博格華納 (BWA) 2004 Q4 法說會逐字稿

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

Thank you very much and thanks to all of you for joining us today. Copies of the release were sent out today particularly market opened. We've also posted financial talking points that should help you follow the financial discussions.

These are located on bwauto.com investor information webcast fourth quarter results talking points on that website, notes will be helpful to you to review the financials and the operations. And they also include a reconciliation of any non-GAAP financial measures.

Before we begin I want to remind you that we're going to be participating in a number of upcoming investor conferences. First is the Prudential Auto Value Conference on February 24, in New York. The Smith Barney Industrial Manufacturing Conference, again in New York, on March 8, which is the day we're presenting. And then finally the Morgan Stanley Global Auto Conference on the 22 of March, again in New York City. Before we begin I need to inform you that during this call we may make forward-looking statements which involve risks and uncertainties as detailed in our 10(K).

Our actual results may differ significantly from the matters we discuss today. Moving on to our results, Tim Manganello, our Chairman and CEO will be providing comments on the quarter and the year. And Robin Adams, our CFO, will be discussing our operating results. With that I'll turn it over to Tim to tell you what a great quarter and year we had.

Well, thank you, Mary, and good morning, everyone. We had a strong fourth quarter and an outstanding 2004. Fourth quarter sales reached 889 million, and net income reached $68 million, both records for BorgWarner. And for the calendar year we achieved sales and net income of $3.5 billion and $218 million respectively. Also records for BorgWarner. This resulted in a full year earnings per share number of $3.86. We achieved these record results in spite of flat industry production in North America and modest growth elsewhere in the world. Strong demand for our technology Europe and Asia, along with continued cost improvements, helped boost our record results.

Once again we delivered growth that significantly outpaced worldwide car and truck production because our technology is targeted at the fastest growing parts of the market. Our sales were up 15% while worldwide industry production was up about 3%. Both our engine and drive train groups had solid growth driven by demand for our systems which improved fuel economy, performance and air quality.

We translated this sales growth into improved profits despite increases in steel and other commodity prices by sharpening our focus on manufacturing and administrative cost reduction efforts as well as on supply chain management. We clearly demonstrated the viability of our technology driven growth strategy and the benefits of building one of the most diverse customer bases in the auto industry. Talk about some highlights of the fourth quarter. Record sales of $889 million, up 11%.

Earnings per share of $1.19 including a $0.20 or $0.20 from a favorable year end tax adjustment. Operating income margins of 9.2%. And net cash provided by operating activities of $106 million. Now let's go to the year. Record sales of $3.5 billion. Record earnings of $3.86 per share, including a $0.20 adjustment for a favorable year end tax treatment. Operating income margin of 8.8%. Return on invested capital hit 13.1%. Our engine group sales were up 19%. And drive train group sales were up 9%. So, let's focus a lint lint on the engine group. Strong demand boosted engine group sales 18% in the fourth quarter and 19% for the year.

The group continues to benefit from European and Asian OEM demand for turbo chargers, our timing chain systems and emissions products, and there was -- they also benefit from stronger commercial truck production in both Europe and North America.

During the year the group expanded its presence in Korea to manufacture timing chain systems for Hyundai's volume gasoline engines and also established a joint venture for the manufacturing and sale of turbo chargers. Also we had new business awards with Asian and Europe OEMs, which expanded the groups customer base. I'll switch to the drive train group. In the drive train group sales were flat for the quarter but up 9% for the year.

Results were driven by demand for transmission and four-wheel drive systems, especially among Asian and European auto makers. Productivity efforts more than offset the impact of commodity pricing as well as healthcare cost. Important new four-wheel drive all-wheel-drive system for both rear wheel drive and front wheel drive applications were won during the year with two auto makers in North America.

In Europe, our fuel efficient dual tronic transmission technology was made available on four additional Volkswagen Audi vehicles. 2005 expectations. For 2005 we have reiterated that we expect earnings per share in the range of $4.30 to $4.55, which includes assumptions about our acquisition of Beru in a range of $0.15 to $0.30 per share and expectations of $4.15 to four 25 per share on our base BorgWarner business.

The overall trends driving our growth continue to be strong. On our base business, we believe that we can achieve sales growth in a range of eight to 10% which will propel earnings growth in excess of 10%, even given current industry assumptions for flat production. The expected accretion of the Beru acquisition will further add to our base business growth.

In 2005 our engine growth expects to deliver -- or our engine group expects to deliver continued growth from further penetration of diesel engines in Europe which will continue to boost demand for turbo chargers in our Beru products. Investments in Korea are expected to begin to contribute to these results. This growth is expected to help offset anticipated weakness in North American production.

