博格華納 (BWA) 2008 Q1 法說會逐字稿

Good morning. My name is Dennis and I'll be your conference facilitator. At this time I would like to welcome everyone to the BorgWarner 2008 first quarter results 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 session. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms. Mary Brevard, Vice President, investor relations. Ms. Brevard, you may begin your conference.

Thank you, Dennis and thanks to all of you for joining us today. Copies of our release went out today before the Market opened and hopefully you have all received them. We've also posted financial talking points that should help you to follow the financial discussion. They're located at borgwarner.com/investor information under webcast, first quarter 2008. These notes will be helpful to you as we review the financials and operations, as I said. Our conference call today is also being replayed through May 9th. The call in number is 800-642-1687. The call ID is 41792620. There is also a replay available on our website. Just for your information we will be participating in a number of investor conferences in the next few months. The KeyBanc Automotive and Industrial Conference in Boston on June 5th, and the Wachovia conference in Massachusetts on June 25th. Before we begin, our call today 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, as well.

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

Thank you, Mary, and good day, everyone. Once again we delivered record sales and record profits that out paced the industry despite weak auto sales in North America. The year is off to a strong start for us with excellent results in Europe and Asia, and despite recession worries we are seeing stable growth driven by our products that improve fuel economy, reduce emissions, and provide better performance. Now, let's take a look at first quarter highlights. We had record sales of $1.5 billion, up 17% from the first quarter of 2007, up 8% if you exclude currency. Earnings were $0.75 per share, up 50% from the first quarter of '07 adjusted for our two-for-one stock split. Operating income margin was 8.5%.

Now, moving on to our group highlights the Engine Groups first quarter results include strong global demand for our turbochargers which boosted Engine Group sales 23% to $1.1 billion. Demand outside of the U.S. for our engine timing, ignition, emissions, and thermal products helped offset lower domestic sales of these same products. In the Drivetrain Group, 2008 sales were up 5% to $410 million, and sales outside of the U.S. were up 12%, excluding the impact of foreign currency. Sales in the U.S. were down 10% primarily due to lower vehicle -- or domestic vehicle production and the group continues to benefit from increased global demand for dual-clutch transmission technology. However, the group -- the Drivetrain Group struggled in the quarter from a cost perspective and I can assure you that actions are being taken to improve their performance.

Comments on our outlook include the following: We expect 2008 to be another record year for BorgWarner and today, we reaffirmed our 2008 earnings guidance in the range of $2.85 to $3 per share. The strength of the platforms which we are on has allowed us to more than offset schedule declines and will enable our future growth to out pace that of the industry. Consumers want better fuel economy and reduced emissions in every region of the world, and these needs are driving demands for BorgWarner's leading powertrain technologies, like turbocharging and dual-clutch transmission modules for which we are launching new programs and expanding capacity.

Two recent events make the future even brighter for us. First, the U.S. Is considering even stricter fuel economy standards. In a proposal to reform corporate average fuel economy, or cafe rules, the National Highway Traffic Safety Administration laid out guidelines for a 3% fuel economy improvement in both passenger car and light truck vehi -- or light trucks for model years 2011 to 2015. In its published materials, Mitsa highlights fuel savings technologies such as dual-clutch transmissions, gasoline direct injected engines, turbocharging combined with engine downsizing, diesel engines and hybrids, all great fits for BorgWarner's expertise.

Mitsa predicts a significant increase in the penetration of these technologies in the U.S. by model year 2015. For example, use of transmission technology like dual-clutch automatics by the seven largest OEMs in the U.S. could increase to 90 -- could increase to 39% for cars and 55% for light trucks, which is up from the current OEM plans of 10% penetration across the fleet. By model year 2015, the use of turbochargers plus engine downsizing could increase from 5% to 17% for cars and 9% to 31% for light trucks, if these rules are adopted. Whether the rules are adopted as is and whether the industry can fast track the implementation of powertrain changes needed in this timeframe still remains to be seen, but even a conservative view of the situation is a very positive development for BorgWarner.

The second event of note is exciting new turbocharger business for BorgWarner in North America. This program is for an important gasoline direct injected engine for Ford as outlined in our recent press release that I think went out last night. To meet these demands of growth we have been expanding capacity. In the engine segment, BorgWarner Thermal Systems opened a new facility in Ningbo, China, and broke ground for a new facility near Chennai, India. In Europe be just broke ground for a new production facility in Poland and are already planning and have announced an expansion.

