increase is $10.5mln, or 23.8%. The interest expense continued to decline with a $3mln decrease to $9.3mln, as we continue to make progress on the debt reduction front and it rebalanced our variable/fixed portfolio. Taxes are at 34%, versus 37.2% last year. This is due to the legal and financial structure to support our business growth, which we expect to continue to lower our effective tax rate in 2003.

There have been many comments that our results have improved with the strengthening of the euro and the yen. Our improved performance is a result of operations, not changes in currency rates. The rate impact was minimal for the quarter, in fact no earnings per share effect. Year-to-date, the impact was slightly negative.

Now, I’ll review how our segments did. All segments experienced double-digit sales growth compared to last year, ranging from 12.5% for Air Fluid Systems to 35.2% for Torque Transfer Systems. Overall, growth of [Eagle] was 24.6%, compared with the 2001 amount adjusted for goodwill amortization. Here, the story was a little more mixed. At Air Fluid Systems, income grew 8.21%. Cooling Systems experienced a 9.5% income growth, slightly impacted by plant consolidation and the ongoing weak truck market. A much more positive performance was realized by MorrisTec, our chain and turbocharger business. Income was up 16.7%, despite a $6.5mln charge in the quarter related to [on goal] settlement. [Without that charge], the increase would have been 38.5%, with a 25.5% sales increase. Market conditions have been positive for our chain business, especially transmission and four-all-wheel-drive products.

We continue to penetrate the engine business with planning system applications, and the passenger car turbocharger business in Europe is growing rapidly, with new applications coming on stream throughout 2002.

The Torque Transfer business almost tripled their income on the largest increase in sales of any group: 32.5%. Much of the growth is new applications, such GM, [Gia], Honda and Hyundai, but their existing applications, such as Ford, have also been strong. Transmission systems grew their income by 21.6% and improved their operating margins. Market conditions helped, but new applications, both in North American and overseas, were just as responsible.

The group also continued to identify cost savings opportunities to improve its operating margins. From a balance sheet perspective, we continue to improve our strength, with a focus on both working capital and fixed capital levels. At our current pace of improvement, our after-tax return on capital will reach 11% for the year, which compares favorably to the prior year’s 7.7%, adjusted for the goodwill implementation.

For the third quarter, we reduced debt by $6.7mln, despite the $25mln payment to Honeywell. For the nine months, we reduced debt by $76.1mln, while cash has increased by $13mln, for a net debt reduction of $89mln. Our debt to capital ratio improved to 40.2% as at September 30th, compared to 46.9% a year-end 2001, adjusted for the goodwill implementation. Our long-term target for debt to capital ratio is below 40%. Working capital trended as expected with sales levels. The third quarter sales of $684mln were 17% above the fourth quarter level of $583mln, and 4% below the second quarter of $712mln.

For the quarter, receivables and inventory, net of payable accruals, increased by $4mln, and for the first nine months, the increase was $66mln.

Capital spending for the third quarter was $28.1mln, versus $42.6mln for last year at this time. Year-to-date, our CAPEX is $83.4mln, compared to $93.2mln for the prior year.

And regarding our credit quality, our debt compared to EBITDA, on a trailing 12-month basis, is now at a robust ratio of 1.8 times, consistent with our BBB+ rating.

Now, before I talk about our expectations for the rest of 2002, I would like to highlight a few areas. First, on the reformatting of our income statement, BorgWarner historically was a conglomerate with many different businesses, and our former income statement reflected that. We believed it was important to reformat our income statement to give a more traditional definition of costs [with sold] and to allow more comparability to other companies in our peer group. We also believed that this would enable a more consistent and uniform basis to present EBITDA. We have seen in a number of different calculations that BorgWarner’s EBITDA from various analysts and wanted to bring consistency to the EBITDA calculation. This is important because EBITDA is one of the common metrics being used in valuation models. We also want to focus our discussions on the quality of our earnings metrics to our peer group, instead of how EBITDA should be calculated.