Growth in the drive train group in 2005 is expected to be flat. Demand for traditional light trucks will be about the same as 2004. SUV sales are expected to decline, while sales of front wheel drive base all-wheel-drive systems are expected to continue to increase. Transmission products will benefit from increased penetration of automatic transmissions in Europe and Asia and we'll have the continued ramp up of dual tronic transmission models in Europe.

This year is starting out as we expected with weak North American sales and continued pressure from commodity prices, especially in comparison to the first half of last year. Despite these pressures we continue to expect that Borg-Warner's earnings in each quarter of 2005 will meat or exceed last year's earnings. So before I turn the call over to Robin, I also want to pass on two observations from my recent participation in the World Economic Forum in Davos, Switzerland last week.

One of the major subjects addressed in the forum was that of global climate change and a need for emissions improvements and fuel efficiency. I certainly came away with a validation that BorgWarner is on the right path with technology that addresses these issues and that our approach is consistent with the world needs.

My second observation came from discussion with other auto industry leaders. I am more convinced than ever that our having strategy to differentiate ourselves from others in the industry through technology and product leadership is the winning strategy. It is the right business model for BorgWarner. So with that, I'll turn the meeting over to Robin for the financials.

Thank you, Tim, and good morning to everyone. As Tim said this past quarter and full year were outstanding performances for BorgWarner. Our record sales and earnings performance was achieved while the industry was experiencing only moderate growth throughout the world. In 2004, as Tim mentioned, worldwide product was up about 3% while our sales grew 15%. We continue to execute our growth strategy despite a challenging industry environment. Our overall sales in the quarter were up 11%. Changes in foreign currency year over year contributed $29 million to that sales growth in the quarter.

Excluding the currency impact, sales growth in the quarter was still 8% versus North American vehicle production which was down 3%. So we -- 11 percentage points better than the market in North America, and global production itself was relatively flat. Our sales in North America, as Tim mentioned, were relatively flat in the quarter versus last year. Impacted by the 3% decline in industry vehicle builds and weakness in the SUV pickup truck segment. This, however, was more than offset by sales growth outside of the North American market. We continued to experience strong levels of growth in both Europe and Asia with growth rates on a comparable currency basis of over 20% in both regions in the quarter.

Gross margin for the quarter was 18.4%, compared with a BorgWarner two-year high of 19.9% in fourth quarter 2003. Increases in the price of some of our commodities including steel, copper and aluminum, negatively impacted gross margin. Now this margin decline at the gross profit level was offset by improvements in SG&A expense and, if you eliminate the $2.7 million of fixed asset write-off reflected in other net on our income statement it resulted in an operating margin relatively flat with a record fourth quarter of last year.

Affiliate earnings for the fourth quarter were up due to the continued strong performance of our NSK-Warner joint venture, where year over year sales growth was north of 20%. Interest expense continues to decline due to increased cash balances and reduced debt levels from prior periods and this is despite some rising short term borrowing rates that we're -- we've seen.

Our effective tax rate in the quarter on a GAAP basis was approximately 16.3% compared to 28.5% for fourth quarter last year, and as the press release indicates and as Tim mentioned, this change in the tax rate is due to favorable year end adjustments to tax accounts of approximately $11 million. Our normalized tax rate for the year has been 30% it would have remained that for the quarter which was up from last year's 28%, due to increased sales in higher tax jurisdictions, primarily outside of the U.S.

If you look in our segments, drive train consolidated sales were flat for the quarter, impacted primarily again by the weaker SUV and pickup truck production, while EBIT margin, or earnings before interest and tax, was down 1.3 percentage points, to 8.4%. The growth of our drive train products in the quarter was actually reflected in our NSK-Warner unconsolidated joint venture, whereas I said earlier, their sales growth was north of 20 %. Under U.S. GAAP convention we don't consolidate those sales.

However, if we were able to consolidate NSK-Warner Warner sales, our drive train business growth in the quarter would have reflected 6% year over year growth. Drive trains consolidated EBIT margin was negatively impacted by higher commodities prices and some restructuring costs in our European operations. Engine sales increased 18% in the fourth quarter and earnings before interest and taxes grew 1.7 million with EBIT margins relatively flat at 12.8%.

We saw sales growth in all of our engine group product areas in the quarter with particularly strong growth in turbo charger product sales and additional timing chain sales growth to our Asian customers, again as Tim mentioned. As we look to the full year we experienced sales growth in every geographic region of the world in 2004. And 20% plus growth in both Europe and Asia on a comparable currency basis.

The currency impact on total BorgWarner sales growth for the year was about $114 million. Excluding this currency impact, our sales growth was a strong 11.1% compared to North American industry production which was down about 1% and global production which we estimate to be at about 3%. We continue to significantly outperform the industry that we are a part of.

