博格華納 (BWA) 2002 Q4 法說會逐字稿

Please stand-by, we are about to begin. Good day and welcome to this BorgWarner third quarter results conference call. Today's call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to the Director of Investor Relations and Communications, Miss Mary Brevard. Please go ahead.

Thank you very much, and thank all of you for joining us today. We issued our release before the market opened today, and I wanted to advice you all that we have posted notes that should help you follow the financial discussion on our investor information page on our website at www.bwauto.com. So, if you are on your computer, you might want to pull those up, or if you are listening to the replay or have questions afterwards there is a bullet-point that will help you follow George's discussion. We were not able to e-mail these to you obviously because of FD concerns, and we wanted to make them available to everyone. We hope it's a new feature of our call and would appreciate any feedback to help us improve it in the future. Also, wanted to let you know that we will be at a couple upcoming conferences, we will be attending the Prudential Conferences on February 26, and our presenters at the Morgan Stanley auto concerts are held for 14. Before I 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 we discuss today. Moving on to our results, joining us are John Fiedler, our Chairman and CEO; he will be providing you his comments on the year, George Strickler our Chief Financial Officer will discuss operating results, also joining us today is our COO Tim Manganello. With that, I will turn the call over to John.

Thank you Mary. It was a great year for BorgWarner. We delivered record sales of almost two and three quarters $1b, operating earnings of $5.58 per share exceeded our expectations. Our results were bolstered by stronger than expected business volume and demand for key technologies for more efficient engines. With our technology targeted the fastest growing parts of the market. We again delivered growth at significantly outpaced worldwide car and truck production. Our sales were up 16%, while industry production was up only 2%. We also continued to strengthen our financial position, improving margins, reducing debt, and generating strong cash flow. We clearly demonstrated the viability of our technology driven growth strategy by securing anticipated new business of $1.2b over the next three years. This pipeline have expected new programs, benefits both our engine and drive line groups, and puts us in a strong position, even if auto production softer during 2003 as expected. Our guidance for 2003 earnings per share is in the range of $6.20 to $6.35. We expect to deliver continued growth in 2003 from new business and from increased penetration of the faster growing parts of the auto market. Strong demand is expected in Europe for more fuel-efficient engine and transmission systems, and in North America for computer controlled four-wheel drive and all wheel drive systems that enhance vehicle stability.

Our growth will come from customers like GM, Hondo, Hyundai, [Inaudible]. Demand for engine products, turbo chargers, engine timing systems and emission products is strong among Japanese, Korean, and European automakers. On the driveline side, the Hyundai Santa Fe with the first application of Interactive Torque Management I, our Intelligent All Wheel Drive System is extremely popular and gaining in volume. The Honda Pilot and Acura MDX with a very sophisticated ITM 2 continued to be a greet success story and while GM and Daimler Chrysler have announced the return of new venture gear plants back to their respective parents, we continued to work with GM on new four-wheel drive business. We are very excited about the launch this year of our new DualTronic transmission technology on two vehicles, the Volkswagen Golf and the Audi TT. This project has been under development since 1997 and I want to commend the entire BorgWarner team that has brought this technology to commercialization.

This project is an example of the benefits we expect with the organization of our businesses into engine and driveline groups beginning this year. By leveraging our expertise in these areas, we believe, we can continue to deliver above-industry average growth and profitability. Before I turn this over to George, I want to give you some thoughts after representing BorgWarner at the world economic forum in Davos, Switzerland last week. During the forum, the automotive governors' conference was held with CEOs from most of the important automobile companies worldwide and from many of the top automotives' suppliers. No surprises. Worldwide auto production for 2003 is predicted to be flat. Growth in Asia is expected to be offset by a slightly softer US market. But of special interest to me was workshop session on sustainable mobility through 2030. During that session a number of speakers emphasized fuel economy, machine control, and safety as the driving forces in that time period. Our new engine and driveline products are at the forefront in making this sustainable mobility happen. In a difficult global economic situation, I just couldn't feel any better about BorgWarner and on that note I would pass this call over to George. George.

