博格華納 (BWA) 2007 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the BorgWarner 2007 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. Mary Brevard, Vice President, Investor Relations and Communications. Ms. Brevard, you may begin your conference.

Thank you. Good day to everyone and thank you for joining us. Our release was done before the market opened today. Copies were sent to you and so we hope you have those in hand. We've also posted financial talking points that should help you follow the financial discussions. They're located at borgwarner.com, Investor Information Webcast Third Quarter 2007 Conference Call Talking Points. These notes will be helpful to you, as I said, as we review the financials and the operations.

This call today will also be replayed through November 1. The call-in number for replays is 800-642-1687. The ID for the conference is 20121859. The replay is also available on our website.

We have a number of conferences coming up at which we will be participating -- the Gabelli Automotive Conference on October 30 in Las Vegas; the Barrett Industrial Conference in Chicago on November 6; and of course, we'll be at the Auto Analysts of New York Conference in conjunction with the International Auto Show here in Detroit. The analysts meeting is January 16 to [18].

Before we begin this call, I need to inform you that during this call we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters we discuss today.

Moving on to our results, Tim Manganello, Chairman and CEO, will be providing comments on the quarter and industry trends, and Robin Adams, our CFO, will discuss operating results in the rest of the year. With that, I'll turn it over to Tim.

Thank you, Mary, and good day, everyone. BorgWarner had another great quarter with record third quarter sales and record earnings. The outlook for the fourth quarter also looks favorable, so we refined our full year guidance to the high end of our range and that range is now $4.73 to $4.83 per share.

During the third quarter, we experienced sales growth in every region of the world and in every major product family. All driven by demand for our fuel efficient engine and Drivetrain technology. In addition, the third quarter of 2007 clearly demonstrated the positive results we achieved by our restructuring initiative taken in the third quarter of 2006.

Sales in our U.S. operations were up a solid 10%, outpacing domestic vehicle production, which was up only 3%. At the same time, sales outside of the U.S. grew 23%, excluding the impact of currency compared with vehicle production outside of the U.S. that was up only 7%.

BorgWarner continues to be in the sweet spot of the global auto market. Our third quarter highlights include record sales of $1.3 billion, up 24% from third quarter '06. Third quarter '07 earnings were a record $1.13 per diluted share, excluding a net gain of $0.28 per diluted share related to tax adjustments. That's up 47% from the third quarter '06, on an operating basis which excludes the restructuring charge and a gain on a divestiture last year.

So let's discuss our group highlights. Engine Group results include third quarter '07 sales up 27% to $934 million. Earnings before interest in income taxes were up 33% to $101 million. Sales in the U.S. were up 12%, primarily due to higher sales of turbochargers and emissions products. Now, sales outside of the U.S. were up 24% as the Group continued to benefit from European and Asian demand for turbochargers, timing systems, thermal management products, emissions products and the European demand for diesel engine coldstart ignition systems.

Now, Drivetrain Group results include sales which were up 17% to $387 million. Earnings before interest in income taxes were up 103% to $27 million. Sales outside the U.S. were up 11% excluding the impact of foreign currency and the acquisition of our European Controls business. The Group continues to benefit from increased demand for dual clutch transmissions and TorqTransfer products. Sales in the U.S. were up 8%, primarily due to higher sales of our TorqTransfer products. Our global technology leadership, global presence, and customer diversity have been key elements in the successful execution of our growth strategy and our cost discipline continues to help us return to our historical margin levels.

So let's talk a little bit about recent BorgWarner highlights. On the engine side of our business, the Turbo and Emission Systems business, launched its Variable Turbine Geometry or VTG turbochargers, and the Hyundai Grand Starex diesel van. This is our sixth new VTG turbocharger product launch in Asia in the last three years.

In the Drivetrain segment, BorgWarner TorqTransfer Systems has been selected by Chery Automotive as the driveline systems integrator for a new all-wheel drive SUV. This vehicle will also feature our patented NexTrac technology along with our control systems. As a driveline systems integrator, BorgWarner will specify systems requirements and coordinate design and execution to provide a competitive edge in the marketplace. This is the kind of project that makes the best use of our all-wheel drive expertise.

In North America, the all new 2008 Cadillac CTS will offer BorgWarner's all new, all-wheel drive technology as optional equipment for the first time beginning this year. Also attracting a lot of attention is our dual clutch transmission technology. If you are at the Tokyo Auto Show, look for three Japanese vehicles with new dual clutch transmissions. Two have our content and one is a concept car with great potential for DCT.

Our people just spent the last two days at a special pre-show media event with Nissan, helping them unveil their much anticipated, and seems to be, very successful car, the GTR. We helped them design the dual clutch transmission and it delivers crisp shifts and head-snapping performance. It is a great driving machine and one that is a superb platform for experiencing the full range of dual clutch transmission, efficiency, responsiveness, and versatility. The Nissan GTR is also an important milestone for us since it is the first launch of our dual clutch technology in a Japanese transmission. It is also the world's first transaxle dual clutch transmission with a front engine and a rear transmission. The dual clutch transmission is standard equipment on the Nissan GTR and it features four of our advanced DualTronic technologies including the integrated dual clutch module, which includes clutch control and shift actuation modules, along with synchronizer assemblies.

The sports car is expected to go on sale in Japan in December and to be available in other markets, including the U.S., next year. With this dual clutch program and others that we have under contract, we expect production of our dual clutch transmission modules to increase 500% over the next six years. And at full launch in the 2012 to 2013 timeframe, we will be providing our innovative technology to an expected 2.3 million dual clutch transmissions per year. This compares with 450,000 dual clutch transmissions that will be produced this year, all which have BorgWarner modules.