Gross margin for the year was 18.5% compared with 19.1% for 2003. Again, as we've talked in the third quarter as well as now in the fourth quarter, increases in the price of some of our commodities, particularly in the last half of the year, was partially offset by aggressive cost reduction activities. Containment of SG&A expense resulted in BorgWarner increasing operating income for the year by $40 million versus last year, and also maintaining its industry leading operating income margin levels with last year.

In 2004 our commitment to R&D continues as our spending was $123 million, up 5 million from 118 million in 2003. As a percentage of sales R&D was about 3.5% of sales, versus 3.9% a year ago. The differential as you can see is not due to the lack of increased spending. It's due primarily to the strong sales growth we've experienced in 2004 that's outpacing our R&D spending growth.

Affiliate earnings were up for the year due to the strong performance as I mentioned on the quarterly comments, of our NSK-Warner joint venture where sales for them grew over 20% in 2004 versus 2003 levels. Interest expense continued to decline throughout, in 2004, 2003, due to increasing cash balances and reduced debt levels throughout the year.

For the full year our effective tax rate was approximately 26%, compared to 28.5% last year, again the full year rate reflects the fourth quarter favorable year end adjustment to our tax accounts of $11 million. Our normalized tax rate for the year would have been approximately 30% which is up 150 basis points from last years 28.5%, again due to higher increased sales and higher tax jurisdictions particularly in the European markets. BorgWarner enjoyed sales growth in every one of its major product lines in 2004.

Every one of them. drive train sales, as Tim mentioned, were up 9% on the year, while EBIT grew 8.5 million, and EBIT margins we were able to contain those and remain those flat at 7.9% despite some of the cost pressures in the industry. The sales increase for the year was the result of strong demand for transmission components and systems worldwide, plus global all-wheel-drive and four-wheel drive systems. Sales in emerging markets like India, though small, continue to increase, and as I said before, our unconsolidated sales in the drive train area with NSK-Warner was up over 20% year over year, for the year.

Engine sales increased 19% for the year and EBIT grew by $42 million, with EBIT margins again remaining relatively flat with 2003. We experienced sales growth in each one of our engine group product areas with particularly strong gains in turbo charger sales in both Europe and Asia and, again, sales of timing chains continued to increase particularly to our sales -- particularly sales to our Asian customers. Let's look at the balance sheet now and cash flow for a minute. From an overall financial perspective we continue to stay focused on return on capital. Our after tax return on capital on a trailing 12 month basis was 13.1%, up from 12.3% at the end of last year, and slightly ahead of our 2004 target of 13%.

With the inclusion of Beru in 2005 our ROI target is for 12% in 2005. Our investment grade capital structure continues to be strong as our debt to capital ratio improved to 28.7% at the end of the year versus 34.2 at the end of 2003. Our cash balances increased 117 million during 2004 in addition to a 38 million reduction in balance sheet debt, which positioned us well for the acquisition of 65% of the stock of Beru in January, 2005. Net cash provided by operating activities was a record $427 million in 2004.

Regarding working capital levels, our net operating position, which we define as receivables and inventories less payables and accruals, decreased by 19 million since last year as our inventory turns improved at 12.9 times from 12.3 times at prior year end. Capital spending was 78 million in the quarter and 205 million for the year, compared with 68 million and 172 million respectively, for the fourth quarter and full year 2003.

This level of capital spending is required to support the $1.4 billion of business we have coming on stream over the next three years, as well as to support our cost reduction and productivity investments. Our overall strong financial performance in 2004 continues to support our contention that BorgWarner is different from other auto suppliers around the world.

Now let's talk about the outlook for 2005, again as Tim mentioned, our outlook for earnings per share is in the a range of $4.00, $4.30 to $4.55 which does include assumptions about the impact of our acquisition of Beru in the range of $0.15 to $0.30 per share. Beru will be reported as part of our engine group starting in the first quarter of 2005.

The first quarter will be our toughest comparison in 2005, again because of North American production weakness and commodity price carry over. But despite that, as we've said earlier, we expect to meet or beat 2004 earnings levels in all four quarters of 2005. Based on our current mix of business we expect our tax rate to continue to remain at approximately 30 to 31%. Capital spending for 2005 will be around 6% of sales or slightly in excess of $250 million. R&D which is included in SG&A again is targeting to be approximately 4% of sales for this year and we expect to maintain SG&A in the 10% of sales range. We expect our net cash provided by operating activities to be another record in 2005 at approximately $450 million.

The fourth quarter and the full year were both records for BorgWarner despite the very challenging industry environment. Even after excluding the year end tax adjustments, these were record earnings for BorgWarner on the quarter and the year. We expect that momentum that we gained in 2004 will translate into another strong performance in 2005. Thank and you for your support and interest in the company. And with that, I'll turn the call back over to Mary.