For 2002, we expect to achieve EBITDA of $400mln, and at recent trading levels, this would result in an enterprise value to EBITDA multiple of about 4.7. One of the other key metrics for valuation is price/earnings ratio. BorgWarner is trading at a 2002 ratio P/E ratio of about 80. And both of these valuation metrics represent historically [...] values for BorgWarner. Because of these facts, the company has begun repurchasing stock in the open market under the existing authorization for 1.2mln shares, which was first disclosed on May 11, 2000.

Second, with respect to pensions in the current stock market performance, we have been presenting that our pension plan would have a negative effect on our 2002 income, due to lower pension income from our US plans. This year, 2002 versus 2001, our US plan had a reduction of income of $4mln. The foreign pension plans are smaller in our final estimate for the year, but we had anticipated a small negative impact, year-over-year. This impact is included in our $5.50 guidance for 2002. In 2003, we anticipate that we will see an additional reduction of pre-tax income somewhere in the range of $4mln to $8mln. Our net US under-funded position is anticipated to be around $30mln to $40mln, and not the huge overhand that some companies face. We have also been impacted by higher retiree health costs. Year-over-year, the total expense increase was slightly over $10mln. All of this is included in SG&A, and a substantial proportion is not allocated to our reported segments. These expenses are for retirees at businesses BorgWarner has exited. For next year, we anticipate these costs increasing by approximately 10%.

As to our expectations for the remainder of 2002, most have not changed from the second quarter. Our build assumption is unchanged. For North America, we are forecasting light vehicle build in the 16mln range. We expect the fourth quarter business conditions to remain similar to third quarter, assuming no unusual worldwide disruption. Interest expense will be about $38mln, cash flow will continue strong, and we still expect a $100mln reduction in net debt. Capital spending will be in the $130mln range. R&D spending will be between 4.3% and 4.5% of sales, and we were at 4.3% through September. Overall, SG&A will be between 10.5% and 10.7%, a slight reduction from our nine-month actuals. Taxes will be 34% and decline for next year. With the Honeywell agreement, we will recognize $15mln this year, and $10mln next year.

Overall, our third quarter and nine-month performances were very strong. We expect the full year to meet our guidance of $5.50 per share. And with that, I will turn the call back to Mary.

Thank you very much, George. With that, I’ll ask Chris to provide the instructions for the question and answer part of this call. We would appreciate your keeping your questions brief and focused so that we can get to all of them. Chris.

Thank you, Ms Prevard. Today’s question and answer session will be conducted electronically. At this time, if you would like to ask a question, please press the ‘*’ key, followed by the digit ‘1’ on your touchtone telephone. If you’re using a speaker phone for today’s conference, please make sure to un-mute your telephone in order for your signal to reach our equipment. Once again, if you would like to ask a question, please press ‘* 1’. We’ll pause for just a moment to give everyone a chance to signal. We’ll go first to Rod Lache with Deutsche Bank.

Good morning, everybody.

Good morning, Rod.

I’ve got a few questions. First of all, the top line growth looks great. I was hoping you could drill down a little bit on the margins, particularly in the Cooling, the Air Fluid and the Transmission businesses. They didn’t show the kind of margin conversion that you’ve historically ... Are there any reasons for that? Were there any anomalies in the quarter?

Well, I think, you know specifically asked about three segments, Rod. Well, first of all, they did highlight, we had the Honeywell charge that cost us about 1 percentage point. For the year, that will count for about 0.5%. Our trend has been fairly consistent over the last eight quarters and continues to improve. The three specific divisions you asked ... actually Transmission continues to do very well. We’re seeing a lot of improvement in Asia and Europe. The market’s been somewhat a little softer in North America. On the Cooling side, it’s really more a reflection of the heavy truck market, and really their volume that they’ve had over the last two years has been down. And quite honestly, our Fluids Systems just had a tough quarter I the third quarter, but we see that improving in the fourth quarter and the first quarter of next year.

What we see for the whole year, I think we said that our gross margins would improve by 100 basis points. We’re on track with that, even absorbing the Honeywell charge, which is going to account for about 0.5% for the year. So, we would have been up about 150 basis points. We will be up 100 basis points for the year, year-over-year 2002 to 2001.