We're also talking about our new DCT or dual clutch technology on the horizon. This technology is the second generation DCT, which is even more cost and fuel efficient dual clutch technology. In addition to that second generation, we have a completely new BorgWarner patented compact dual clutch transmission for small cars and for developing market transmissions. Stay tuned for that new product.

Now, on the diesel front, diesel engine penetration has reached 52% of the engines in Europe. Now, for those of you who attended the Frankfurt Auto Show, you saw the proliferation of clean diesel technology that continues to drive our growth.

In the U.S. we expect production of clean-powered light vehicles to grow 50% over the next five years from a very small base. But diesel sales will grow even more with sales including imported -- imports expected to jump from 3% today to 12% by 2015 based on our research and that of industry experts. We certainly expect diesel vehicle sales to outpace hybrids by 2015 in the United States, where close to 50 new vehicles with diesel options will be available over the next few years, including both light trucks and passenger cars.

Recently, Volkswagen has announced that the popular Jetta will be available in a diesel that does not need a Urea filter to meet regulations in all 50 states. This is a great vehicle to attract mid-price U.S. buyers to the diesel market.

Now, Daimler is using new TV advertising to promote the efficiency and availability of three of their diesel models. BMW has just announced the first major diesel push in the U.S. and Canada. The push will begin with BMW's three liter in-line six cylinder twin turbo engine with BorgWarner's regulated two stage turbochargers. BMW calls it the most efficient turbocharger there is today.

So as you can tell, we have a lot going for us here at BorgWarner. The global powertrain technology trends that demand improved fuel economy, lower emissions and better vehicle performance continue to drive our growth. I don't think any supplier is better positioned than we are to benefit from the demand for cleaner powertrains around the world. I expect that when we unveil our new business backlog for the period 2008 through 2010 in November, we should see the positive results of our strategic focus on fuel economy and emissions. And as I said earlier, BorgWarner continues to be in the sweet spot of the global powertrain market.

Thank you and with that, I'll turn it over to Robin.

Thank you, Tim, and good morning, everyone. Before I get into the financials this morning, let's review the industry environment during the third quarter this year, which was an improvement over the same period a year ago. Global vehicle production was up 6% with growth in every major region of the world, including the U.S., where as Tim mentioned, production was up about 3%.

The 3% U.S. growth in the quarter was primarily driven by comparison to a weak third quarter in 2006. But this is the first quarter in over a year where we have seen growth in the U.S. market, which is encouraging. Global vehicle production, excluding the U.S., was up a solid 7%. So despite the growth in the quarter versus last year's third quarter, I want you all to remember that overall production levels in the quarter were below first and second quarter this year, which is typical of the industry due to the summer shutdowns in the U.S. and the typical August vacations in Europe.

Given that industry background, let's look at our record third quarter financials. On a U.S. GAAP basis, net income was reported at $1.41 a share compared with $0.68 a share reported in the third quarter of last year. And while that indicates a growth rate of over 100%, it's not really a fair year-over-year comparison; so let me help you get the numbers in line to understand the true performance of the Company.

Reported net income in this quarter included a net gain of $0.28 a share related to tax account adjustments, primarily due to a change in the statutory tax rate in Germany that goes into effect in 2008. Without the tax gain, earnings were $1.13 a share, which is more comparable to prior periods, and reflects a very strong 47% increase from a comparable third quarter 2006 earnings of $0.77 a share. And that would be 39% increase in earnings, excluding currency.

As you remember, third quarter 2006 included both a gain related to a previous divestiture and a restructuring charge [the] net effect which lowered 2006 net income in the quarter by $0.09 a share. On a U.S. GAAP basis for the first nine months of the year, net income was $3.69 a share compared to $2.95 a share for the same period a year ago. And again, the same adjustments that we just talked about regarding the third quarter also applied to the nine month comparisons.

Excluding these items again, net income for the first nine months of 2007 was $3.41 a share versus $3.04 a share for the same period a year ago; about a 12% improvement year-over-year. All these comparisons for the quarter and the year-to-date earnings per share appear on a table on page three of our press release to help those of you I may have just lost in the conversation here.

Currency, primarily the euro, favorably impacted earnings by $0.06 a share in the quarter and $0.15 a share year-to-date. Our sales growth in the quarter was 24% or 18% excluding the impact of currency, and another quarterly strong performance compared to what's going on in the marketplace. And as I said earlier, global vehicle production was up 6%, excluding currency were up 18%; triple the growth rate of the industry.

Our sales growth outpaced vehicle production growth in every region of the world in which we sell product. In the U.S., sales were up 10%, outpacing domestic vehicle production of 3%. Outside of the U.S., we posted strong growth of 23% which excludes the impact of currency. And that compares with 7% market growth outside the U.S. Sales from the U.S. in the quarter represented 34% of the total versus 38% last year. Or looking at it from a flipside, outside the U.S. our sales represented 66% of our total sales versus 62% in the third quarter last year.

Year-to-date our sales increased 17%; 12% excluding the effect of currency versus 4% global vehicle production growth around the world. So again, triple the rate of the industry activity.

In the quarter, our operating income margin improved to 7.5% versus 5.7% reported during the same period a year ago or 6.3% a year ago, excluding the restructuring charge and gain from a divestiture in the third quarter that I mentioned previously. If you look at the 7.5% versus the 6.3% adjusted from last year, that's a 120 basis point improvement year-over-year in the quarter. Good strong margin improvement.