On Wednesday, our board of directors approved spending $125 million to increase our global passenger car turbocharger capacity by more than three million units. The increased capacity will support important new business awards in North America for Ford, as I just mentioned, and those in Europe and Asia. The continued growth of diesel engines around the world and the move to gasoline direct injected engines in North America provide opportunities to leverage our turbocharger expertise as never before. The demand for vehicle turbocharged -- the demand for vehicles -- for light vehicle, turbochargers is expected to grow over 40% in the next five years from 19 million to 27 million units, as more engines are downsized with turbochargers and as more sophisticated engines incorporate multiple turbocharges. The additional capacity includes new facilities in Mexico for Ford and in Thailand for a major Japanese OEM and expansion of facilities in Hungary and Poland because of European growth.

On the drivetrain side we opened our second manufacturing facility in Arnstadt, Germany to serve the growing market for dual-clutch transmission technology. As mentioned earlier, construction is also under way for our new facility in Ramos, Mexico. The facility will produce dual-clutch transmission modules to serve the North American market, in addition to all-wheel drive products, and will serve and manufacture turbochargers for North America. Dual-clutch transmissions and turbochargers were hot topics here in Detroit recently. They were mentioned repeatedly as important technologies at the 2008 Society of Automotive Engineers Congress in April. BorgWarner was the supplier partner of the event along with our OEM partner, Chrysler. Our executives and engineers participated in numerous panel discussions and technical presentations during the week. For me, the major take away from the meeting was this; it's a great time to be in the powertrain business. The rate of change is accelerating and there is a great need for technology to reduce fuel consumption and CO2 emissions and talk is now turning into action. BorgWarner is totally prepared to meet our customers' needs.

As you can tell the FAE show was a real highlight for us because it reaffirmed the strength of our powertrain technology strategy. As I have stated numerous times in the past, I believe that first technology leadership and customer diversity can succeed in tough times and we're proving that. Also, we provide the technology our customers need and want, such as products to improve fuel economy and emissions. And lastly, and probably most importantly, employee pride can create value for our customers and our shareholders. I also believe that 2008 will be a year in which we continue to separate ourselves from other suppliers as a solid, steady, global performer in the auto sector.

With that, I'll now turn the meeting over to Robin for the financials.

Thank you, Tim, and good morning to everyone. As Tim said we had a great quarter and it looks even stronger relative to what's going on in the industry, so let's take a look at the industry environment in the first quarter. Global production, as Tim said, was up about 2% and not a very robust growth for the industry around the world. And as typically is the case the picture varied by regions. Production in the U.S. was down 8%, with the Detroit three light trucks and SUVs down about 16%. European production was flat, while production in Asia was up about 8% in the quarter. Our growth continues to out pace the markets. Our sales grew a little over 17%, as Tim said, or a little over 8%, excluding the impact of currency, and that's compared to the global production environment of 2%.

Looking at our regional performance, sales in the U.S. were down 4% compared to the 8% decline in the market, and outside of the U.S, we posted solid growth of 15%, excluding the impact of currency, compared to 4% market growth outside the U.S. That geographic divergence has put our U.S. operations sales at 30% of our total, down from 36% in the first quarter last year and 42% in the first quarter 2006 and that's a 12 percentage point shift in geographic share in just the past 24 months within BorgWarner.

In the quarter our gross margin was 18.9% versus 16.9% in the first quarter 2007 and our operating income margin was 8.5% versus 7%. Now some of you have adjusted our first quarter 2007 numbers to exclude a $14 million warranty charge, so throughout this call, I'll also give you numbers for 2007 that exclude that charge to help you do your year-over-year comparison. So excluding the warranty 2007 gross margin and operating income margin would have been 18% and 8.1% respectively, and either way you look at it, with the warranty charge or without it, 2008 was a stronger quarter compared to 2007. And if you look at that 8.5% operating margin in the quarter it's consistent with the 2004-2005 first quarter levels and those are years in which we operated within our historical 8.5% to 9% operating income margin range for the year.

Sales in the U.S. are really the story of two different situations. Our base U.S. operations declined approximately $45 million in the quarter, and the decline in those sales were due to continuing reduced production volumes in the U.S., particularly the Detroit three light trucks and SUVs. The lost operating income margin on those sales was at about $0.28 of a dollar, and as we said before, this is a little bit higher than what we'd like. We'd like to be more $0.20 tash $0.25 on the dollar and this $0.28 on the dollar was primarily an issue in the drivetrain segment and I'll talk a little bit more about drivetrain margins in a few minutes.

The base U.S. operation sales decline of $45 million was offset by turbocharger program growth in the U.S. and that's how we netted to a 4% decline. The U.S. sales decline was also offset by more than 15% growth in our operations outside the U.S., totaling about $150 million in sales, and that generated about $0.17 on the dollar incremental contribution margin. The impact of foreign currency added approximately $115 million in sales in the quarter versus last year at about $0.10 on the dollar of operating income, again pretty much in line with our average operating income year over year.