For example, Cooling and Air Fluid margins were down, with revenue increases. Was there anything behind those numbers? Because obviously the charge was in the [MorrisTec] division and shouldn’t have affected any of the other groups. Right?

Well, I think what we have to keep in mind, Rod, it’s still the third quarter. We had plants up, plants down, you know. The third quarter is always the poorest quarter, and it’s always the most variable quarter too, because it depends a lot on how customer was. Without getting into a lot of detail on the segment, I think we did overall very well. We’re all very happy with it. We don’t see anything special that needs to be called out.

Okay, two more things. One is, you mentioned that you’re pulling ahead some of the new business into this year. Can you give us an update on what kind of incremental new business you see coming online next year? And secondly, can you just comment on what your build assumptions are for next year for North America?

Rod, we look at the new business that we probably had some volumes pulled forward into this year. It will lower our base, as we’re looking at new business over the next three-year period, and I’m working on that right now. What it does is lower our base a bit for next year, but we still expect an overall increase in new business over the three-year period. It’s just come on stronger than we expected, so some of our volume assumptions for next year will change on some of those specific platforms. It will not have a big impact overall, and we’re hoping to give you more detail when we release the new business, how it flows by quarter, and what is more volume related to new business, and what is new programs. So, we’ll talk about that on November 5th.

Our build assumptions for next are pretty flat to this year, what, 16, maybe 16.3.

Yeah, we’re seeing the range of 16 to 16.3 for 2003 for North America.

I think, if I could just add to that, first of all, I’m very happy the business came sooner, rather than later. We’re not complaining about it. And the business now, because it continues next year, even though Mary will call it ‘base business’ next year. I’m very happy to have it.

The other thing about the builds is, as I explained, because of our particular global, you know, business, I think what you’ve got to look at, no matter how far you think the US build is going down, that’s only slightly more than half of our earnings. So, you want to divide that in half, and then you also want to take the fact that Mary’s new business ... and when I get done doing all that, as I said in my speech, I’m really quite confident about the business next year, and not that concerned about the North American build or sales.

Okay, thanks.

We’ll go next to Laura Thoreau with Robert W Baird.

Good morning.

Hello, Laura.

I have a couple of quick questions for you. Did you ... I may have missed this ... Did you give a year-to-year change in revenue by region?

We didn’t, but we continue to see our growth really expanding in Europe. And I think, in fact, our mix of business has changed. We were about 65% North America; we’re now about 60%. So, We’ve seen continued growth in Europe during the first nine months of this year.

Okay. A question for you on the Hyundai business, the timing chain systems. What exactly is the scale of this program? Is that just chain? Is that including [break in audio] systems? And then also, what the dollar content might be there?

This is Tim Mahnganello. It includes the whole overhead cam timing drive system. I cannot go into the scale of the program, but because Hyundai is affiliated with Mitsubishi and Chrysler, it has a significant impact on future business, in terms of possible linkage in terms of other Mitsubishi or Chrysler programs, in addition to any buy-in that may materialize, or will materialize, I should say, with Hyundai.

I think in our announcement ...

It’s a timing drive system that would kind of be in the $40 to $50 per engine timing drive.

Laura, I think in the release, we said a million units for Hyundai ...

Okay, just another quick question. On the four-wheel-drive business with Ford, I think we saw a release out that the four-wheel-drive program, on the [on the ABR] is coming from continental. I was wondering how your other four-wheel-drive business at Ford is, for example, on the Explorer.

Well, within the Ford and transfer case side of the business, we continue to do well. It’s continuing to stay strong. If it’s a transfer case, if it’s a vehicle being launched at Ford right now, with four-wheel-drive, it will have our transfer case on it, whether it’s the Aviator or the new Expedition family. And, you know, we continue to see fairly robust and strong and stable programs with Ford, on the truck side of the business. And I would say that most of our programs, a lot of our sales campaign we have at the company, at the company-level, is tied to either duo-overhead cam engines or overhead cam engines, which are heavy content on trucks. Four-wheel-drive chains, transfer cases, whether it’s a BorgWarner transfer case or another manufacturer’s transfer case, and the four-wheel-drive systems themselves are tied to trucks. So, this will continue to be a stable part of Ford.