SG&A, although up $17 million, was down to 10.2% of sales in the quarter versus 11% in the third quarter last year. The $31 million of incremental operating income in the quarter [on] $254 million of incremental sales translates to an incremental margin of about 12.2%. If you adjust for the 8% to 9% margin on the increased currency-related sales, $3 million of nickel pricing increases in the quarter and $3 million of cost related to a change in certain retiree health care benefits, the incremental margin was north of 16% in the quarter; good strong performance by our operating units.

Below the operating income line, equity and affiliate earnings was up $2.1 million, primarily related to stronger operating performance of our transmission component joint venture, NSK-Warner. Interest expense and finance charges were slightly lower, primarily due to lower outstanding debt levels offset by higher short term interest rates.

Our reported effective tax rate in the quarter was 10.9% and again, was positively impacted by certain tax account adjustments that we talked about. Again, the primary adjustment was related to a year 2008 change in the statutory tax rate in Germany from about 38% to approximately 28%. Excluding the impact of the tax adjustments, our normalized effective tax rate for 2007 remains at about 27%.

Now, let's move on to our Operating segment performance. We saw sales growth not only in every region of the world but in every one of our product areas during the quarter. The Drivetrain Group's third quarter sales were up 17%, which is strong performance for a group that has been under a great deal of North American production volume-related pressure in recent quarters. In the U.S. Drivetrain Group, sales were up 8%, primarily due to higher sales of its TorqTransfer products. Drivetrain Group sales were up 11% outside of the U.S. excluding the impact of currency. And the Group continued to benefit from increased demand for dual clutch transmissions in Europe and TorqTransfer products in Asia. The EBIT margin for Drivetrain in the quarter was 6.9% compared with 4% last year; that's almost up 3 percentage points. And that improvement is largely due to the impact of the North American restructuring actions taken in the last half of 2006. If you remember, the majority of the restructuring actions last year were in the Drivetrain part of the business. As a result of that, Drivetrain has shown margin improvements in every quarter this year versus last year.

On the engine side of the business, third quarter sales were up 27% versus third quarter last year. In the U.S., sales were up 12%, primarily due to higher sales of turbochargers and emission products. Outside of the U.S., sales were up 24% excluding currency. The Group continued to benefit from European and Asian automaker demand for turbochargers, timing systems, thermal management products and emission products. The EBIT margin for the Engine Group in the quarter was 10.8%, also up compared with third quarter last year of 10.3%. Nickel cost increases in the quarter, as I said, were minimal at $3 million compared to much higher levels in the first and second quarters of this year.

Now, let's talk about the balance sheet and cash flow. Our investment grade capital structure continues to be strong. Our debt to debt-plus-equity ratio was 22% at the end of the quarter versus 28% at the end of the year. Net cash provided by operating activities in the first nine months was $366 million; up $95 million from the same period a year ago, primarily due to improved working capital management. And regarding working capital levels, our net operating position at the end of the quarter which, again, we define as receivables and inventory plus payables and accruals, increased about $75 million since year-end 2006 as a result of currency translation, which was about half of the increase. And that increased level of business activity at the end of September relative to the end of December last year.

Capital spending including tooling was $195 million in the first nine months of the year, relatively flat with $192 million last year. These investments continued to support our $1.7 billion book of new business through the end of 2009 as well as our cost reduction and productivity improvements. Year-to-date stock repurchases totaled approximately $38 million. Our aftertax return on invested capital at the end of the third quarter on a rolling four quarter basis was strong and improving at 12.5%.

To summarize, we had another great quarter financially with record sales and record earnings for a third quarter of BorgWarner's history. Let's talk about the guidance for the year.

We have refined our full year earnings guidance to date primarily in line with our strong performance in the third quarter and expected continuation into the fourth quarter. Our new earnings guidance is $4.73 to $4.83 a share, which represents anywhere from 16% to 19% growth over a comparable 2006 earnings and also is at the high end of our previous range. And this guidance excludes the $0.28 a share favorable impact of third quarter tax account adjustments that we talked about but does include the negative $0.17 per share warranty-related charge that we took in the first quarter of 2007. For those of you who like to include the $0.28 of share favorable tax adjustment, our guidance would be $5.01 to $5.11 a share.

BorgWarner, with its improved cost structure in North America, its technology leadership, its geographic and customer diversity, and its intense focus on managing costs, continues to leverage industry global market growth into superior double digit sales growth and strong operating performance. And we continue to believe that we are well positioned to continue to profitably exploit the powertrain trends around the world that will drive our long-term growth for many, many years to come.

And with that, I'd like to turn the call back over to Mary. Mary?

Thank you very much, Robin. I would ask the call coordinator, Tina, to please give us the protocol for the Q&A session. Tina?

(OPERATOR INSTRUCTIONS). Rich Kwas, Wachovia.

Robin, question on margins here. Gross margin was up a little bit year-over-year but you had a fairly easy comparison. I thought it would have been up a little bit more significantly. Was there anything that kept margins, suppressed margins, during the quarter on the growth side?

Well, we did have some growth year-over-year, as you say, on the gross margins side, [17.4%] versus [17.3%]. As you look at our gross profits, actually first quarter was slightly ahead of that; we were 18.1 in the second quarter. Third quarter is always a tough quarter for us from an operating perspective; again, due to the vacation taken in the U.S. and Europe and the shutdown periods. So third quarter is typically a weaker quarter for us when you look at the four quarters of the year from a gross profit perspective.