Within those incremental income numbers, there is a $29 million increase in SG&A cost versus 2007, and as a percentage of sales SG&A was 10.4% this year versus 9.9% last year. $10 million of that SG&A increase year over year was currency related, $7 million of it was R& D related, with the remainder being higher incentive compensation and higher levels to support business growth around the world. R&D costs, as I said, increased $7 million in the quarter to $58 million from $51 million in the first quarter last year, and that R&D increase is primarily driven by our continued investment in a number of cross business unit R&D programs, as well as support for key customer powertrain technology initiatives driven by the demand for improving fuel economy and reduced emissions around the globe. As a percentage of sales R&D was 3.8% versus 4% in the first quarter of last year. The other expense line item on our income statement includes a $2.5 million disposal loss that occurred first quarter 2008.

Below the operating income line, equity and affiliates earnings relatively flat prior year. First quarter interest expense of $6.5 million was $2.5 million lower than the first quarter last year and that's primarily due to -- and I'm going to speak slowly here -- to an end-of-quarter favorable measurement of the ineffectiveness of a cross-currency interest rate swap, and I hope you all understood that. Had you counting. The tax rate in the quarter was 26%, in line with our full-year guidance, versus 27% in the first quarter of 2007. Basically, on the interest expense it's currency driven. We expect some of that to come back in the second quarter of 2008. Net income was $88.7 million for the first quarter or $0.75 a share. This is an increase of $0.25 or 50% over the previous year's first quarter. Again, for those of you that adjusted our first quarter for the warranty related charge of last year of 8.5% -- $0.085 per share, EPS would be up 28% year over year, a very strong quarter. Currency provided $0.06 a share in earnings versus last year. Compared to our full-year earnings guidance currency assumption, the Euro 140, Yen 112 assumption, currency provided about $0.02 in the quarter.

Moving to our operating segment performance, first let me say that we had growth in every one of our product areas at BorgWarner in the quarter, except our torque transfer products. In the Drivetrain Group sales increased almost $18 million, or 4.5% from the first quarter last year. Excluding the impact of stronger foreign currency, however, sales were flat. In the U.S, our drivetrain sales were down 10%, offset by about 12% growth, excluding currency in Europe and Asia. And those Europe and Asian sales growth were driven primarily by higher sales of dualtronic transmission modules. Drivetrain earnings before interest and taxes decreased $9.4 million in the quarter, or 34%, which was disappointing, as Tim mentioned. The decline was related to first, challenged new product launches outside of the U.S. -- and those challenges are particularly focused on supply-based quality and supply-based capacity issues -- and second, lower North American sales of light trucks and SUVs equipped with our products, which was exacerbated in the quarter by some product rearrangement between a number of our North American manufacturing facilities. There are action plans in place to improve both of those situations and we expect drivetrain margins to improve in the second quarter versus the first quarter, and trend back to the +7% historical levels by year end.

Engine Group first quarter 2008 sales increased to $200 million -- over $200 million, up 23% versus the first quarter last year, up 12% excluding the impact of foreign currency, and again, compare that to a 2% global growth in the world market. In the U.S, Engine Group sales were relatively flat, as growth in turbocharger sales offset declines in our other product areas, which are tied, again, primarily to light truck SUV vehicle production. Outside of the U.S. sales were up 16%, excluding currency, driven by continued strong demand for turbochargers around the globe and demand for the products, the group's engine timing systems, ignition products, emissions products and thermal products. First quarter earnings before interest and taxes for the Engine Group increased $53 million from the first quarter of 2007, or $39 million excluding that $14 million first quarter 2007 warranty charge, and that translates to incremental margin on sales of 26% or 19% respectively, whether you include or exclude the warranty, either way good strong contribution margin from the Engine Group.

Now let's talk about the balance sheet and cash flow. Our investment-grade capital structure continues to be strong. Our debt-to-capital plus -- our debt-to-capital ratio was about 23% in the quarter, up slightly from 22% at the end of December, and balance sheet debt increased a little over $90 million due to seasonality, stock repurchases, and currency. Net cash provided by operating activities was $8 million lower versus the first quarter last year, at $75 million versus $83 million, and that's primarily related to higher working capital levels to support the significantly-higher sales levels we saw in the first quarter.

Investments and capital expenditures, including tooling-out waste, totaled $75 million for the quarter compared to $58 million in the same period last year, so if you look at net cash provided by operating activities less cash used in investing activities it was basically flat in quarter and that's not bad performance for a traditionally seasonally weak quarter from a cash flow perspective. We also purchased $13.5 million of our common stock in the quarter, and as you saw we issued a press release recently increasing the authorization from our board to continue to purchase stock. Our after-tax return on invested capital at the end of the quarter was 13.8% on a rolling four quarter basis versus 11.8% a year ago, so a dramatic improvement in ROIC.