Thank you very much, Robin. I would now like to ask the call conference coordinator, Sylvester, if would you please provide everyone with the Q&A procedure.

[Caller Instructions]. And we'll take our first question from Darren Kimball with Lehman Brothers.

Hi, can you hear me, okay?

Yes, Darren.

Yes, Darren, good morning.

Hi, Darren

A couple of thing. First, I'm just wondering, I think you commented that the drive train group might see flat sales in 2005. I'm just wondering, you know, what that meant for the -- do you expect to hit your sort of long term sales target for the whole company of up eight to 10% for this year? I mean, and what does that mean for the performance we'd have to expect from the engine group?

Well, first of all we do expect to meet our targets of eight to 10% per year in sales growth and continue to hopefully exceed our 10% target for profits. That's already accounted for and the drive train numbers are included in that. So, you know, everything that we're aware of relative to the drive train is included in the current 2005 gains.

Darren, to help you, the engine group represents now about two-thirds of our business. And we expect the type of growth we've seen in 2004 to carry over in 2005 on that side of the business. And the other thing I want to remind you, our drive train business is growing. We expect another strong year from our unconsolidated drive train sales at NSK-Warner that, again, unfortunately doesn't get added into the mix here.

Okay. And the currency, does the currency reek havoc at all? I'm trying to remember, are you guys -- do you guys use the currency at the end of the quarter or do you use sort of an average for the quarter?

Darren, we use the average for the period from an income statement perspective. We use the end of the period rate for the balance sheet.

Okay.

As we look at 2005 our expectation is currency will be relatively flat 2005 versus 2004. Our a -- I'll use the Euro as an example. the Euro was at 125-dollar to the Euro was our average rate for 2004 and our projections expect that same rate that average 125 for the full year 2005. And obviously quarter by quarter that's going to move a little bit but that's our expectations.

Okay. Let me just ask one final question, which is that , you mentioned a couple of items which will probable be, you know earnings drags in 2005. I mean, you've got the North American build pressure. You've got the commodity pressure. You know, R&D, if you actually hit your 4% target would certainly be up as I imagine SG&A would be up. And I think your taxes will wind up being up. So is the right way to look at this that you just have -- the profit mix of the new business that's coming on this year is very strong and more than mitigates those factors o or what else would you add there?

Well, Darren, actually we expect the tax rate to be relatively flat year over year in the 30 to 31% range.

You are looking at the base excluding the --

Exactly. You know, as we look at this business, and I hope you get the sense is we are looking at the fourth quarter and for the full year. We are trying to give you a picture of what the business looks like without that year end tax, the favorable tax adjustments. And that's what we are comparing to. Obviously if you look at the tax rate on a GAAP basis year over year it will increase.

But as we said, our run rate tax rate has been about 30% for 2004. We expect basically the same type of run rate in 2005. So there'll be no penalty from a tax rate perspective. Again, as we look at margins, our SG&A as a percent of sales was about 9.6 this year and when we say in the 10% range basically we are going to try to maintain our margins, give us a couple of basis points here and there. So as we've said before, Darren, our focus is maintaining the industry leading margins we have in our total business and driving our top line growth.

And that's, as you look at 2005, that's the formula for us. Obviously we expect to see continued growth in our NSK-Warner business as well and good tight cost control. But, from a margin perspective, and again this exclude Beru, we're talking about our base business. We're going to maintain margins, we're going to continue to see reduced interest expense. The tax rate year over year should be relatively flat. It's the incremental sales that are going to be generating the incremental earnings for us.

Okay, thank you.

You're welcome.

We will take our next question from Jonathan Steinmetz with Morgan Stanley. Good morning, everyone. Can you hear me?

Yes, Jonathan. Thank you.

Yes, Jonathan.

I just had a few questions. The SG&A came in down versus the prior year. Could you just talk about what type of expense items you were able to control this quarter that helped achieve that?

You know, as I explained to people before, we have 40 some locations around the world. And our focus on cost reduction is not just one large item. It's a focus on cost containment at the operating level and it's just a continued focus on tight cost control. There is not just one particular item. It's watching travel and expenses. It's looking at consultants you may be hiring. It's just a number of small things that seem to add up. There is no one major item in the quarter year over year from an SG&A perspective.

The other thing is that as we are expanding in our sales we are being very judicious in the number of people we higher. We are typically, unlike a lot of suppliers in the industry, we don't hire a lot when things are growing great guns and we don't have, therefore we don't have to reduce a lot when something, you know, gets a little tough.