Thanks John and good morning. This past year was a very good one for BorgWarner. We achieved record results for both sales and income, reporting in taxes and changed in accounting principle. The results were achieved in a market environment that was not nearly robust. While vehicle production in North America was up 6% for the year 2002 but only 1% in the fourth quarter. Asia was up 4% for the year and Europe was actually down 2% for the year and up 1% for the quarter. BorgWarner on the other hand experienced a 16.1% increase in sales for 2002. Income before the impact of the change in accounting principle for goodwill was up 34%. For the fourth quarter, sales increased by 20.2% and income by 46.2%. In 2002 and 2001, our earnings from a US GAAP perspective were affected by change in accounting. There is a new standard for goodwill accounting and buying non-recurring charge. The comparisons I guess may aid in the rest of my discussions. We will focus on changes before the effects of these matters. Our press release contains a table comparing all elements of income for the fourth quarter and full year 2002 versus 2001.

In reviewing the factors impacting earnings, top line sales were up 16.1% and our gross margin for 2002 increased from 19.6% to 20.3%. We benefited from the operating leverage on the incremental sales as well as [Inaudible] economics, and selling price reductions by cost reduction and productivity gain. Selling and administrative cost were 11.1% of sales, up slightly from the 10.6% of last year. Major factors causing these costs to be up included health care, both the current and retired employees pension costs, and risk management. Retiree health care increased by almost 30% or $8.7m. One impact of the weak stock market is low returns on our pension investments, which has caused a swing of almost $5m in pension expense. Research and Development spending increased by $4.6m to $109.1m or 4%of sales, which is on our target range. EBITDA improved by $52.9m or 14.9% to $408.9m for 2002, an all time historical high. Overall income before special charges and accounting changes increased from $4.23 per share to $5.58 per share. Other factors impacting the improved performance include higher [Inaudible] earnings from our Japanese joint venture NSK-Warner, lower interest resulting from debt repayments, and management of the balance of fixed versus floating rate debt, and a reduction of our effective tax rate from 55.5% to 33%.

Changes in our legal structure to support our growth strategy have helped the tax improvement. We anticipate that this tax benefit will increase in 2003 and beyond. Despite the increase in the value of the Euro versus the dollar at the end of 2002, the [Inaudible] changes did not contribute significantly to year-over-year improvement since we use a 12-month average for exchange rates. Sales benefited by $27m and earnings were favorable by $0.08 per share. For the quarter, gross margins also improved from 20.3% to 20.8%. Compared with the third quarter of this year, we improved from 18.7%. Selling, general administrative expense improved to 11.3% of sales from 11.7% and earnings improved from a $1.06 per share to $1.52 per share. The [Inaudible] impacted currency was $15m in sales and $0.05 per share. Now I would like to take a little time to review our income statements format, which we restructured in 2002. We have adopted our new format which spells our gross profits shows the sub-total for operating income and moves minority interest to low taxes. To be more comparable, with other companies in our industry. In going with this format, we have now include depreciation and amortization either cost of sales or SG&A as appropriate. Historically our depreciation is 1 but 4% of sales, and it breaks down into about 3.5% in cost of sales and 0.5 % in SG&A. We have also set up below the income statement, the components of depreciation, amortization, capital and tooling outlays and EBITDA.

Hopefully we are achieving our objectives of improved comparability within our industry in a more consistent and uniform basis to present EBITDA. As we told you in the third quarter, we believe that EBITDA is becoming a very common metric and we want to focus our readers on the quality of the earnings, rather than [Inaudible] how to calculate it. Now, we look at our segment performance .We would be measuring our business in two segments in the future, so this will be the last time, I would discuss the five segments. We switch to the two segments as reflected how our business is evolving. The [Inaudible] business had a spectacular year. Sales rose 20.4%, and earnings before interest and tax rose 20.5%. The increase in EBIT was in spite of the $15m in royalty expense to a Honeywell related to total charges. Sales increases, we realize for almost every product line including passenger car service charges, engine timing systems and drive change for both wheel drive transmissions and total wheel drive systems. For the fourth quarter sales and EBIT, we increased 24.7% and 31.4% respectively for the same reason. Edward systems had a good year over all with a 8.6 % increase in sales and 20.6% increase in EBIT. The improvement was weighted towards the first half of the year and was the result of higher volumes of the major customer close look.