As Tim said, despite a continually challenged U.S. economy , a continuing mix shift away from light trucks and SUVs, and intense raw material price pressure, we have not changed our views on BorgWarner having another record financial performance in 2008. We have reconfirmed our guidance of $2.85 to $3 per share for the year, with operating income margins back to our historical 8.5% to 9% range. Our guidance is still based on a 26% tax rate and currency assumptions of $1.40 to the Euro and Yen 112 to the dollar average for the year.

Now, I know that in the first quarter the dollar was weaker than our full-year assumptions. We had the Euro at a dollar -- the $ 1.50 to the Euro and Yen 105 in the first quarter, but from our perspective it's a little too early in the year to be reguessing on exchange rates for the rest of the year. We know we're wrong at $1.40, we just don't know how wrong. We'll probably recast our full-year estimates based on currency as required at the end of the second quarter. Like everyone else, we are seeing pressure on our raw material prices, primarily steel, and are now expecting increases in raw material in the $30 million $35 million range for 2008 versus the $20 million to $25 million we originally thought we'd see when we first gave our guidance. And there is potential for more steel-related increases in the back half of the year, but as we did with the significant increases in nickel prices in 2007, we expect to manage through any steel price increases without a material negative impact on our earnings.

You know, again, we're off to a strong start for 2008, and as Tim said, we anticipate another record year for BorgWarner. We intend to stay on top of our cost structure to ensure that we provide solid, incremental earnings growth on our strong incremental sales. And you can tell from our recently-announced expansion plans, driven by a number of new business awards, that we expect to continue to deliver incremental sales growth that significantly out paces the industry far into the future, And with that I'll turn the call back over to

Thank you, Robin and we'll ask Dennis to initiate the question-and-answer session. Dennis?

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Rich Kwas with Wachovia.

Hi, good morning.

Hi, Rich.

A question on the launch cost issue, Robin. I know it's an emerging market but how do we think about it from a product perspective, given that you're pretty -- being pretty aggressive with new product launches overseas right now?

Rich, actually, a good portion of that was in Europe and it is tied to our dual-clutch transmission product area and as I said, it's predominantly supplied chain issues, both from a capacity perspective and quality perspective. As you point out we've got a number of new launches, DCT is growing quite rapidly for us, and our supply chain is struggling to keep up with us.

It was a -- Rich, it was an issue with a relatively new supplier. We have since -- we're working to improve things at that supplier and we made progress there and they're coming out of the woods. We are also capacitizing ourselves to do the same thing so we don't have to rely on this supplier much, and with the growth we have, we're actually bringing on other suppliers, so this issue's going to fade away reasonably soon.

Great, thank you for that, And then in terms of the guidance relative to where we were three months ago, you maintained it for the year and I know you talked about currency being conservative, at least right now, but what's changed in the last three or four months in terms of puts and takes relative to initial expectation?

Well, as I mentioned raw material prices. We're at this point in time looking at at least a $10 million increase from where we thought we were three months ago. Second, I think if we look at the U.S. market, we expected about $50 million a quarter decline in our sales in the U.S., in our base operations, and the first quarter was about $45 million so pretty close. Second quarter we're looking more like $75 million, so as we look at the year right now, we are seeing more deterioration in the U.S. market than we actually had expected three months ago. And again, it's primarily on the light truck and SUV side. We're not sure how much of this is industry labor disruption related or a real decline in demand for these products. We think actually most of it is the latter, a real decline in demand for these types of products. But certainly the U.S. looks weaker than we thought it looked three months ago. Raw material prices, again, are inching up and those are the two major factors that we're looking at right now.

Anything on the plus side in terms of what's better than expected?

Yes, we've got much higher demand for turbochargers, particularly in Europe as they downsize from larger engines to smaller engines, both on diesel and gas. We're seeing a lot of interest in twin turbos now with regenerative 2 stage turbochargers, as our guys call it. So there's a lot of plus there and we're starting to see -- you saw that in terms of our numbers and so things are actually really positive for us in almost every parts of the world -- every part of the world with the exception of North America, and like you and Robin have both discussed, I think it's going to be more structural in North America than we originally anticipated.

Okay. And then final question, Tim in terms of the quoting activity and the changes to that over the last three or six months, what's different relative to six months ago, given the news coming out with the government changes to fuel economy?

A couple things, Rich. There's a the lot of activity being on in the development side and the quoting side for turbocharged gas engines with direct injection in North America. I've said all along for two or three years now you're going to see turbocharged gas engines in North America first, and with higher volumes, and then followed by turbocharged diesel engines in North America. We're seeing a lot of activity on both, but gas is first, as you saw by the Ford announcement. There's other programs and projects we're working on. There's a tremendous amount of dual-clutch activity going on in the world right now. And actually, in addit -- your question was related to quotes, but I'll tell you, in terms of awards we're starting to see an increase in the pace of our awards, too.