The other thing too as you look at -- there's a tremendous amount of our growth coming from overseas. And a lot of this growth, as we have said earlier, the incremental margin is at the lower end of the range -- the 15% line versus the 20% incremental margin because we are putting additional infrastructure in place. So those are the really two drivers for the gross profit performance in the quarter. And obviously, fourth quarter always tends to be a stronger quarter for us. And so you will see stronger gross profit margins in the fourth quarter as well as operating income margins.

Okay. And so, if I'm hearing you right, aside from the seasonality, it's a mix of business, right, for the third quarter?

Yes. Plus we've got a lot of launches going on too. So those are all things that add up.

And then Tim, on the Chery agreement, it sounds like your systems integrator there, is that a higher margin project for you relative to similar type business that you've done in the past?

Well, what we're doing is we're helping them design and develop the total all-wheel drive system. And as part of that package, there will be other people's components in that package along with, obviously, the BorgWarner torque management couplings and so forth. So, it's a way for us to help them optimize their system and at the same time, utilize our products as part of that total systems package. But there will be other people's parts involved. But we're not buying the other parts, we're not responsible for the other parts in terms of warranty or service or any of that other stuff. We're just helping them integrate the complete design, which will include our parts along with other people's.

Okay, thanks. And then on, finally, Robin, on Drivetrain margin, you did [6.9] this quarter on the EBIT side. How should we think about [2000] going forward over the next few quarters with -- you're starting to comp the restructuring here. How should we think about the EBIT margin in Drivetrain?

Well, obviously, we think the business is stabilized right now given where we were last year. You're seeing the benefits of the restructuring. So I would expect margins to be able to maintain somewhere in this range on a relative basis.

Joe Amaturo, Buckingham Research.

Quick question related to Drivetrain. Could you quantify what the restructuring benefit was in the third quarter year-over-year?

I think the way we've characterized that benefit is looking at the incremental margins. If you look at the incremental margin on loss sales, which is basically what we restructure to fix, in the third and fourth quarter last year the margin, incremental margin, on loss sales was like 45% -- 44%, 45% in the third quarter, north of 35% in the fourth quarter. And as we got to the first and second quarter this year those incremental margins were closer to $0.20, $0.25 on the dollar.

So the way to look at it is you look at the decline in sales and again, third quarter and fourth quarter last year were both north of $50 million. If you look at the incremental margin on that -- instead of $0.45 and $0.38 on the dollar, I think actually were the two numbers -- closer to $0.20, $0.25, that's really the benefit.

Okay. And then next question. Could you just tell us how many shares you purchased in the third quarter, if any, and what the average price was?

Yes, we did purchase shares in the third quarter. And I've got that somewhere. We purchased a little over 250,000 shares in the quarter. And, yes. It was -- I know the price -- it was about $85 a share.

Okay. And then lastly, you spoke about the improvement in working capital year-on-year. How should we think about that for the full year? Should that continue through the full year or through the fourth quarter as it relates to the cash flow?

The improvements we have through the first nine months will hold through the end of the year. I think -- as people remember from a working capital perspective, the fourth quarter is always a stronger quarter, primarily because of receivables. And this phenomenon where receivables build up in September and June relative to December because of the higher sales levels, those receivable levels will be lower as we get to December because of the lower sales activity in December.

So you will see a little bit more strength in working capital in the fourth quarter from a receivable's perspective. We should be able to hold on to what we've generated already this year.

And build on that a little bit, I'm assuming, right? (multiple speakers)

Yes, our inventory turns have improved; for the first nine months were up almost a turn. Some are close to a turn in the first nine months. And we hope to hold on to that -- expect to hold on to that. And again, you'll see some working capital come off the balance sheet from a receivable's perspective, as well.

Okay, thank you. See you next week.

Chris Ceraso, Credit Suisse.

A couple of things. Maybe we can start with a big picture question. If you look at it on a global basis, what would you say your share of the turbocharger market is?

Right now we're in the low 30s percent.

Okay. Can you break that down, Tim, in terms of light vehicles versus commercial vehicles?

Well, I don't have exact breakdown but I can tell you we have a heavier marketshare on commercials than probably light vehicles, although in Europe we have a pretty -- a light share or light-duty share in that turbocharger market. Europe is pretty strong. So, I don't have the breakdown, but the blended average globally is in the low 30s.

I think if you separate the two pieces, I think each of the pieces as well are 30% plus.

Is that right?

Yes.

Okay.

I know that your traditional top line guidances has been 8% to 11%. You've been doing notably better than that recently, even ex-currency. What is your outlook for the next few years? And I know you haven't issued the specific backlog yet, but is it fair to expect that you'd be running at the high end of that or better in the next [let's say] three years?

Well, we don't quite know what the final backlog numbers are. But I think on a top line basis we've been above 10% in terms of growth. We continue to plan on being in that range. And we like to see bottom-line growth also above 10%. So we plan on being in that range for a while; a long while.

I think from our perspective what you need to look at are the fundamental trends that are driving the growth in our business. And as we look at those trends, there's nothing going to change in the next three years and in the next five years with respect to the tremendous demand and growth of turbochargers, dual clutch transmissions, the need for more fuel efficient and emission-friendly powertrain technology. Those trends aren't going to change and therefore what drives our business growth isn't going to change either.