The fourth quarter was affected by [Inaudible] and certain new products. Cooling systems 2002 results reflected the flat state of the the primary market, mainly medium heavy duty, which kept the revenue improvements only 6.9% for the year. The increase came from European and Asian markets rather than North America. We will assure by price increases for raw materials and cost of the facility rationalization in the second half of 2002. This factor also influence 18.6% increase in fourth quarter EBIT. Transport systems had a very strong year with sales up 26% and EBIT up 52%. The group lost to a number of new products during 2002 including GL, Hyundai and General Motors applications and the interactive torque management system on the new Honda Pilot in addition to the [Inaudible]. The sales increase of operating leverage so the group was able to absorb higher health care [Inaudible] will still achieve solid EBIT growth. In the fourth quarter, the growth in sales exceeded the growth in income because of a one-time favorable credit in income in the fourth quarter of 2001. Transmission system sales increased 15.5% and EBIT 19.7% this year. North America was up slightly and solid growth was experienced in both Europe and Asia. The growth was as much a function of new applications as it was market conditions. Fourth quarter EBIT growth was lower than sales growth due to product development costs. I spoke briefly before about the split between the driveline and engine businesses. We have included in the press release sales and EBIT on the basis of the new organization.

On the new basis each segment grew sales and EBIT by double-digit percentages and improved margins. We'll make available in the first quarter of this year the restated historical segment information on the basis of our engine and driveline segments. From the balance sheet perspective, we continued to improve our asset utilization with a focus on both working and fixed capital levels. Our after tax return on capital was 11% for the year which compares favorably to the prior year of 8.7%. For the fourth quarter, we reduced total debt by $44.2m which was comprised by reduction of $14.2m on the balance sheet and $30m reduction in our off balance sheet accounts receivable securitization facility. The accounts receivable facility has now been reduced by $30m from $120m to $90m in 2002 on top of the $30m reduction in 2001. For the year, we reduced total debt by $120.3m while we increased cash by $3.7m for a total beneficial change in net debt of $124m. Moreover for the past 3 years, we have paid down debt by $394m. Our debt to capital ratio improved to 39.9% which compares favorably to last year's 46.9%. Working capital level trends as expected with sales levels. The fourth quarter sales of $700.8m were 20% higher in the same period last year and 2.5% above the third quarter 2002. And again accounts receivable reflected a $30m increase due to the reduction in the off balance sheet debt recovery. Capital spending for the fourth quarter was $57m versus $47.7m for the prior year.

The yearend CAPEX was $138.4m before $5.1% of sales compared to 140.9 or 6% of sales for the prior year. In the past two years, we have completed the installation of four technical centers in Europe and the US at a total spend of $75m. With this investment behind us we are now confident that we can sustain our R&D developments and product growth with the capital-spending rate of 4.5 to 5% of sales. Regarding our credit quality our balance sheet debt and EBITDA average to very robust ratio of 1.6 points. Consistent with our triple reflux rating. Further more our funds from operations defined as net income adjusted for non-cash charges is over 40% of our total debt level. Including off balance sheet financing. And this re-establishes our balance sheet strength to our 1998 levels. I mentioned previously the impact of increased pension cost and our results in 2002. We have lowered both our assumption and the earnings power of pension investments and the discount rates for our liabilities. The effect of these changes in investment returns has increased our under-funded pension for the US clients (ph) at the end of 2002 to $37 million and we will probability add an additional $8-10m in expense in 2003. We will be taking steps to manage this under funding and don't believe there will be [Inaudible]. Also as we told you in the third quarter health care for retirees is rising and is expected to increase 7-10% next year.

To update you on the turbo charges situation of Honeywell we recognized 15m in the second half of 2002 and planned to recognize an additional $10m in 2003 as well. We will continue to develop our new generation Divgi's to replace our current product. We have informed the customers that we will not deliver the current design of Divgi's turbo charges after June 30th 2003. We intend to have the new Divgi ready to ship by July 1 2003. Now lets look at our expectations for 2003. These expectations do not reflect any disruptions should there be a short-term conflict in the Middle East. We told you last month we expect 2003 earnings in the $6.20-6.35 [Inaudible]. We don't foresee any major decline in business conditions and the other hand we don't expect any major up turn. Our build assumptions are pretty [Inaudible] decline in North America running in the range of 16-16.3 and flat in Europe and Asia. Interest expense should continue to [Inaudible] strong cash flow and we have set a 5% reduction as our target.

Capital spending being $140-150m dollar range excluding [Inaudible]. SG&A should improve slightly over 2002 to be on the 11%. Research and development spending will be in a 4-4.5% of sales range and net cash flow should again exceed a $100m. [Inaudible] 2002 full year and fourth quarter performance was strong, we are going into 2003 on a very positive trend. Now, I will turn the call back to Mary.