Great. On your SG&A, it’s gone from around 11% ... I’m sorry, from around 8% to around 11%. Where do you see that going forward? Is that 11% or 10.5%.

We see that staying constant, or actually flattening out as our sales growth continues to go up. You know, we’ve experienced increases, I mentioned, between pension and the medical costs, that we can hold those costs in relation to our sales growth. So, as a percent, it will stay the same as now.

Okay, great. And just finally here, on the variable cam timing program, is this an enhancement of the timing chain system, or is this a whole new system?

I would say that it is supplemental technology to a timing drive system. You can be the supplier of the timing drive and not be the variable cam supplier, or you could be the variable cam supplier and not be the timing drive supplier. But in the case of BorgWarner, it ties together very well for us because it’s all related to cam timing. And with our new technology in variable cal timing, we expect to be able to leverage our technical capabilities and build a complete system that includes both.

Great. And do you have a content aspect on that?

The ... I think per cam shaft, it’s in the $40 to $50 range per cam shaft. So, some engines have one cam shaft, some engines have two, some engines have four.

Okay. Great. Thank you.

We’ll go next to John Rogers with Wachovia Securities.

Yes. Good morning. I have just a couple of quick questions. In terms of ... you’re breaking out the tooling amortization now and, you know, I’ve noticed that it’s not really fluctuating with sales. I mean, do you expect that to continue in the $6.5mln to $7mln range per quarter? Or can you just give a little color on what drives that number?

Well, I think part of the drive is all the new platforms in the business we’ve had. So, we have seen some uptake over the last couple years. But it should pretty much flatten out and stay in that range that you’re seeing right now. You know, I think the biggest reason we made the change is that the industry’s changed a lot over the last three to five years. It’s become a major item for us, in terms of capital, and what the auto companies have really absorbed to reimburse us. So, it was a major item included in our costs to goods sold. So, we thought it was important to break it out in order to get more consistency of truly what tooling and tooling amortization represented for BorgWarner.

Okay. I don’t know if you gave this already, but what is your volume expectation for Europe next year. Is it flat with this year? Or are you seeing some better stability there?

Our volume will be up substantially, but that’s because of the increasing popularity of the fuel-efficient engines, primarily the diesel engine. But the overall build rate will be flat to perhaps slightly up, especially if you include Eastern Europe, it will be slightly up. But we’ll be double-digit growth plus. And it is our ... still it’ll continue to be next year what George said it was this year, which is our fastest-growing geography. However, Asia will also be stronger next year, we feel, for us, and again because of fuel-efficient engines and because of vehicle stability.

Okay. Great. That’s all I had. Thank you.

We’ll go next to Ronald Tadross with Banc of America Securities.

Hi. This is Jerome Nathan here. I was just wondering, can you give us some more color on the turbocharger, the Honeywell settlement issue? What’s the timeline here? When do you have to get the new design built, and how is that going?

Well, the agreement, as we’ve announced, is through to June. So, obviously, we have until that time to be there with the new product. And, as I said, we already think we differentiate ourselves from their product. However, the judge doesn’t agree with us. So, this new product will further differentiate us from them. But we don’t have to re-invent the turbocharger.

So, what is the December date? December 12th?

That’s the date when we’ll be in court. But we’re ... I’m talking about the commercial day when we have to change. Obviously, if we were to win in December, it would all be over. I mean, we would have won, but I’m giving you kind of the most conservative date which says we don’t win in December and then have to be out of the product by June.

Jerome, the December hearing is the main patent hearing. The outcome, as John said, will really have no impact on our business because we have this agreement to product the product through June of 2003. And I think the date is December 10th.

Okay. Thanks.

We’ll go next to Rob Hinchcliffe with UBS Warburg.

Good morning, everybody. oH

Good morning, Rob.

A couple of questions. [With all your new businesses and transport] with different customers, could you give us a breakdown, your customer breakdown in that unit now?

We’re ...