Okay. You mentioned the compact version of the dual clutch. Can you just revisit that? This is mainly something that you've talked about with the Asian makers, right? Can you just give us a feel for the market opportunity there relative to the $2.3 million of the regular DCT that you see by 2012?

Yes. Sure. Well, first of all, none of it is included in the 2.3 million units. The market opportunity is -- started out we were developing this product for let's just say micro-cars in Japan, people's cars in China and India. And we've got a product -- this product fits those applications and is very cost competitive. Those cars are price cars, especially when you get in India and China. And they're probably -- the basic car will be a manual transmission. But there will be people who want to upgrade to automatics and they're going to want a low cost automatic.

So this technology will fit that category. But, we've also developed this technology to fit higher torque vehicles to the point where it will go all the way up and handle midrange vehicles, mid-size vehicles. In terms of torque capacity, it's got a little more torque capacity for diesel engine vehicles than it does gas engines. So this is a product line that has a huge future. We've had a couple of development projects with some Asian OEM's, I'll just say in at least two different countries -- Japan and China. And we see a lot of -- a lot of opportunity for this, all of which is outside our backlog. This is all stuff that's probably in the four to five year range timeframe in terms of when we start launching this stuff.

I think if you look at the growth in A&B segment cars, that's really where -- that's a good growth rate to look at; the transmission is just for that market.

Some people say by 2012 that's an 18 million unit market globally.

What is it today?

12. In that range. 11 million or 12 million.

Last one, just a housekeeping item. On the cash flow there, what was the sale of marketable securities?

That's just moving some securities into more liquid cash. It's a movement from -- if you look at the cash flow, it's basically moving out of marketable securities and moving into cash. We view them all as one and the same; from an accounting perspective, obviously they're different. That's why we disclose them differently. But from our perspective, it's just short term cash.

Robert Barry, Goldman Sachs.

Just a follow-up on that last question. How big a content per vehicle difference is there for BorgWarner on DCTs on the AB segment cars versus some of the other vehicles?

Well, the content on the other vehicles right now -- let's just take the Shanghai Automotive, where we supply a number of components like five or six modules. We supply to them, they do the assembly. It's extremely high content. I don't have the ballpark number. Mary might have it. But we can get it and we can talk about it at the next conference or something. But it's a high content. This -- on this emerging market transmission, the content could be all the modules or it could be the whole transmission if we decided to go to the transmission business. So, the content could be huge.

But the bottom line is we're really still in development stages and we don't have hard numbers on any of this stuff yet.

Got you. Got you. Okay.

It will be profitable, I'll tell you that.

Well, we don't do anything that isn't profitable. I think we've tried to prove that.

The restructuring that you started in the back half of '06, is there -- the cadence of that impact likely to be bigger in the fourth quarter or was it the brunt of it in this quarter, in terms of the year-over-year impact?

The size of the year-over-year impact that we saw in the third quarter we'll see basically the same type of sizable increase with respect to margins in the fourth quarter as we did in the third quarter year-over-year. So it's more of a -- what you're comparing to. I think we saw the benefits of the restructuring, both in our first and second quarter financials this year. If you look at our reported operating income margins, we had pretty strong margin in the first quarter. Excluding the warranty-related charge in the first quarter, we were like 8.1 versus 8.2 in the prior year. We were 8.3 in the second quarter.

It's the comparison in the third and fourth quarter that looks pretty dramatic but the improvements are already built into our operations. But to your point, we'll definitely see a dramatic improvement in the fourth quarter of this year versus fourth quarter last year. Fourth quarter last year, our operating income margin was 7.4% when you exclude all the restructuring and everything. And we expect to see similar improvements in the fourth quarter as we did in the third quarter with respect to margins.

Okay. And then just finally, what tax rate should we model for 4Q in '08?

Well, 4Q, as I've said, we expect our run rate for the year to remain at about 27%. '08 is another issue and we're looking at that right now. The reason we adjusted our tax accounts in the third quarter was a result of the change in the tax laws in Germany. Again, reducing the tax rate from about 38% to 28%, depending on the regional issues and other things. But generally, it's a pretty sizable reduction. We will reflect that on a run rate basis starting in 2008. So we're going through the impact right now. I think just if you look at it on the surface you would expect a lower effective tax rate in 2008 than 2007, all other things being equal.

How much lower yet, we're still going through. But certainly if everything else in the world stays the same, we would expect a lower effective tax rate next year. We'll tell you how much as we get into January and release our guidance for the year.

John Murphy, Merrill Lynch.

Getting straight to the balance sheet in your cash flow, what's your current stance on acquisitions? Is there other possibilities out there similar to Beirut?

There are possibilities out there. Tim and I reviewed a list just yesterday of activity we're going through, as we do every couple of weeks. As we've said before, we're not buying assets that are out there that are being marketed for sale. We're looking to buy assets that actually aren't for sale. It's a little bit more difficult to predict the timing, but I do have, from my perspective, a very strong list of options that we're pursuing. And hopefully we get one of these things home pretty soon.

What I would add to that is the range is from large to small. So that we've looked at all sizes. Some of them are bite-size and some of them would be something kind we'd -- kind of a like a Beirut acquisition.

Okay. And then just on turbochargers, your marketshare you're saying globally is about 30%.

The low 30s.

Low 30s, I apologize. On GDIs, though, I mean, if you can just remind us of your competitive position on turbochargers for GDIs, because I think you guys are well ahead in that market. I'm just wondering if you could sort of review where you stand there?