Thank you very much George. We'll now turn to the question and answer portion of the call. We would appreciate you are keeping your questions brief and focused so that we can get to all of them. I will ask the call coordinator Peter to announce the Q&A procedures please.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. Once again, it's star one if you would like to ask a question. And we will take our first question from John Casesa with Merrill Lynch.

Actually I was just, you just went through the explanation of the margins and I am all set towards that. Thank you.

Thank you.

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

Good morning everybody. It's Jonathan Steinmetz for Steve.

Good morning.

Good morning Jonathan.

A few quick questions. It looks like CAPEX may have come in a little bit higher than you would anticipated previously. I am just wondering if that represents any kind of timing issue or if it's more CAPEX or programs coming on or what?

As you know, we've got a number of major programs and if you would take our annualized rate that we're going through the first 9 months, it looks like it's going to come under our forecast for the year. But our capital really did come in very close to the estimate for 2002. So, we are right on track with the programs we have in the capital expenditures estimates we are looking at.

I think we have given you a range of 130 to 140 and far might be at the lower end of that range at one point. But, first quarter was stronger than we expected.

Okay. And on the tax rate, you discussed a little, just wondering how much lower you think you can go over the next couple of years? We've seen a number of your peers bring it down several 100 basis points.

Well, I think Jonathan just very recent release said that we have reduced another 400 basis points. So, I think we can be in range of probably 30-32%.

Okay. And any new business falling [Inaudible] comment on the quarter?

I think the biggest announcement was that the verification of Volkswagen customer for DCT. The Dual Tier (ph) transmission. Beyond that we had no other major announcements, but I am sure that you can stay tuned for more exciting information.

Thank you.

We'll take our next question from John Venusti with J.P. Morgan.

Good morning.

Hi John.

Good morning John.

Quick question on equity income. Pretty strong results for the quarter and for the year, $20m. I would expect that that would trend up going forward but did that grow at -- same rate as the overall company. Can you just kind of go into your expectations for that line item?

Well John, -- most of that is really created by NSK-Warner in Japan and as you know its the yen. They have done a great job of really improving productivity and maintaining their profitability even though their sales were off because of the yen but we see them staying roughly in the same range that they are. So you won't see the same kind of increase in the affiliated equity line that we have experienced this year.

Okay, but any type of gains -- if there is a reversal in the yen versus the dollar, you are not going to see any type of -- you are not going to see that slow down, are you?

Well, you know the yen has floated the last three or four years and I think that the thing you notice is we have been able to maintain our profitability whether yen was going up or down. So our guys have done a solid job of really maintaining the business level in Japan and in the export volume.

Okay, you went a little bit into SG&A versus -- in the quarter it seems that the SG&A kind of ticks up every fourth quarter, is there a seasonal reason for that, is that just -- end of year R&D. You mentioned some risk management issues, is that a typical year-end event that we expect see every year.

This is John Fiedler. Before he gives you that answer, let me tell you -- he always underestimate what the bonuses are going to be -- he has to make it up on the fourth quarter. I'll let George give you the real reason.

I 'm not [Inaudible] exactly going to tell you that.

I just wish we had that problem here but --

You know, John, I do want to say, to put this thing on a common basis is that a lot of people commented our SG&A is up at a 11.1, but I share with you today that we have changed depreciation, amortization. So we have now split that between the piece we go to the profit sales and the other piece goes to the SG&A, so that did raise our SG&A as to the 11.1. On the old basis was about a 0.5%, we would be in the 10.5 -- 10.6 range, so we are very close to where we said we were [Inaudible] last year, but we do have -- we have a tendency and we will try to do a better job with this. If we have some unusual things that show up in the fourth quarter, but I think we got our hands around all of those so I think our SG&A is very well on track as we've said we trend under the 11% range which is out of intrigue.

I think, the real key has been -- is that we have got a good trend going and then you were talking about in 2003 being under 11% which is one of our goals.

You know half of that is R&D and as you've always commented. We continue to invest in R&D, in fact this has been going up in dollars terms but is reducing in percent of sales because of our [Inaudible] sales growth.

Okay, just a couple of quick other questions regarding growth in Europe and in Asia specifically with the turbos and the engine timing systems, obviously good growth over the last couple of quarters within both those businesses, do you see acceleration from here or do you see those growth bridge maintaining where they are?

I think it would be and I think we shared with you that growth will maintain about the same pace that we have seen over the last year or so, especially in the turbocharger side and Asia has done a good job, especially [Inaudible] what we were doing with our key customers out there. So the growth will stay fairly consistent and what we have seen this past year.