But, right now, there’s a significant amount of businesses attached to General Motors that is either launching right now, like the Hummer, or is launching as the full-size Ford utilities. I think it grows to ... I can’t remember the exact number of dollars associated with this year, but [...] units could be in, at least this year, could be in the 100,000 range. There’s a significant amount of growth on the new pilot for the ITM2 technology. It’s additional volume, over and above the accurate MDX. When that matures, that will be about, at leat 125,000 units of additional volume. The [Kea] transfer case that we are manufacturing in [Margom], Wales, and shipping to Korea, has the potential of, I think we’re shipping now at a run-rate of about 80,000 to 85,0000 units a year. And we just launched the new Hyuandai Sante Fe with a ITM1 for front-wheel-drive/all-wheel-drive cross-over vehicle. I don’t remember the exact run rate. I’ll give you ... I think it’s a conservative number that is probably around 75,000 units, probably more like 100,000 units per year. And, what else?

And I think that we probably, that’s something we should look at, in terms of what the percentage of Ford business is, and get back to people on that.

Okay. Maybe you don’t know the answer, or you’re not sure on this one too, but how big can GM get when they’re all up and going with them? Units or?

It’s John Fiedler. Let me answer that one. I think the only, it depends a lot on what happens with New Venture here. We’ve had several announcements ... There was an announcement earlier this year: they were going to break that up. That would make available a million units, somewhat, but it hasn’t happened yet. And, therefore, I think we’d just be guessing. All we really know, all we really know at this point is that, as Tim said to you, what business we actually have. We have the Hummer business and the full-size SUV business. And that could mature ...

The business that’s already booked to mature to plus or minus 300,000 units. But beyond that, the real potential happens, depends on what happens with New Venture here. We just don’t know.

Yeah. Too early to tell. Okay. On debt to capital, you guys, you’re right at just about 40% now. How far below do you want to get? Or what do you do since you’re so close? What do you see doing with your cash flow going forward?

Well, Rob, we have [sort of back stock], but our debt to cap goal is really 36% to 40%, so we have a ways to really stabilize that. Quite frankly, we’re looking for an upgrade in our credit rating too. So, that’s the goal we have, at least in the short term over the next twelve months.

Okay. And then, do you have a number for new business in the quarter?

Well, Rob, rather than explaining it that way, I think what we ought to do is, we could talk about our customers. You know, we’re up $261mln to nine months, we were up $124mln in the quarter. But I think what’ interesting is the big three of the quarter only represented about $24mln of that increase, so it’s about 20% or 19% of that total. The rest of it really came from Volkswagen, which was about 14% of the growth, Renault was about 6%, Honda was 13%, Gea was 13%, PSA was 6%, [A&F] was 11%. So, you’re really starting to see the impact of our customer diversification globally. That was the third quarter, and we see the same thing for the nine months. It’s really built into all the areas, but once it’s spread across those six key customers, and even in the nine months, the big three only represented about 29% of our growth. So, we have really started to see the diversification of customer and geographic presence.

And, Rob, next year, we will, we have started to split up the new business by quarter. So, we’ll be able to provide a little more color on that going into next year.

Okay. Great. Thank you, guys.

We’ll go next to Steve Girsky with Morgan Stanley.

Good morning, everybody. Hi. It’s Jonathan Steinmetz for Steve.

Hi, Jonathan.

A few quick questions. On the Torque Transfer side, if you had to isolate the single biggest factor for growth, was it GM, or what it Honda?

I think it’d be a combination of Honda, coupled with Kea or Hyundai (they’re the same company), coupled with General Motors. They’re all three right in there real strong.

So, essentially, new customers.

Okay. Next question, ...

That is non-Ford business. That is where are growth is going.

I understand. On the Cooling Systems side, are you doing anything operationally, sort of, in anticipation of a fall-off in demand there in the first quarter of next year, or perhaps the fourth quarter of this year?

Well, I think we’ve already seen that. Actually, one of the things about our cooling system: in the United States here, we only have one class-A customer, and that’s Mac. So, we’re not as exposed as some of our competition is. We do have a lot of class-A customers in Europe, but as you know, they were not a signature to this agreement here. So, that business isn’t falling off. But, even having said that, there has been an anticipation of lower production, and we have had a plant cut-back, and they’ve got themselves, and they’ve got their labor and their raw materials in line for a cut-back.