Yes. On the GDIs, which is the gas direct injection engines, we were the first ones to launch turbochargers with variable turbine geometry for the gas. We've continued -- we are the strong player in that market. At one time we were probably the only player in that market for DG -- VTG. I don't know if our competition has launched anything yet, but I don't think so. But -- so we are the go-to turbocharger company for that marketplace if you want a turbocharge gas engine.

And if we think about how the North American market develops, it seems like you think diesels will be a larger opportunity for the market here. Might that be a very big opportunity for you here in North America as you sort of maintain a dominant position?

Well, I'm sure our competition will enter the market. But -- and they talk about it. But let's just say this -- the North American market represents a tremendous opportunity to convert current gas engines to turbocharge gas engines now that direct injection technology is being launched at various engine platforms. So we see North America, Japan, and all the markets around the world as tremendous opportunities for turbocharge gas engines.

Rod Lache, Deutsche Bank.

The organic growth, excluding affects, has been exceeding what would be implied by the backlog even adjusting for the better than expected industry production. Is that a function of short term wins? Or is that mostly just the mix of production is becoming more favorable, more fuel efficient kind of vehicles?

Well, I think it's more of the mix. Short term wins -- we know about short term wins well enough in advance because there's no such thing as short term in this industry any more. It's two, three years, we know about it. So it is mainly volume and mix. Let's just say this. Some of the key customers we have for turbochargers and a lot of our other products have been reasonably successful in their markets in terms of increasing their volumes. And diesels are just continuing to grow. And turbocharge gas engines in Europe continue to grow. So, when I say we're in the sweet spot, I really mean it.

And when you think about recasting the three year forward backlog, do you sort of recast mix assumptions? So obviously new business wins generally are a couple of years ahead, so things that would move the near-term backlog would be like mix assumptions and FX assumptions. Do you take that into account?

Yes, we take mix, volume, currency. We re-cast that each year.

Okay. And what was the FX assumption that you used when you put out that backlog last year?

125.

Okay. Great. And then on the U.S. growth, that's been particularly above trend. U.S. engine, a 12% increase. What is that turbo program that you -- or the turbo programs that are driving that in the U.S.?

U.S., that's --

Navistar. On the TorqTransfer side, we've got to remember the comps for last year in the third quarter were horrible because of the -- remember all of the -- we were seeing 20% and 25% declines in schedules almost with no notice in the third quarter last year on trucks and SUVs. And so the comps were pretty easy from the -- actually there was increased growth from the third quarter of '06 to the third quarter of '07 on our four-wheel-drive business because of all the schedule cuts last year.

Rob Hinchliffe, UBS.

Just a couple of questions now. In Frankfurt, there are a couple of suppliers that were also showing turbos for the first time, guys that currently don't make them today. What are your thoughts on new competition coming into the market there?

Well, I think it's a growing market. It's a global market. There's a lot of people that are interested in it. I think some of the people see the growth in the turbocharger market and say, we want in. So there are some Europeans especially that would like to see some -- that are thinking about getting into the product line.

It's not easy to get into the turbocharger business. We could have never done it without doing an acquisition. And if somebody wants to enter into the turbocharger business and they want to do it organically, I'd say it's going to take them five to seven years to get up to what I would say a reasonable level of technology.

So, are there partnership opportunities then that BorgWarner could benefit from?

It's a very good business for us. I don't know why I would not want to enter into a partnership. But that being said, if you look at turbochargers as a part of a more -- as a larger system, there's probably some alliances and some technology cooperations we could work with, with other companies to basically increase or optimize engineer management, both diesel and gas engines. And we work with people. We work in cooperation with other companies from both the diesel DEGR valve side, the Beirut, instant starting systems for diesels and also turbochargers.

The goal is to optimize emissions and reduce it and improve fuel economy. You've got to do it in conjunction with other suppliers and you've got to do it with the OEMs.

And then just one more question -- the DCT light. You mentioned earlier, Tim, something that sounded interesting. If you decide to go into the transmission manufacturing business, which is something that you don't really do today, can you talk a bit more about that? What are the pros and cons of going down that road versus kind of shipping modules like you do for DCT today?

Well, let's just say this. We know that business. We used to be an automatic transmission manufacturer. We use to be a manual transmission manufacturer. We still have all that expertise. Right now we are in the module business and we have some tremendous technology for transmission modules.

There are other parts of the -- there are parts of the world where OEMs are in other parts of the world where they don't have any expertise on automatic transmissions. But they do have manual transmission infrastructures. So, in addition to just being a supplier of major modules, we can help them with complete transmissions. And how we fit into that, we'll have to decide for the future.

And a quick follow-up on that. This transmission, if I remember, Tim, is not -- it's completely different than a regular manual transmission, right?

Right.

It's not as simple as using existing infrastructure.

Here's the best way I can describe it. If I take the generation one DCT and the generation two DCT deal I just talked about, which is more cost-effective and more fuel-efficient, those basic technologies start as a manual transmission, take an existing manual transmission and convert it to an automatic using dual clutch technology.

What we asked our extremely bright engineers to do, that are very knowledgeable about transmissions, is forget starting with a manual transmission. Just start with a clean sheet of paper and design -- instead of converting a manual, just start with a blank sheet of paper and create a transmission that starts as a dual-clutch and isn't converted. And that's what we've done with this, what I'll call emerging market dual clutch transmission. And because of that we've been able to optimize and take a lot of cost out of it. And still get good torque [cape caring] capabilities and get a great -- what I think is going to be a really good price point. But you've got to remember, we've got to work in conjunction with the OEMs or the transmission guys. And it has great fuel economy and emissions reduction capabilities.