Great. Thank you.

Your next question will come from the line of Brett Hoselton with KeyBanc capital.

Good morning, gentlemen.

Morning, Brett.

And ladies.

Thank you.

Who you calling a lady? [LAUGHTER].

The steel price, Robin, wonder what you're factoring into your thinking regarding higher steel prices and the impact in the year?

Well, we're certainly looking at price levels that are in the market today, and we're not expecting significant increases from those levels, but at the same time, we're not expecting those prices to fall off dramatically, as well. So the current thought process is pretty much steel levels at about the current state extending through the rest of the year.

And given that it sounds like you feel quite confident in your margin expectations for the year, as you look at your sales and earnings expectations for the remainder of the year, I think what you've clearly stated -- and want to make sure I understand this -- is that if FX stays or the Euro stay s where it's at versus the dollar that you're more than likely going to be raising your earnings guidance come the second quarter.

We'd have to, Brett. We would have to. Again, right now, we believe that at 140 Euro to the the share -- $1.40 to the Euro and Yen 112, we're going to earn $2.85 to $3 and if you put a different currency assumption on that obviously it's going to higher earnings.

But I think what you'll see is there's upside based on currency, Brett, and there's downside based on material and steel's not the only material we're going to fight the battle o, I think, by the end of this year.

And then as you think about -- Tim, as you think about upside or downside to your current book of business, in terms of products, which ones would you say you're particularly more bullish on, which products would you're particularly maybe more bearish on?

Well, as you can tell by my report and Robin's report and all of our press releases, I can't answer that question without saying that we're bearish on -- I'm Sorry, we're bullish on turbochargers and bullish on dual-clutch transmissions. We haven't said much lately about variable cam timing but we're still cranking along on variable cam timing. We're cranking along very well on on-demand cooling systems for off-road highway vehicles and actually turbochargers for off-highway vehicles, also. We're getting some -- transmissions we're getting a tremendous amount of growth in transmissions cellanoids as they relate to dual-clutch transmissions, traditional automatic transmissions and transmission control modules, even automated manual transmissions in other parts of the world, so we are really really increasing our penetration on all types of transmissions even though we're really driving a tremendous amount of growth on dual-clutch.

On the downside or the bearish side, I'd have to say that we're taking the hits on the four wheel drive side because of the truck business in North America, because of the fuel economy, push for more fuel economy, people moving towards cars. Now some of these cars will have all-wheel drive or they will go to crossovers with all-wheel drive which helps our torque coupling business, but as you -- we've answered this question many times and as you know, the revenue on a transfer case is better than the revenue on a torque coupling, so that's an area where we're kind of getting hit a little bit and that's the real soft spot we have. Beirut is doing well, in terms of growth. We're tackling some profitability issues in Beirut, but all-in-all they're doing well with growth.

Thank you very much.

Your next question comes from Rob Lache with Deutsche Bank.

Good morning, everyone. Congratulations.

Thanks.

A couple things. First of all, was the raw material cost impact in the quarter roughly one fourth of that $30 million to $35 million impact or are you thinking that it ramps up more later in the year?

That's a great question, Rod. No, the first quarter was more like $5 million. It'll ramp up later in the year.

Okay. And can you quantify this supplier launch issue for us and just diving a little bit into this -- into that segment a little bit more, was there any benefit from the Muncie restructuring?

What do you mean quantify the supplier issue?

Well, you said that there were launch issues, quality issues related to a supplier, so is there some kind of number that you can put around that that you think it hurt you in the quarter?

Well, I don't have the number in front of me. Robin is digging it up, but it was enough to get noticed, I'll tell you that, and it made an impact. But the issue really -- there's a couple things. That was one issue and Robin said it -- and I'll go back and repeat it. We're doing -- within the torque transfer business and in the transmission business -- let's just take the transmission business. In North America, we're rearranging product lines in three different plants to become more efficient, so there's some inefficiency there that we're struggling through as we rearrange products within three different plants and that's causing a little bit of a headwind for us. The issues that -- on quality that we talked about on dual-clutch in Europe is mostly behind us, but that caused some issue.

And then on the torque transfer side, as you know, we're closing the Muncie plant down in April of next year and we're going through a tremendous amount of rearranging. We're going to be shift -- we're staffing and -- we're under construction but we're also in the process of moving product towards Mexico, moving product to our Longview plant and moving product to our Senica plant, so we have three plants in the torque transfer business that are also rearranging product at the same time, which is causing some level of disruption and inefficiency. I don't say these as excuses, just only as fact as to what's kind of hit -- what hit the Drivetrain Group. And then on top of all of that you put the schedule cuts in in North America and it just makes things a little bit more difficult. I don't know if you --

Yes, Rod, let me quantify, our launch-related issues, our challenges outside the U.S. including supplier issues, cost us about $5 million in EBIT in the quarter -- in the Drivetrain group.