Great. And finally, the ...

Just to finish on that, you’re only talking about 4% of our overall business. So, it’s not like this is going to be a big deal. But to some people in this country, as you know, it will be.

Sure. On the share buy-back, can you give any update in terms of, since you sort of last provided an update?

We had about 900,000 shares available under the 1.2mln authorization. Do we have an update on ...? We expect to have purchased about 100,000 shares this month.

Okay. And those have been purchased, or you say you expect to?

No. We’ve been in the market for three weeks now. So, we’re approaching that number now.

Great. Thank you very much.

To go in on the down days, though, when everybody else is [up]. Ah, I’m kidding.

Thank you.

We’ll go next to Chris Sarratso with Credit Suisse First Boston.

Good morning, everyone.

Good morning.

A couple of quick questions. Maybe, I think some folks are trying to get a handle on the same thing, which is, maybe you can frame your year-over-year revenue growth, relative between North America, Europe and Asia. Top line grew north of 20%, was North America up 10%, and Europe up 30%? Can you sort of ball park that for me?

Well, I guess I could give it to you this way, Chris. Is that, through nine months 2002, our North America business is about 62%, or 61.5%; last year it was 64%. Europe was about 24% this year; last year it was 20%. And Asia was about flat at 15%. So, what you’re seeing is the growth in Europe and North America coming down about 3 percentage points in total. So, it fits into sort of what we’ve been talking about with our customer base, and it’s the same trend in our geographic side.

Okay. Are we starting to see some launch costs for all of the new business that’s coming on next year? Is that partially why margin might have been a little bit weaker than would have been expected, given the robust top line?

No, actually, launch costs are part of any auto part business. We’re not going to make excuses, like everybody else is, about launch costs. That’s just what happens to you when you start new businesses. We expect it, and we haven’t had anything out of the ordinary. That doesn’t mean we don’t have costs; it just means we expect it.

Okay. And then one sort of housekeeping ... George, can you tell us how much of the total D&A was in cost of goods, and how much was in SG&A?

Very little in really the ... 86/14. There you go, 86 is your cost side, and 14 on the administrative side.

Okay. Thank you.

You’re welcome.

We’ll go next to John Venush with JP Morgan.

Good morning.

Hi, John.

Good. Just got a couple quick questions. I’m hoping you can go into [MorrisTec] a little bit. Obviously, some strong revenue growth there, and saw some margin improvements. Can you just discuss where this strength lied, relative between the turbocharger business and the engine chain business there?

It’s a single business segment, so we don’t record it separately. I think we said in our comments, both businesses were very strong. The turbocharger business in Europe, with the more fuel-efficient, primarily diesel engines, and the other side of the business, not only in engine, but also in four-wheel-drive, which as Tim said has continued to grow for us, all over the world. Every one of those four-wheel-drive new business people he talked to you about have got the Morris chain in their transfer case. So, I’d say both are very strong. There’s not much to differentiate them.

Okay. So, basically, the growth stood between, relatively evenly between the two businesses there?

No. I think you have to say stronger turbocharger because of the market growth in turbochargers. But we’re going to get, I mean, you know, okay.

Okay. Great. Thanks. Also, when you’re looking at the ... Do you view the Ford and GM six-speed transmission venture as an opportunity or as a challenge?

We think it’s an opportunity. We supply important transmission shift components to both of them. And if they go from four- to six-speed, that’s two more shifting clutches. And we love it. Every time ... George mentioned earlier our increased business with [Zeta]. That’s because [Zeta] is one of the leaders in the world right now with six-speed clutches, so they obviously a lot more of our products in them. So, it’s a great opportunity for us.

Okay. And when do you see that business kind of ramping up? You know, is it going to be in your backlog in 2005, or is it beyond that?

I think they’re still in the process of working that out. It’s not definitive enough to be in the backlog. And I think that they’ve announced that it’s out a ways.