Great. Thanks, Tim.

That's probably as far as I can go now.

Brett Hoselton, KeyBanc.

I was wondering about margin progression. Robin, you've talked about margin's progressing or improving. We saw some of that here in the third quarter. I'm wondering, what are your expectations as you move into the fourth quarter and then into 2008? Do you continue to expect to see them improving? What sort of levels do you expect to see them at? In the past, you've been upwards of 9% or even 10% operating margins. What are your expectations?

Well, as we've said before, we expect by the end of this year to be back to our historical range, 8.5% to 9% margins. And for the year, to be approaching the low end of that range. So if you look at where we are year-to-date, take out all the one-timers and project the full year approaching the low end of our historical range, you could see fourth quarter margins are going to be pretty good. And that margin kind of level will run into 2008, which should put us right back into the 8.5%, 9% range that we've been historically. So we'll see a margin improvement this year as we've seen throughout the year; continued improvement; approaching the low end of our historical range and then into 2008 we'll see margin improvement again to get us back into that range.

If you listen to our operating guys, you'll see margin improvements beyond that. But I think as we've said before, we're very happy growing our top line at industry-leading sales growth rates far in excess of industry activity and maintaining our historical margins in that 8.5% to 9% range.

And then on the acquisition front, would you put a -- what sort of a probability would you put on the likelihood that you'd be able to make an acquisition in the next say, 12 months?

I wish I was a seer of the future. I'd say we have -- let me put it this way. We have some very good solid opportunities. We believe we have some parties who will be interested. We also remember, though, that it takes a willing buyer and a willing seller agreeing on a transaction. And you can never predict that. We have enough opportunities, though, that would suggest we do have a good probability but again, an acquisition is an acquisition. You've got to have two willing partners. There's enough out there for us to look at, work on and chase.

The issue here is that when we do an acquisition, two things -- we're very disciplined in it, and two, it has to have a strategic fit into what we would like to do for the future. And typically the kind of stuff we're looking at is not for sale. There's no book on the street and it's typically not for sale.

So it takes a lot of wooing and dating to basically to figure out a way if there's an opportunity for an acquisition. So, if it was a matter of stuff being on the market and up for sale and just us being one of the five bidders on after they put the books out, that's typically not the way we approach the acquisition market.

I will tell you, Brett, we're wooing and dating some pretty good-looking girls.

Thank you, Robin. Thank you, Tim.

He took that to the extreme, didn't he?

Himanshu Patel, JPMorgan.

Just two questions. On the commodity cost outlook, any words you could give us for 2008 at this point?

It's a little early for us. I can tell you, though, at this point in time, nickel was obviously our biggest issue for 2007. Nickel prices have moderated and we certainly don't see the type of negative impact in 2008 that we saw from nickel prices in 2007. The rest of the commodities are fluctuating a little bit. We will see some commodity price increase pressure next year. At this point in time we haven't quantified it. But as in every year in this industry there will be raw material price increases for one of those raw materials. But nickel, which was our biggest concern -- and I'm knocking on wood right now at this point in time -- doesn't appear to be the issue in 2008 that it was in 2007.

Okay. And then I guess on margins, I mean, given the growth rate you've got, any reason why we shouldn't be thinking about sort of a low 9% operating margin in the near future? I know you've kind of shied away from going above that level significantly, but it just sounds like the rate of operating leverage you should get is pretty good at this point.

You know, I'd be happy to tell you that margins are going to continue to improve. And again, if our operating guys were sitting in the room here they'd all tell you that margins are going to improve. Based on my experience in the industry and with this Company particularly, as I said, we're going to be very happy to have margins back in that 8.5% to 9% range going forward. If they're stronger than that, we'll all be celebrating here. But from our perspective, we'll be comfortable in the 8.5% to 9% range.

Do you see offsets per se or are you just kind of factoring in sort of a normal level of risk, if you will, in terms of where the margins finally fall out?

I could list 15 different risk factors we have that continually put pressure on margins. And I'll start with customers and customers and customers. And then there's suppliers, suppliers, and suppliers.

There's just continuous pressure in this industry on costs and on margins. And again, I don't think there is any reason for us to be saying that we're going to grow our margins to 10% in the next five years. Not saying it's not possible, but knowing the pressures in the industry, where our growth is occurring, which is outside the U.S., and there's a little bit more infrastructure required to support that growth, we're not going to commit to any type of margin growth above that 8.5% to 9% range.

David Leiker, Robert W. Baird.

Robin, given your comments earlier, I think I need to hang out with you more.

Well, that's just my opinion, David. I mean, they look pretty to me. My General Counsel is giving me the no sign here, but I --.

On the revenue number, I digged through this a little bit. Obviously there's some mix issues that are going on there with your customers doing well in the marketplace in adoption of your technology on their vehicles. You also have a mix -- you've kind of alluded to this on the margin side but you also have a mix issue at how the bad the business was last year, particularly for the trucks in North America. I don't know if you can gauge that of how much of an easy comp that is behind the revenue number here in this quarter.

Well, I'll help you a little bit with that, David. As Tim said, as we look at the drivetrain, we had good strong growth in the quarter versus last year. And it certainly was helped in the quarter. This is the first quarter in a long time we've got any help at all with our four-wheel-drive business, as you point out, light truck and SUV. So that did help us out.