Okay. Great. Thank you very much.

We are going next to Ron Tadross for Banc of America Securities.

Hi. This is Jerome Nathan here.

Hi Jerome.

Hi. The CAPEX guidance, with that said, you said, does that includes tooling or it doesn't?

No it doesn't include tooling.

And how much does that usually run?

Well, it's varied, it has been running between $25m and $40m. As you know, we have got a number of platforms started up in the couple of years. But it has declined or in fact it came down in 2002 and I think we'll continue to see it reduce.

Okay. And on the patent issue, you had about, -- I guess in December and I guess that there was some conflict. Can you just update us on that like, what have, like was it a conclusion reached in January, I thought that's what?

Well, it was not a surprise as we, I think we have told everybody in the market that we would loose that court decision in the recent one in December. We have appealed that we have 30 days to file that, but we continue to work with our customers in that action and the real push we have is to develop a new commercial VTG.

Okay. All right. That's all I had. Thanks.

And we will go next to Rod Lache with Deutsche Banc.

Good morning everybody.

Good morning Rod.

I have got a couple of questions. First of all, something you are pretty confident, you are going to pass this validation with a new turbo design? Can you comment on whether there's still some risk there or is the validation process pretty much done?

Well, I think the [Inaudible] as we have a product we have numerous products that shift through the new VTG, which really does an issue of testing for durability, corrosion, and we are going through that process for our customers delay. So, you know, you never know the final answer until we have it all complete, but we are continuing to work with them as fast as we can.

When do you expect to have an answer? I mean that the, I would imagine you need a couple months of lead time right before you launch in the new product?

Well, as you know the license arrangement runs out in June 30th and we're continuing to push to that date as where we need to have it completely finished.

Okay.

I think Rod, if you are talking about the validation of the product, it's actually done. The question now is that you have an engine product like this; you have long term durability testing that has to go on.

But I am sensing you guys still pretty confident in the process. Can you comment on what the, trying to follow the free cash flow in the quarter?

Well one of the biggest things that happened is, and I think we went through those last year, as you know the commercial paper markets changed a lot and we drew down our accounts receivable, securitization line by $30m, this year and also did last year. So, we've reduced that line by almost $50m in the last two years. So, we generated almost $44m of positive cash flow in the fourth quarter with $14m of that reducing debt. The other $30m that reduced the securitization line. So, I know you expect the concern of our cash flow. But we continued that in the fourth quarter, the total year was a $124m in total and we continue to have even in the fourth quarter. It's just how we apply the cash and we drew down the securitization line by $30m in the fourth quarter.

Okay, and lastly, you guys were talking about $300m of backlog coming in 2003. But the top line in Q4 was a bit higher than expected. Does that actually go forward, some of that from 2003, and can you offer any guidance on your outlook for Q1?

No, I think Ron, we look at this whole thing, we started the year saying that our backlog volume is going to be closer to $200m, and now its probably exceeded $250m. How we view this thing is that it has really raised our base level going into 2003, and some of it certainly did continue to accelerate. But we see those programs being sold in 2003, plus the add-on business. So we still feel comfortable for what we said two years in our ramp up business for 2003.

Okay. Let me like $300m or still thin?

Its still very much in the target of what we are looking at right now.

Q1 guidance?

Well, we haven't given any guidance for the first quarter, and there was since uncertainly the bills schedules and we've given it two at a year. I think its, we are, look at the strength and historically we've let John do something around the Morgan Stanley [Inaudible] and I think we will evaluate it during the course of the quarters staying with bills schedule still.

Great. Thank you.

You are welcome.

Then we will take our next question from David Leiker with Robert W. Baird.

Good morning.

Good morning David.

A couple off detailed questions here. George what was the securitization balance at the end of the year?

It was a $100,--well it is down to $90m at this point. It was $120m the end of November.

So $90m was the year-end number?

Right.

And then 'Q3 was $120m?

Twenty. And it was a $150 before we paid it down in December of 2001.

Okay. What are you assuming for Euro value in your guidance for '03?

Right now [Inaudible] but I know all of have feeling of what Euro will do, but it's certainly trading in a much higher level than we anticipated in the plan.

Okay and then I don't think you gave us the specific number of where you think the Tax rate will go in '03. Did you or did I miss?

I think in our guidance in Detroit that we did, David we said we can take it to 30% for the year 2003.

For '03?

For '03.