So we've controlled our costs on the hiring side. We've -- you know, with the sales growth, the percentages do, we have -- obviously we have some natural decline if you control your infrastructure and that's what we try to do. And we have like 3,000 cost reduction initiative ideas in the pl -- in our company and not all of them are manufacturing ideas. They are administrative issues. We are going after, like Robin said, travel costs but we are looking at our legal costs. We look at our HR consulting costs, everything. So I think that that probably answers the question.

Okay. I may have missed this but on the raw material did you give a number on the estimated year over year impact net of recoveries?

We didn't.

Would you be able to?

Well, we gave a number for last year. For raw materials the total was around 40 million was the impact. This year raw materials are going to be less than the 40 but they'll probably be between 30 and $40 million impact Okay, with the 40 for the full year, what did the fourth quarter work out to, do you have a number for that? Approximately $20 million.

Thanks.

Now, we should add though, that we, like we said, with our cost redu -- we have a disciplined focused cost reduction effort that went a long way or partially towards offsetting a lot of those dollars.

Okay. Thank you.

We'll take our next question from Rob Nash with Deutsche Bank.

Good morning, everyone, it's Mike Heifler.

Hi, Mike.

Hi, Mike.

Hi, Mike.

Just a couple of questions. The timing of the backlog throughout the year, can you speak to that, you know, is it pretty even or a little bit lumpy?

The backlog flows in the first quarter is a little weaker. You, the first and third quarter's are a little weaker, the second and fourth are a little stronger. But there's not big swings one quarter to the next.

Okay, thanks. On the relative profitability of the new business can you talk about how strong the new business is from a margin perspective relative to some of the business where you see weakness like in the four-wheel drive in the trucks in North America?

Let me just, first of all we don't go into the break down of profitability by business or by product but let's just say in general the profitability -- and I think you've seen it, the engine group margin's probably a little bit better than the drive train group margins.

Most of the -- a lot of the growth is in the engine group so there is some definite, you know, improvement in margins on the average because of the balance of engine to drive train. And also given the fact that we focus on leading technology that automatically has some benefits, too, in terms of margin improvement.

Yeah, and Mike, I would also like to point out that when we are working on new business programs, we're focusing as much on the return on invested capital that these new programs will bring us as opposed to just strictly margins. If you look at the new dual tronic programs, those were designed with a real focus on improving our return on invested capital.

Yeah, I think that's a good point, Mary. When we look at return on invested capital our drive train group does as well as, as the engine group mainly because they know -- that they are very efficient and effective users of their capital. Whereas the engine group is growing and rapidly increasing their capital base.

Would you characterize the new business as being more pass through in nature versus the existing business where that might be exposed to some of the production cuts or how would you, how would you look at it from that angle.

I'm sorry, Mike, could you rephrase the question.

Yes, if you look at the new business that's coming on line in the backlog, is that more pass through in nature or is it more of your own content versus the existing business right now that's more subject to reduction inside North American production?

Let me see if I understood that. First of all, if you are talking about content within the product, how much is, are we putting together more systems than we have in the past and therefore there's components that just get passed through in the overall system, in some instances, that's correct. DCT is a great example.

There is, there's a complete package there. There is some components that we buy that's part of that system. And therefore the value-added is a little bit less than than you would see maybe in some of our auto products. But as Tim pointed out, you know, we run this business based on a return on capital and therefore we get the appropriate return on invested capital with that business. We're not necessarily completely margin focused.

With respect to the issue on the sensitivity with volume declines in the market. You know, as we've said before, one of the strengths we have as a company is we continue to bring out new product technologies, add new programs to our business. And so we're always adding sales while there are slow downs in certain parts of the market.

As you know, we tend to finds the niches within the market that are growing faster than the overall market itself, not only in North America but in Europe and Asia. And if you look at the products that are in our product backlog they're all those type of products. They're in certain niches within the marketplace that are growing faster than the overall industry.

Thanks, Robin, that's helpful.

We will take our next question from David Siino with Gabelli and Company.

Hey, good morning.

Hi, David.

Hi, David.

Most have been answered, just two quickies. Robin, do you have a D&A number for '05 with Beru consolidated.

Oh boy, that's a tough one. One of the reasons we don't have a D&A number yet is we still haven't completed the evaluation of the allocation of the excess purchase price.

And we will have that done before the ends of the first quarter and that's why we are in this range of 15 to -- range of earnings for Beru because of the potential difference in the amortization. But we will have that before the ends of the quarter and we will make sure we get that out.

Okay. But simply speaking I guess we are just take the '04 number for Borg-Warner, add Beru's consolidated calendar year '04 and get to something which, which should be similar, give or take whatever the purchase price adjustment was?

Yeah, exactly right. And we've walked through before, how to assess that purchase price. How much is excess? We've given you the book value, estimated total transaction cost and you make your own assumptions how much that excess purchase price is going to be amortized --

Sure.