As I said earlier, when we look at our growth in the U.S. market, we saw a decline in the third quarter last year of, I don't know, north of $55 million, somewhere in there. We saw a decline in the fourth quarter somewhere $50 million or so -- I can't remember all these numbers. But I remember those girl's phone numbers, though.

In the first quarter, we saw continuing declines in our U.S. sales and in the second quarter as well. And as we told you before, we expect that in the U.S. market, sales to be relatively flat in the last half of the year because we had some pretty easy comps from third and fourth quarter last year.

The four-wheel-drive business, as Tim pointed out, was a little bit stronger in the third quarter. But as we look into the fourth quarter, we see that kind of leveling off trend as well in the four-wheel-drive business. So we don't expect -- the growth we've seen in the third quarter, light truck, SUV-related products, we don't expect to see that growth right now in the fourth quarter.

And the other thing you can look at is when we restructured last year, we laid off and then we did some write-offs. And the lay-offs, a lot of the layoffs were in the drivetrain side. And of the drivetrain side, a lot of the lay-offs were in the four-wheel-drive side. We picked up volume and didn't bring anybody back. So we've run lean. Like I said at the tail end of last year, when we did our restructuring in the third quarter, we projected what we thought was going to be a tough market for 2007. This was when we were back in 2006 we projected a tough 2007. We sized that business to what we felt would be a difficult 2007 level. And 2007 came in a little bit better than we expected on the drivetrain side. And we basically held -- we pretty much held our salary levels and our hourly levels for the year for the last 12 months since the third quarter last year.

So, you're seeing the benefits of that, what I call fairly tight discipline on our hiring structures and operating.

Yes, I know you guys always do a great job on that. Do you have a sense at all whether some of this revenue that we're seeing showing up in '07 are pieces that are in your '08 new business backlog that are showing up earlier? I know in the past you've seen some pulling out on that. Is that happening this year as well?

No, I think it's just volume increases and mix. It's not pull ahead. Programs we still have in our backlog are still there and should kick in just like the same timing we expected when we put together the original 2007 to 2009 backlog numbers.

Okay. And then, Robin, on your previous comments guidance you had talked about your operating margin being at the low end of the 8.5% to 9%. I don't think I heard you update that comment here as it relates to the 2007.

No. I think in one of the questions here I kind of reconfirmed that, but basically, we expect -- the [accounts] we expect to approach the low end of the range. And we still believe we will approach the low end of our historical range at 8.5% to 9%. And again, you can extrapolate what that means for a fourth quarter, which means good strong margin improvement year-over-year versus 2006.

I don't need to extrapolate any more. Thank you.

We have time for one final question. Brian Johnson, Lehman Brothers.

A couple of questions about the growth of the engine business in the United States. First, what are the key platforms that you're seeing growth in or what are the key platforms for the turbocharger business domestically?

Well, domestically, for 2007 the key platforms will be -- is Navistar, that will continue, I think. We're seeing some slight growth on the ag and off-highway side, the commercial truck side, both the commercial truck side as it relates to the OEMs and some growth in the aftermarket for commercial trucks. So those would be -- so you could say we're picking up some growth with CAT and Deere and some of these other off-highway guys along with commercial truck.

But with commercial truck flat, where did the growth come from? Is it (multiple speakers) [light] vehicle side?

Well, it's increased penetration -- yes. No, it's increased penetration on commercial trucks.

Okay. So it's really CPB in commercial truck.

Yes. We picked up -- on the thermal side, we've pretty much picked up a lot of marketshare because of the benefits of our technology; our on-demand fan and fan drive systems improve fuel economy for commercial trucks. So even though there's been a decline in that market, we've increased marketshare. Pretty much by the end of the year we will have bridged the decline. So when the market picks up, we're going to have an increased marketshare on an expanding market.

Turbochargers have been strong in Europe, just like thermal products have been strong in Europe. I think you asked about North America, though, didn't you?

Yes, North America. And second on North America, your diesel forecast implies I think 15% by 2015, so it's 2.5 million units. What are the big segments in addition to the luxury brands you mentioned which are imports at this point you see there? And in particular, where is the half-ton segment in your thinking and when do you think we might see that in terms of diesels on the market with BorgWarner concepts?

I think that -- there's a lot of questions and there so let me try to grab them all as one at a time.

The number at 2015 was I think 12%, if I remember right. And it's going to come from the Europeans but it's also going to come -- a combination of light trucks and pass cars. And you're seeing more and more cars being advertised. We see -- BMW has announced cars, Audi has announced cars, Toyota has announced cars, Hyundai has announced cars -- or crossover vehicles. Honda has announced vehicles. So it's pretty much a cross-section of pass cars, crossovers, and light trucks. So that's pretty much what's driving the growth. And we'll get our share of that. I'd love to get all of it, but we won't. We'll get our fair marketshare.

And in the light trucks, do you see half-ton diesels coming in '08, '09, 2010?

My guys could probably answer the exact dates, but you're talking about the F-150s and the standard Dodge's and the GM's? They're going to be in the 2009, 2010 timeframe.

And will we see -- is that, any of that in your backlog right now?

Some of it will be in our backlog, yes.

Okay. I think that will conclude our call today. I thank all of you for joining us. You can direct any follow-up calls to me or to Ken Lamb. But try not to pester Ken too much, because today is his birthday. So, happy birthday, Ken.

We're going to get Robin's wife -- we've got to get Robin's wife to listen to this call.

Thanks, guys. Bye.

Ladies and gentlemen, that does conclude the BorgWarner 2007 third quarter earnings conference call. Thank you for joining and you may now disconnect.