Okay and then on the SG&A number, year-end high double-digit growth the year-over-year in '02 running at a 11% you realize that there is a depreciation number in there. That number used to run at 8% to 9% is that a number [Inaudible] just not going to see you get back to that level at all?

Well, I think 9% was a different era too, that's before we really added some of those acquisitions in 99 and they ran a little higher SG&A level and that took us up in that range of about 10% and 10.5%. Dropped slightly from that level because of what happened in both the pension side and healthcare cost but we feel that we can now begin to trend that back down and it does include the half percent for the depreciation we just put in there. So, we feel pretty strong that we will have that under 11% for 2003.

And then lastly as I look at the your guidance and new business and where the Euro is and everything, it looks like you are 620 to 635 guidance implies that operating margins would be flat for the year. Is that consistent with what you are looking at?

Well I think when you add all the assumptions, I mean that's one of the conclusions that you may draw but, I think we push,-- we will continue to improve margins in 2003.

Okay great thank you.

You are welcome.

Will go next to Jon Rogers with Wachovia Securities.

Hi good morning. Most of my questions have been answered. I just have a couple of quick ones. As you look at the new business coming on in 2003, George, is there any quarter that -- can you just talk about the [Inaudible] of that new business, is there any -- is it weighted towards the beginning of the year or the end of the year? Can you just talk a little about the way you see it falling in?

Jon, this is Mary Brevard. It's fairly evenly spread throughout the year. I think that when we issued the new business, we said is a little heavier in the first quarter than the other, but it's pretty balanced throughout the year.

Okay. And then just one more on the amortization for Tooling. Now that you are breaking that out and I think George has said that it would be about $20m -- Tooling cost would be about $20m in 2003, how does the amortization flow back over that outlay? Is it a three year, is it a five year, can you just give us a little color on that?

Amortization on Tooling is just three years. So, I -- you know and one of the reasons we finally did because [Inaudible] sort of changed their approach and we were observing more of the capital cost for Tooling but strangely enough, it started to go the other way because some of our lead customers are now saying, we want to control the Tooling and so we are seeing a different approach from some of our lead customers in some case. [Inaudible] we're still on the transition phase here though we may see some other changes in Tooling. But if that -- now you go back five or six years ago, we were running in the range of probably $15m to $20m [Inaudible] peaked at about $42m and is down this year in 2002, and I think you will see that trend continue to go down, especially [Inaudible] is one that is saying we want to control the Tooling and own it. So, I think we are seeing a different approach from our customers today.

Okay, thank you very much.

You're welcome Jon.

We will take our next question from Rob Hinchliffe with UBS Warburg.

Hi, good morning everybody.

Hi, Rob.

Good morning Rob.

On working capital, think I got the accounts receivable part of it understood pretty well but on the accounts payable it looks like your payables are down quite a bit from the third quarter, is there anything going on there?

No nothing unusual - its one program we are still trying to drive. In fact Tim has taken that all of an objective, the rates are [Inaudible] throughout the organization but our inventory are pretty consistent where they were receivables and were still set to aggressive targets to really improve our payables with our vendors that we have some tax accruable had some impact on the numbers in December '02 so.

Okay I guess more of a conceptual one but as you guys move to the new reporting structure with [Inaudible] - AFS and maybe cooling systems, do they get lost in the [Inaudible] already, has broke more stock pretty committed to those businesses?

I would say that we are definitely committed to those businesses, the way we have merged them together as this allows I'll say the engine portion of the cooling what was the old cooling group and the engine portion of the old AFS group, to team up with the engine portions of [Inaudible] and the turbo group to create technology and synergies and technology what is called technique technology integration across those [Inaudible] platform to greet much more growth than they probably could do on their own.

To this changes its quite a bit more than just how are reporting in it is actually how you are working with in Borgwarner too.

This is definitely a major change within the how we work and how we collaborate within Borg-Warner, bows us to collect synergies that I think would generate growth that should be greater than the sum of the parts and you have seen the results of our historical approach of the some of the parts. Its fantastic so this should be another level of growth I hope on top of that. I think if you want a good example of that just to take a bit of more on the transmission side of that business we just talked about the new duel product businesses Volkswagen and how long we have worked on it and what a great success its been, that would not have happened under the old Borg-Warner with our separate divisions because we would not have co-operated we would not have take, we could not have taken the risks among the small groups and it would just wouldn't have happened and I think Tim's point is well taken that we expect more of those kind of projects to come out of this organization so its definitely more than just a way we are going to report it this way we are going to operate it. However we would not lose our decentralized way of approaching the custom. We'll be product experts first and then we'll integrate technology across the company in addition to that.