-- and you can get the, get the number.

And the second question on EBIT margin for drive train looks like it -- in order for everything, for your numbers to work, I guess you are looking at a pretty -- pretty big hit on the drive train margin. Is that right?

For 2005?

Yes.

A hit positive or negative?

Negative.

Well, actually at this point in time we are not expecting a significant decline in margins in that business, no. We expect them to be able to maintain their margins next year give or take a couple basis points. But I mean, we're not anticipating any significant decline in margins in that business.

Okay. So flat revenue less raw material plus increased margin on the new business kind of gets you there?

Yes.

Add a couple of those cost reduction improvements.

Okay, great. Thank you very much.

We will take our next question from Kadeja Lavoni (sp) with JP Morgan.

This is Doug Carson, JP Morgan. I just had a quick question on the debt numbers. Given the acquisition of Beru and the cash flow number that looks like Capex will be about 250 and then free cash flow, 450, the cash on the balance sheet,. Would you be able to give us a little bit of a walk through how you expect the balance sheet to look throughout the ends of the year and where we could finish up the year?

You know, as we've said before, post transaction in January, our debt to capital was about 37 %, our debt to trailing twelve-month EBITDA is 1.5 times. So I think, you know, if you know what our ending equity is, you can adjust it for the debt to capital ratio and you can see we expect to generate cash throughout the rest of 2005. We'll just improve those metrics.

Right. As -- as the year progresses can we see the free cash flow being deployed, you know, fully to debt reduction?

A substantial portion of it, yes.

Okay. All right. Great. Thank you very much.

We'll take our next question from Brett Hoselton with Key Banc Capital Markets.

Good morning.

Hey, Bret.

Good morning, Bret.

Good morning, Bret.

Looking at the raw materials impact some of the other suppliers are apparently assuming some sort of net release, maybe in terms of lower price reductions or something along those lines, as they are forecasting earnings into 2005. My question to you is, are you doing something similar to that or --

We don't -- let's put it this way. There are some OEMs that have a more rational and more humane approach to their, the way they handle pricing and let's just say allowing us the ability to pass through pricing. Those OEMs that we are aware of based on past practices in 2004 or expectations for 2005, those are baked into our number already.

The ones that we typically don't get anything from, we haven't assumed anything but, you know, we continue to negotiate with every customer we do business with to go after pass through on materials because it is becoming a ridiculous issue in the industry. And, you know, no, no supplier or the supply base as you can see, the supply base in general cannot continue to basically suck this up.

Okay. And then, Robin, in the Beru acquisition, I believe the tender offer for the minority portion expired at the end of January. Is that correct?

Yeah, there's a, mandatory two-week examples tension to that so we're still in the, in the extension period. We really have -- cannot make any comment on that tender offer as it is still ongoing and that's a transaction that's going on in Europe.

That's fair enough. And, I guess what I was going to ask, would you expect to update us towards the ends of February, March timeframe as to what happened there?

I believe the offer period ends on the 10th of February. So some time after -- a couple days after that when we have some accounting of it.

Okay, excellent. Last conference call you talked about new venture year, I apologize -- you talked about a third piece of General Motors business being awarded. What was timeframe on that?

Well, let's just say that we have announced that we are growing with a North American automotive OEM for four-wheel drive transfer case applications. And that's basically all we have said and that's all we can say at this time. You'll have to form your own conclusions.

Fair enough. Thank you very much.

Thanks, Brett.

We will take our next question from Michael Bruynesteyn with Prudential.

Morning, folks.

Good morning, Michael.

Good morning, Michael

Could you bring elaborate on the $2.7 million write-off that you discussed, or briefly talked about on the call earlier and the European restructuring? Were those the same thing or two separate items?

Very closely linked. That's activity going on in our European operations. As we continue to grow we're kind of restructuring. As Tim said, constant cost focus in this company, cost containment, cost reduction, and that's just part of that cost reduction focus we have. It happened to end up with a little bit of restructuring going on in Europe.

Is that, is that sort of a normalized rate of restructuring cost?

No, not at all.

So you wouldn't expect to see more of this in 2005?

That's correct, we would not.

And was -- is there more than the 2.7 in the quarter? Or was the European restructuring referred to included in the 2.7?

No, the European restructuring is part of our cost of sales.

Okay.

The other net were figured asset write-offs that were, were throughout a number of facilities throughout Borg-Warner. U.S. and Europe.

And, what was the European number, in cost of sales?

We're not disclosing that.

Okay. And then just to clarify this, 2005 earnings growth over the, of over 10% that's in light of the tax impact at starting point in '04, are you basically backing off of that, and saying, you know, on the tax adjusted basis, I mean, sort of on an operating basis, that's your starting point?