Okay, right. And can you quantify roughly the size of your U.S. transfer case business now? I know it's been declining.

It's less than 10% of the Company, I can tell you that.

All right, Lastly, pretty substantial premium for diesel versus gas right now, at least here it offsets some of that the fuel economy advantage. Are you hearing anything from customers about expectations for growth being affected by that or do you have any thoughts on how that plays out for your business?

Well, a couple of things. We're not hearing anything -- as a direct answer to your question, we're not hearing anything from our customers about them not bringing diesels or slowing down their plans to bring diesels to North America. I think that the difference in the fuel price gap between diesels and gasoline fuel fluctuates up and down so a year ago diesel was cheaper than gas, now diesel is higher than gas. Things will change.

Gas is creeping up so the gap is -- between diesel fuel and gasoline is not that great, it's not as great as it was, I think, a month or two ago, and you hit 30% to 40% better fuel economy on diesel -- on a diesel engine than a gas, so you can afford to pay -- let's say on a $3 gallon of gas -- which I wish it was that cheap now -- but a $3 gallon of gas you can pay up to $1 more for diesel fuel and still save -- breakeven on your total expense for fuel for a year. I know that people have talked about the up charge on diesel engines, but the data's starting to roll in now that you pay a little bit more at the purchase price for diesel, but on the resale price you get all your diesel -- all your up charge back when you resell a diesel vehicle. So I'm not so worried about -- I think what's going to happen is that the gap will close between the diesel fuel prices and the gasoline prices and some day, you might find diesel cheaper than gas even.

Great, that's helpful. Thank you.

Your next question comes from Chris Ceraso with Credit Suisse.

Thanks, good morning.

Good morning, Chris.

Let's see, a couple of things. Can you tell us a little bit more about the award with Ford? Are these some of your advanced technology turbochargers or are they some of the more basic turbos and what do you expect in terms of -- I know you don't like to talk about specific profitability on a customer or a program basis, but how do you think it'll be relative to your overall turbo basis, better or worse?

Well, it'll be typical of our overall turbo business. All of our business when we take it has to at least return a 15% cost to capital, so it meets that threshold. It's higher tech turbo charging, it's going to be used on their rear wheel drive eco-boost applications and it's -- I don't know -- I don't remember exactly, hold on a second. Okay, it's two per engine and it's normal turbocharger technology.

Okay, cool. You've had a lot of announcements over the past few months about adding capacity. You probably have these numbers handy. Can you just quickly sum up for us how much capacity you're adding in terms of X number of millions of turbos and how does that compare to your current capacity?

Well we're adding three million units of capacity and that takes us up to about -- over 11 million units of capacity and so that tells you it takes us up to 11, a little over 11 -- and this is all on -- what I'm talking about is pass car or light vehicle capacity. I'm not talking about commercial truck. I'm talking light vehicle. It takes us up to a little over 11 million units and it's three million, so obviously you can tell that we got capacity today for about eight million units or between what we are production with plus the capacity we're already putting in based on last years and this years expansion.

Is that three million just the North America? Are there other turbos or does that three million --?

No, that's global. That's three million total and it's spread out between Thailand, Mexico, Poland, and our Orsolani plant in Hungary.

Okay. What do you expect the SG&A level to be for the balance of the year in terms of a percent of sales?

We're focused on trying to bring that below 10%.

Is that for your full-year target or where you're going to run in --?

Full-year target.

Okay, that's great. Thanks.

Thanks.

Your next question comes from Joe Amaturo with Buckingham Research.

Good morning.

Hi, Joe.

How are you? Robin, are you considering hedging the Euro by any chance given that you have a lot of visibility with the backlog predominantly in Europe over the next couple of years?

As we look at our business, Joe, we -- where we sell in Euro, we actually also pretty much manufacture in Euro, so our day-to-day transactions, there's not a lot of exposure there. The only exposure is investment exposure and we typically -- as we grow in those regions of the world, we typically borrow local currency, so as we grow in Euro land, we're borrowing or financing that growth in Euro so the cash flow -- future cash flow stream thrown off by that business is repaying Euro denominated liabilities. As far as Income statement hedging, no, we don't hedge our income statement. Basically that currency gets translated at whatever the effective rate is and what we try to make sure is we explain to our investors the impact of currencies s on our operations and try and strip that out of the equation so they understand fundamentally how strong our business is doing in those regions of the world, excluding currency. But we don't have a lot of cross-border transactions that require day-to-day transactional hedging and obviously, we don't hedge for speculation either.