Okay last question and the 60 is automatic, the JV or collaboration with GM and Ford, any news on that? Is the beating still going on? Is that [Inaudible]?

We have been involved in that program. The start up of that is included in our backlog, so, it is logical that as a leader in transmission systems that we would be involved in that project.

Some of it, you said that (ph) is already in your backlog?

Yes.

Okay. Thanks Mary. Thanks everybody.

Okay.

We will take our next question from Darren Kimball with Lehman Brothers.

Hi. It's actually Andrew Mahony [Inaudible] for Darren.

Hi Andrew Mahony.

If you exclude Honeywell settlement expenses, Morse tax margin performance in the last two quarters has been pretty solid. I am assuming most of this margin growth has been on the turbocharger side of the business. Historically, engine-timing systems have carried a higher operating margin in turbos. Is it safe to assume the turbos margin have got up in recent quarters and net profitability in both businesses roughly somewhat (ph) -?

Well, I think, you will be surprised to know that Morse is growing -- I mean they continued to grow. Morse TEC has done a great job [Inaudible] turbocharger, the margins are improving, they were seeing the same thing in engine-timing system, so, really both of them are combined for getting the part of this growth.

Okay. Could you possibly provide European turbocharger market share data as of end of 2002?

I don't have that. I think, worldwide we think we have may be 25% of the market but that for world including both commercial and passenger.

Okay and Honeywell is at 40% or something?

Probably, higher than that.

Okay. Thanks a lot.

And now we will go next to Chris Sarratso with Credit Suisse First Boston.

Good morning everyone.

Hi. Good morning.

If I can just go quickly again through the margins in the various segments, you kind of went through that a little bit quickly. If I understand correctly four of the five segments were a bit weaker than a year ago on a pro forma basis and you are attributing part of that to the cost associated with bringing on new businesses, is that right?

Yeah. The air fluids certainly well has been and even TTS [Inaudible] volume as they got.

Okay and when -- is that anniversary at some point or because you have got a lot of new business coming on over the next few years, we should expect margin to kind of hang around, where it is now?

Well, I guess, the best way to answer is we consistently said, we will improve margins 400 basis points over the next three to five years and I think, this is certainly a year that proves that you know we are up about 700 basis points in total in operating income and that includes 0.5% of royalty that we paid. So, probably over 120 basis points this year, we see continued margin improvement next year and we see [Inaudible] over the next two to three years. So, I think we are well on track to continue our margin both on -- really driven from three key areas volume, is certainly a key to that, cost improvement is always [Inaudible] productivity and [Inaudible] operations. So those three are a sort of cornerstone of how we drive in the margin improvement and we will see it across the board in every one of our businesses. It is not the one or two way [Inaudible] we think that everyone of these five businesses has the ability to raise the kind of margins we look at over the period.

Okay. What are the biggest programs that come on stream in '03. You got the balance of the GM four-wheel drive system, you've got Hyundai and others. Would you consider those some of your biggest ones for '03?

Yeah. This is clearly - we still have Honda. They are launching all of it that is going on with Honda Pilot in the normal-wheel drive and four- wheel drive area, we have [Inaudible] . We are ramping up on the Hyundai [Inaudible] . Nissan is kicking in and timing drives, I think we are going to start to see -- we will see ramp ups on the [Inaudible] as we go out throughout the year. So, as strong as some of the full volume [Inaudible] for the first half of the year and the programs that were launched in the second half of 2002, we going to also see in the second half of 2003, we are going to see some of these other programs starting to kick up in terms of higher ramp volumes.

Okay. And did you say that actual new business that you realized in '02 was somewhere in the neighborhood of $250m? Did I hear that right?

I think we've kind of [Inaudible] to 250%.

And my last question. The Honeywell payments in '02 you said totaled to $15m pre-tax. Right?

Right.

And how that - was it $6.5m in the third quarter and the balance in the fourth?

There was some in the second [Inaudible] .

It was about in 3.

I think it was a 6.5 and it was a roughly about 3 in the fourth quarter.

Okay. Terrific. Thanks.

Your welcome.

We'll take our next question from Bryan Neff with Midwest Research.

Hi. Most of mine have been answered but the one question I had was, I know the slip, shareholders equity was down sequentially and I was wondering, if there is pension adjustment in there or something to that effect?

It was the pension adjustment in that.