Yeah, what, what we want people to understand is that was a year end tax adjustment. We want you to understand what the business looks like on a run rate tax basis, which is about 30%. The comparisons we have year over year continue to be based on that 30% run rate tax rate in 2004 and the expectation that, that we'll be at about that rate in 2005. We are trying to get people to understand and compare apples-to-apples here.

All right. Thank you.

Okay.

One thing I would like to adjust in general as we continue to talk about our focus on cost reductions is, we continue to focus on growth with leading technology and product, product leadership. In addition to that focus on growth and technology and global growth with a diversified customer base in Europe and Asia and diversified geographic manufacturing footprint, we just added a third leg to the stool with a manufacturing focus. So, I don't want anybody to think that we are not continuing our business model with our lead foot forward on technology and customer diversity.

We'll take our next question from David Leiker with Robert W. Baird.

Hi. Actually it's Laura Thurow, here.

Hi, Laura

Hi, Laura.

Just a couple of questions. First housekeeping, currency, did you give the operating income impact of that? Or can you?

No, we didn't. I can tell you in the -- for the year, let's start with the quarter. For the quarter, currency added about $0.05 per share off set by the tax rate year over year, about $0.025 a share and the increased shares outstanding.

So, the net earnings impact that you see year over year is basically from operations when you take those three into consideration. The same math works for the full year. It's the same situation, it's about 20, $0.20 or so impact positive from an earnings perspective offset by both the higher tax rates, and I'm talking about the 30% versus 28.5%, and also by the increased number of shares outstanding, the 56.5 versus 54.6.

It's basically a wash, so as you look at earnings comparison year over year they are apples-to-apples comparisons adjusting for all those factors. It's true operations performance.

Okay. And then, on the revenues. With revenue up, you know, 90 million in gross profit, and we look at it excluding D&A up 6 million, we would have expected that to be down 10 to 15 million, I guess. Is all of that positive variance in improvements on materials? I guess your gross profit was higher than we would have anticipated. Did you do better than you may have expected on commodity prices?

Could you go through the question again?

As we look at things, you know, revenue is up 91 million year over year. Gross profit, as we look at it, so taking out D&A, was up $6 million, whereas we would have maybe expected that to be a 10 to 15 million shortfall with the challenges you're facing. So the upside there, can that be attributed to less increase in material costs?

No, it can't be attributable to less increase in material costs.

Okay.

It's definitely attributable to a focus on more efficiently the run of our business, smoother launch costs, focused cost reduction, all thing we've said in earlier questions. It's just basically tire -- tighter, tighter focus on running our business.

All right. And just a couple more housekeeping --

Which I will say are not one time events. They will continue on.

Sure. Okay. Then the 20 million impact that you mentioned in Q4 for materials is that net of recoveries?

No, that's just a gross impact number.

And do you have that as a net impact?

No.

We don't quote other than that.

Okay. And lastly, well two things, the D&A, I know you don't what about the to give out look for next year because of the uncertainty with Beru but could you give what you're expecting for the base business?

No, I think as, as you look at the growth in our -- in this company from a capital spending perspective, you know, we increased about $15 million in D&A year over year. That rate, and you look at our capital spending, continues to be fairly in line with that 6% of sales, you can expect to see that type of range of increase in D&A on the base Borg-Warner business year over year.

Great, thanks. And then lastly, is Beru is not in the Q4 balance sheet, is that correct?

That's correct. It was a January 4, 2005, transaction.

Great. That's all I have. Thank you.

Thanks, Laura.

Next question, Rob Hinchliffe from UBS.

Actually it's Peter Songfrey (sp) here. Good morning.

Good morning.

Good morning.

I know you don't comment on the individual margins the but could you talk just for a second about how you are trying to position yourself to sort of keep the high margins and the twin scroll and some of the new technologies that you have, what do you need to do in order to fend off competitors here?

Well, I think we've answered this in different ways but I will try to make sure I pull it together. We, we try to create differentiating technology that basically provides value to our customers. We -- by giving them leading technology that gives them fuel economy benefits or emissions benefits, not necessarily at the lowest price but at a reasonable price.

When they combine the leading technology at a, at a reasonable price or fair price, it provides value to them. And I think that that value equation is what basically helps us keep our product away from the hopefully, the commodity type bidding, and bid process of normal, let's just say, long-term type auto parts.

Okay. If I look -- thanks. If I look at IT M, for example, and I'm looking at the Acura RL, they're doing that in-house. Now with the RDX that, that seems to be in-house as well could you give us an update on how ITM is doing?