Okay. Next, could you just give us -- you said torque transfer was the only business that was down. Could you tell us to what extent it was down year over year in the first quarter?

You know, I don't have that right in front of me, Joe, but we'll keep talking about I'll get you a number.

Okay. Last one, how many shares did you repurchase?

About 300,000, give or take.

Okay. All right, that's all I have. Good quarter, thank you.

Thanks, Joe.

Joe, torque transfer was down a little bit less than 10%.

Okay, great. Thanks.

Your next question will come from Patrick Archambault with Goldman Sachs.

Hi, good morning.

Morning.

Good morning, Patrick.

Can you just -- I wanted to get a little bit more sense of the kinds of contracts that you have, not only for steel but for nickel, as well, which I think, if I remember well, is maybe as big if not bigger in terms of size of purchase. Just how those things cadence out, how much is locked in over the next year and where we might see some of those things reset?

Well, let me start with nickel and then we'll go to steel. Yes, nickel over the past -- the early part of 2007 we spent a lot of time with our customers ensuring that they shared in the movement in basic nickel prices, so we have a majority of our nickel purchase, which is -- we don't purchase nickel per se, we buy it in castings, as one of the raw materials in the blend. We have pass throughs with a majority of our contracts with respect to nickel. So nickel is much less an issue for us right now as it was over a year ago, and also nickel prices are down, which is good.

On the steel side, we have virtually no pass through whatsoever on steel. Steel is our responsibility to manage and we do have contracts with our suppliers, firm contracts for prices with our suppliers. The majority of the buy in U.S. and the majority of the buy in Europe is covered under contracts for this year. However when you get into a situation where raw material prices spike significantly, we get into a situation sometimes where there are surcharges, and that's the unpredictability with respect to the steel buy that we have. Although we do have contracts and it gets to a point in time where our suppliers can't bear the cost of the basic commodity increase and someone's got to help them pay for it. Does that the answer your question?

Ye, that's very helpful. Actually have you been approached already by some of your suppliers asking for surcharges just to cover higher input costs?

Yes, we've been -- this is Tim. We've been approached by the steel guys and we're in the middle of, let's just say, very deep negotiations regarding steel pricing. We're seeing -- they're coming to us with surcharges. They're being very aggressive with the whole industry and they're being aggressive with the OEMs themselves and we certainly don't buy as much steel as the OEMs and the OEMs back -- are starting to get hit on steel, so we're fighting it the best we can but we'll see where we end up. But we do not use material costs as an excuse. We still plan on figuring out a way to make our numbers and meet our guidance for the year in spite of what happens on material, but it just means we have to work a lot more harder to figure out ways to offset it, either directly with negotiations or indirectly through better ways of doing business inside our Company.

Okay, great. That's great color. Thanks a lot, guys.

Your next question comes from [Etai McCalley] with Citi.

Good morning. Just to follow up on that question, does your new steel cost guidance assumes some assumption for what the surcharge negotiations will look like or could that be an incremental hit later on in the year?

No, we have assumed some increased raw material prices in the back half of the year, yes.

Okay, great. And then, Robin, just remind us again what you're assuming now for North American production levels? I think we were at 14.3 back in January. Has that come down to, let's say 14.1 or 14.2?

Go ahead.

We're pretty much assuming the current levels or maybe a slight down tic from here. The April numbers were pretty atrocious, in the 14s, but we're not assuming anything very rosey for the rest of this year in North America.

Etai, I don't have the exact number, but as I said earlier, we're looking about $50 million decline in our U.S. sales first and second quarter to start the year off, and as I said, first quarter was about $45 million, so pretty close, Second quarter's looking like $75 million right now, so we are -- and some of that is mix, as well, so we are looking at overall lower production levels in the U.S. than that 14.3 number. I don't know exactly what it translates to, as Tim said, but certainly it's lower than 14.3.

We tend to be much more conservative and we tend to anticipate these lower schedules with-- much more than the OEMs do, so we've already accounted for a significant amount of the downturn that we're seeing in North America, but we're now getting to the point where we're going to have to go back and relook at what we're doing because things are starting to get a lot deeper than we originally anticipated and we anticipate for some fairly deep schedule cuts.

On the flip side, the good thing is, as Tim mentioned earlier, our sales outside of the U.S. are stronger than we expected as well, so from a sales perspective we're still looking at excluding the $1.50 to the Euro currency, but back to our original assumption for guidance for the year, that 1.40 to the dollar, we're still looking at 8% to 10% growth in the year -- for the year from a sales perspective and closer to that 10% level.