Do you have the dollar amount of that by chance? To kind of just sort of back that up.

Good thinking.

That's still early in the week.

Well Neff. We will come back to you on that one. I mean, we have it, but we will give you the break down as well.

Okay. And another quick one. It seems like in the driveline group, if you look at the way it was broken out there at that is the group where earnings growth was lower than revenue growth. So, does that imply the launch expenses and things like that were greater in that particular group?

Well. We had some of that [Inaudible]. We had a tremendous amount of growth in the Torque-Transfer Systems group and that margins are historically lower than in Transmission Systems. We still need to put the two together that kind of the weighted average doesn't help you. But there were some, there's a tremendous amount of launch in the TorqTransfer Systems group at last year and the good news is a lot of that is behind us now.

By last year you mean the end of 2002?

Yes.

Okay. Great. Thanks a lot.

Your welcome.

We'll take our next question from Kurt Moller with Dresdner RCM.

Good morning ladies and gentlemen.

Good morning Kurt.

You talked about the money you spent on R&D, can you kind of talk about -- what you guys are looking for in some of the new products that have come out in your R&D efforts recently?

Well, I think we have talked about a couple of them already today, the DualTronic transmission which is the fuel efficient automatic transmission concept for Europe, the InterActive Torque Management that is being introduced, its an act of intelligence. We have drive system for front wheel drive vehicles introduced on the Accura MDX, now on the Honda pilot and another version on the Hyundai Santa Fe. I think of a program that's just beginning to get some new business is variable [Inaudible] timing which is an exciting new growth opportunity in our engine business that we have got some book business starting in '05, but that's an extension of our expertise on engine timings and engine management. So those are probably some of the biggest examples. We are adding electronics to a lot of our products which is a big [Inaudible] is developing within the company that we can develop more smart systems for customers that we really leverage is not just our mechanical ability but also the expertise of understanding a system. You want to add anything more. And then there is a variety of emission products and the turbo chargers as well. We have got good development going in everyone of our product lines.

I want to add this -- this is just one small announcement I'm [Inaudible] timing and that is [Inaudible] has a tremendous opportunity for growth, much more than we probably realize ourselves as we go forward because of the major push for fuel economy savings and emissions included.

Okay, thank you.

And we have a follow-up question from David Leiker.

Hello.

Hi David.

The VTG, the new, next generation that you are going to bring out with Volkswagen. Can you give us some perspective on performance of that turbocharger versus the current lining to see some sense of cost in. Obviously I would imagine it is the better turbo charger, but can you talk about it a little bit?

David, I think the one thing we can say is that, we never bring out a new version that isn't better than the one we had before. So, it's got some advantages from a cost standpoint, I think its probably too early to say except a decent range. These items are all in the box of same range.

Okay. And then on the GM four-wheel drive business that you are working on and going after there. What's the extent of the business in terms of transfer cases versus your ITM product?

This GM business is traditional four-wheel drive business. It is, we won it because of our electronics capabilities to interface with GM stability systems. So, it is on rear-wheel drive vehicles that the GM is using with stability systems. It's perhaps a...

That's what we are working on now. That's what we are launching now, we will continue to talk with General Motors about other trans-locate at that time. But I am, we can't underestimate the fact that we talked to other people including most of the big three about our all-wheel drive ITM capabilities. So, that also represents a nice close opportunity for us. Right now, we've done well with Asians; we will continue to work for the development with the big three and the Europeans.

Your business in your backlog on ITM beyond [Inaudible]?

Not at the moment.

I got it. Thank you.

And we have a follow-up question from John Venusti.

Yeah, hi. George, real quick, referring to the tax rate, you said that you expected a 30% rate for 2003. Is that a whole year rate or is that the exit rate when you get in the fourth quarter?

Yeah, that's for the whole year, John.

Whole year. Okay, thank you.

John I might, well. I have you on the line, one of this piece that, I think it's important for all of you is that, it was asked a question about reduction in equity, one of the major reasons is we believe that we in the value of [Inaudible] we bought about 385,000 shares in fourth quarter and that have been in fact the reducing equity [Inaudible] million dollars.

Okay, thank you.

At this time, there are no further questions, I would like to turn the call back over to you for additional or closing remarks.

Thank you very much. Thanks to all of you for joining us. This call will be replayed, you can get the replay information through our website and we remind you that we also have the financial notes out there for you if you need them as you go through your own note. If you have any follow-up calls, you can direct them to me and with that we will end our call today.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.