Well, we were getting -- you know, they're doing -- Honda's always done some of the all-wheel-drive technology inside, inside their own plants. In fact they used to do it all until we cracked some of the business. We, while that vehicle inside we will have the ridge line. So, you know, there's a -- there's a balance. So, you know, and -- and I will state that our technology is very similar technology on the vehicle you just described. The RL, it takes front wheel drive vehicle, goes to all-wheel-drive, goes front to rear and then goes from rear left to rear right.

Okay. So going forward we should anticipate that although you are winning business with to some extent they will continue in house development of these kind of technologies?

Every OEM likes to do some inside. They don't -- they always, you know, they always have multiple options as you know.

Okay. My final question is housekeeping. I'm not sure I got the whole currency impact. I think currency for the year was $140 million impact?

114, on the steel side, $0.20 on the earnings side, again offset by a higher tax rate and the increase in shares outstanding.

Okay. Excellent. Thank you.

We'll take our next question from Scott Merlis with Thomas Weisel Partners.

Good morning, everybody.

Good morning, Scott.

How're you doing?

Okay.

Hi, Scott.

Just wanted to follow up on comments you made regarding '05. The commodity potential gross commodity increment would be 30 to 40 million versus 40 in '04? Was that what I heard?

Yes.

Yes.

That is -- that seemed pretty good considering most of I don't have contracts just expired in December, right?

No, no, all our contracts are phased, there's no one -- .

Oh, it's more phased than I thought.

It's fairly phased and we're constantly in some degree of negotiations unfortunately. But, you know, and so, we have some carry over commodity from last year. We've got some new pricing that will go into effect. You know, so, what you are seeing is -- the total impact I think in 2005 will be a little bit -- will be less than 2004, we hope, or we expect.

And, Scott, as we've said before, we sawed impact of higher raw material price for us, more pronounce the in the last half of the year. Remember we talked in the third quarter and now in the fourth quarter, this has been our toughest quarter. As we look to 2005 as Tim said we've got some carry over into 2005. The comparisons into the first half of the year of 2005 will be much tougher for us versus 2004 and, you know, if you want to look at it as a positive which is difficult for us to do.

But we already had high raw material prices in the last half of 2004. So the comps get a little easier in the last half of the year. Raw material prices aren't going down, but the year over year comparisons get a little easier toward the back half of the year, 2005.

And are -- then to link this to what you said about the EBIT margins for drive train, I think you said EBIT margins could be flat for '05 in drive train.

That's our intension.

That would be -- first I thought there might be more of a commodity hit there, but at least you might have flattish commodity hit, but you still seem to have a double whammy instead of a triple whammy. In other words, are you -- you probably you might have lower industry production at least for the first half? And then, the key question here is, are you assuming lower medium and full size SUV numbers, does that mat -- does that assumption matter much? What is in your thinking for flat EBIT margins for drive train?

I won't take the EBIT margins but I will answer the volume portion of it. We are seeing some decline in light truck volumes particularly around the mid-size SUVs within our customer base.

Not as much on the light truck but more on the mid-size SUVs. And so that -- we saw some of that in the tail end of 2004 and that was reflected in our 2004 drive line drive train numbers. And it's also showing up in the first half, at least the first half of 2005 in our drive train numbers.

Okay. That would make sense. So therefore shouldn't that, hurt EBIT margins in the first half at least,?

It's not helping that's for sure.

So to get a flatness in the EBIT margins you need SUVs to flatten out or is that -- are there just too many other things, or is it many more offsets to that?

No, we're growing, we're growing I think some of the offsets is, we're continue to grow and we haven't -- this is the first time we brought up DCT. and known asked us a question on DCT.

But we are continuing to ramp up on dual clutch transmissions and that, that will continue in fairly smooth throughout the full year and we're going to see some things kicking in in the second quarter and we're going to continue to ramp up, I think we are at about 600 to 650 units per day right now and we are ramping up to 950 to 1000 units per day.

So maybe the missing pieces that the ramp up of DCT. puts you to a volume point where the profit contribution becomes -- is now more meaningful, and you're more over starter -- start up?

You mean more meaningful for DCT?

Yes.

Yeah, I'd agree with that.

And you're more over start up essentially.

Yes. We're, you know, we're definitely over the start up. The capacity's in and we're waiting for, actually we're waiting for the customer orders to basically ramp up to what some of the original schedules were.

Gotcha. Well, that's very helpful. Thank you very much.

Thanks, Scott

Thanks, Scott.

Due to time constraints this does conclude today's portion of the question and answer session. And at this time I'd like to turn the call back over to Mary Brevard for additional comments or closing remarks.

Thank you very much. Thank you all for joining us today. If you have any follow up questions just give me a call and we'll handle them that way. I want to remind you that the replay of this call is available from today through February 8. The call number is (719) 457-0820. The confirmation code is 657499. Thank you all for joining us. Bye, bye.

This does conclude today's conference call. At this time you may disconnect.