Yeah, okay. One last housekeeping question, ‘other current assets’ rose up substantially on your balance sheet. Can you kind of go through why that increase was there and what’s in that account?

Well, that was our, I mean, if you get into accounting technicalities, our Honeywell pre-payment that we made in the third quarter.

Okay. Okay. Great. Thank you very much.

We’ll go next to Brett Hoselton with MdDonald Investments.

Good morning.

Hi, Brett.

It’s the first time for me too, saying good morning to you guys in a conference call. A couple of quick questions, just a clarification. First of all, pensions. George, did I understand you correctly to suggest that your income is going to be down about $40mln in 2003, versus ...

No. That was our under-funded pension liability. Pension income is only going to be down $4mln to $8mln, I said.

$4mln to $8mln, okay. Then, on healthcare costs, I think you said it was going to be up about 10%, versus 2002. Did you give a base for 2002 for healthcare costs?

No. We did not. But we said that it’s running at an increased cost of about 12% this year. But we’ve been putting some changes in already, and we’ve seen a significant improvement, especially on the drug side, in the second quarter. We’re really monitoring that to see if it continues to improve in the third quarter. But we’re working hard to try to control that expense in this year and next year.

Well, I guess, as you look at next year, and think about the dollar impact, incrementally, can you give us a sense of what that might be? Are we talking $1mln? Are we talking $10mln?

It’d be about the same range that we mentioned. It was about $10mln this year.

Debt. Do you roughly know what your variable versus fixed split is at this point in time?

It’s about 60%/40%.

And then, finally, and just kind of circling back, your comment, John, about the organic growth kind of pulling a little bit forward, and if I take the $200mln to $300mln move this year, suggests that you’re pulling toward maybe about $100mln. Next year, you’re looking at $300mln incrementally. Obviously, it’d be a little bit less than that because of what you’re pulling forward into 2002. But is it ...? $100mln sounds like it’s more than we should be adjusting for, at this point in time. In other words, the 2003 number probably shouldn’t be $300mln going to $200mln. It’s probably going to be a smaller ...

If you remember, Brett, we’d given ranges for the 2003 and 2004 year, and that just will factor into that range. And I think we can provide some more color on the [fisc] when we release it. We’re still working. But, you know, the range next year, I think we said $350mln to $400mln or so. So, there’s always some movement in how the new business flows out from one year to the next, and our expectations.

Let me see if I can help a little bit on that one. This goes to an earlier question about [Morris] and about turbochargers. A lot of this is being pulled forward, isn’t through turbochargers. That’s why I’m reluctant to say that it’s ... I mean, it’s earlier growth, and I love it. We love having the business. But once you convert an engine, you can’t do it again. So, what’s happened is, people in Europe are, frankly, they’re not buying gasoline engines. If you go to an auto dealer in Europe, you’ll find his inventory is all gasoline engines. He doesn’t have any diesels. And so they’re just crashing these programs to get the diesels there, and it’s pulled a lot of stuff forward, probably six months to eight months earlier than we thought it could, frankly than we thought it could possibly happen.

But that market’s also growing a little faster than we expected. So, we need to work out those ...

Okay. Great. Thank you very much.

But, Brett, one thing it doesn’t mean ... I think we did say that our top line growth will continue to be in the range of 8% to 11% next year. It will come off the base that we have for 2002.

Yeah, that does give us a point to measure from. Great. Thank you very much.

We’ll go next to Darren Kimball with Lehman Brothers.

Oh, hi. Thanks. Did you say what your expectations for NSK Warner are into 2003? The equity and affiliates line?

We didn’t talk about it, but we, NSK Warner has done well over the last two years. We continue to see that running about the same level as this year for next year.

You think flat?

Yeah, I think it’ll be about flat with where we’re at this year.

Okay. Shouldn’t some of the stuff that’s going on on the transmission side, isn’t it accruing to them? It’s mostly BorgWarner consolidated growth?

Well, most of the growth coming outside of Japan is really coming through our other operations, like Korea. And that continues to grow. So, and that, we do have a minority ownership there, but it’s majority-owned by BorgWarner. So, we’ll continue to see growth outside of Japan with our other investments.