Great, and --

Despite the decline in the U.S, we're still looking for good solid growth outside the U.S.

That's terrific and then just one final question, maybe for you, Tim. The Mitsa report I thought was very favorable for a lot of your technologies. Any customer reaction to that report so far, maybe any signs of change in long-term plans, or what are you hearing in terms of a reaction so far to those penetration numbers?

Yes, it's similar to one of the earlier questions and they're -- all of the customers are very aggressive now to improve fuel economy and lower emissions. I don't think the report caused them too much more effort because they're already working at extremely high efforts on technology to lower fuel economy, and I can tell you we're seeing it. We're actively engaged with every major OEM in the world on fuel economy because every market's got changing regulations; the Euro market, the American market. So I can't say that the effort is any greater now than it was a month ago or two months ago before the report because everybody was really on a -- high levels of aggressiveness in terms of lowering fuel economy. So I think that we -- like I've said many times before, we're in the sweet spot and the sweet spot just seems to be getting sweeter.

Great, terrific, guys, thank you so much.

Thanks.

We have time for one final question and that comes from Jonathan Steinmetz with Morgan Stanley.

Hi, guys, this is Ravi Shankar in for Jonathan. Had a couple of questions on the Ford eco boost, it seems like your release only mentions rear-wheel drive and pickup applications so can you help us understand what's going on there with the front-wheel drive applications?[ Are you on that program as a different kind of turbo involved there]?

Well, let's put it this way, Ford uses the eco boost as a -- to describe a family of fuel-efficient engines. We will probably not be the supplier of all of the volume for all of the eco-boost families, but so far, we've been chosen for the rear-wheel drive. I don't know all of the specifics on the front-wheel drive but we haven't been chosen for that and I don't know if it's been placed but -- I'd have to check with my people. But I will tell you this, at this point in time, as far as we know at Ford this is the highest application -- turbocharger application they'll have in their eco-boost family, so far.

Okay. And Ford has spoken about 500 housing units over the next five years for eco-boost, do you know what proportion of that is rear-wheel drive and pickup only and what are you looking at in terms of volumes?

I think that that question is best to be answered by Ford.

Got it.

All I can tell you is we are very pleased to have Ford as the customer for turbochargers, we're very pleased to be on the eco-boost family, and I've heard from a number of people that are all friends within Ford that we've got a significant volume in there so far from their eco-boost awards.

Great, and this is already part of your backlog?

No.

Okay, so it's incremental to your back --, do you have a new backlog number?

This is not part of the three-year backlog of $1.95 billion that we announced last fall.

No, we -- this is Robin -- w We update that backlog number once a year, so we don't have a revision right now. As Tim said, quoting activity's been pretty strong.

Very good. And finally, are you looking at some kind of long-term structural reduction in production levels in North America and are you doing anything at your end to adjust for that and improve the contribution margin here, or will there be another level of restructuring required to adjust for that?

I'm sure you ask that question knowing that we did restructure in the second half of 2006.

Right.

In 2006 third and fourth quarter we structured, mainly due to the sale and downsizing of our Muncie plant and downsize -- that's the sale and the downsizing has to do with other parts of BorgWarner North America. As things continue to go the way they are, we will continue and we are looking at plans to see what we have to do to meet the future needs of North American schedules. I think -- I agree with you, the schedules are probably going to be more permanent than we'd like and we tend to be on the -- we on the early stages -- we tend to be one of the early suppliers to restructure and when we say we restructure, we do it right away, and all I can tell you at this point in time, we're looking at it.

As Tim pointed out, you need to remember we are in the midst right now of a restructuring. Although we took the charge late 2006, the action required to complete that aren't finished yet. It requires relocating to a new facility in Mexico and rearranging some manufacturing capacity and closing down a facility in Muncie, Indiana, and none of that has been completed yet. It won't be completed until 2009. So we are adjusting our capacity in the North America. We have taken some actions to adjust for what we think is a permanent lower level of activity for those product areas, but we're in the midst of that yet. It hasn't been completed and, frankly. we haven't seen all of the benefits of that and we expect to see more benefits in 2009 as we complete that restructuring.

And I'll add one more thing. We are carrying some extra costs because of that. What we're doing now between now and April of next year, in terms -- and I think I said this before but I'll repeat it -- we're carrying extra costs because of the Muncie plant closure, because of rearranging five different plants, all to be ready and able to handle the lower schedules, both now and in the future. But the schedules are actually getting a little bit lower than we anticipated and if they go another 5% or 10%, we're going to really have to look at this thing again.

Very good, thanks very much.

Thank you for joining us today. That concludes our call. You can direct any follow-up questions to me and we'll talk to you next quarter.

That does conclude the BorgWarner 2008 first quarter results conference call. Thank you for joining. You may now disconnect.