If what’s you’re saying is Toyota growing rapidly in the United States, and is that going on the BorgWarner line, instead of the NSK Warner line, the answer is ‘yes’. That doesn’t even ... People were talking earlier about geography. North America would really not look good if you didn’t include our business, our new business with Toyota and their transmission, with Nissan and with Honda. That, we’re counting all that as North American business, you know. So, it’s a little bit different than talking about traditionally North American base companies. That’s a different number.

Okay. I mean, I hate to ask a question on the subject, but I have to admit, I’m still pretty confused about this stuff. If, in December, you win, do you get the $25mln back? Or is that money that’s gone at this point?

Our lawyers say that we don’t get it back. But trust me: I’ll be there. No, I’m kidding. We signed an agreement that says we don’t get it back in exchange for this license. However, what it would do, it would vindicate us and say that what we said was true, that we never did violate anybody’s patents. But even if it doesn’t happen that way, it won’t be a set-back because our commercial program is aimed at next June and, as I said in my remarks, a commercial solution to this problem.

So, you seem very confident that your next-generation product will not, you know, result in a patent infringement. But, to the extent that Honeywell presses this issue, and who know’s what kind of crazy decision comes out of the German courts, do you have a backup plan in the case that your post-June 2003 product, you know, winds up in an injunction kind of situation?

Well, you know, we have a very firm belief in the patent system worldwide, because we have been recipient of it for a lot of years. We’ve been practitioners, we’ve ... A lot of our products are patented. This one caught us by surprise. We still don’t think that it was fair, but on the other hand, we know the system well. We know how to engineer, both to get patents and avoid patents. And you just have to believe that this company that’s been doing it for all these years, we’ll do it once more, one more time.

Right. Okay. I appreciate that. Thanks.

We’ll go next to Bill Veratos with York Capital.

Good morning. Terrific results. I was curious, everything you’ve been saying, and given the strength of both your results and your outlook, I assume that GM and Ford, given their problems, have become an increasingly smaller part of your business. I was curious if you give numbers as to what percentage of your business they are? And do you expect that any pricing pressure they try to pass on to you will be largely outweighed by other global new business wins? Just general perspective on their troubles and how they may affect you.

We do provide percentages in our customer diversity chart. Ford is about 26% of our revenue last year. That’s probably going down to about 20% by 2005. GM was, I think, at about 12%. They are actually going up to 17% with some of this new business. But overall, the big three, as a percent of the total, will probably reflect about their market share globally. Our goal really is that we have customers across the world, and our business with them reflects global market share, of their business around the world.

The question on pricing is, our pricing averages about 1.2% in actual [give back] during the year. It’s something we’ve been dealing with in this industry a long time, probably no better or worse. It varies from customer to customer. But we have decided that a global diversity is the way to grow, especially as some of market dynamics change.

No. The only thing I’d add on the price pressure thing is what Mary said. We’ve been facing this for a long time. It gets a lot of headlines, but it’s always the same. Nobody buys from somebody who doesn’t offer him the best value. The best value can be the lowest price; it can also be a unique product that he has to have, and can’t get anywhere else. But that’s who they always buy from. They have for many years. Sometimes it gets headlines; sometimes it doesn’t. But trust me, it never changes when we’re negotiating with them.

And the benefit of that is we’ve been able to keep cars very affordable for people. That’s one of the reason we think auto sales have held up, even in a weak economy, is that say, are better value today than they were 10 years ago. And that’s important for all of us in this industry, to keep cars being a good a value, and to keep people buying them.

Great. Thanks very much.

This concludes today’s question and answer session. At this time, I’d like to turn the conference back over to Ms Prevard for any additional or closing comments.

Thank you all for participating. This call will be replayed from today through October 25th. The call in number is 719 457 0820, confirmation code 412427. You can also listen to the web recast at PRNewire, through our investor relations page on our internet site. If you have any follow-up calls, you can direct them to me. With that, we’ll end this call. Thanks, everyone.

This concludes today’s conference call. Thank you for your participation. You may disconnect at this time.