博格華納 (BWA) 2008 Q2 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BorgWarner 2008 second 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 period. (OPERATOR INSTRUCTIONS).

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

Thank you, Tina, and good morning. Thank you all for joining us today. You should have received releases. Copies were sent out today before the market opened. We've also posted financial talking points that should help you follow the financial discussions.

They're located at BorgWarner.com on the investor information page, the webcast section, second quarter 2008 conference call talking points. The conference call today will also be replayed through August 7. The number for call in is 800-642-1687. It's also being webcast on the web and available for replay there as well.

Before we begin, I just want to give you an idea of -- we've got an active conference schedule in the next three months. We will be at the JP Morgan harbor conference in Dearborn on August 13, the Credit Suisse conference in New York on September 4. Wachovia is having a one-on-one conference in Baltimore on September 22. CitiGroup is having an environmental topics conference on September 24 in New York. The JP Morgan mid-cap growth conference in London on September 30 and then we will see many of you I hope at the Paris auto show IAA conference as well.

I also need to remind 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 Robin Adams, CFO, will discuss operating results and the rest of the year. Tim?

Thank you, Mary, and good day, everyone. We are pleased to deliver another record quarter in a tough environment. Our performance reaffirms the benefits of our diversified customer base, our focus on fuel efficient technologies, and our broad geographic footprint. Strong demand for our fuel efficient technologies in Europe and Asia more than offset the declines in North America during the quarter.

For the quarter, sales were up 11%, earnings were up 16% to $0.74 per share. Excluding a BERU adjustment, second quarter earnings were $0.78 per share. The engine group sales were up 16% while drivetrain group sales were down slightly. Our sales outside of the US were up 13%, excluding the impact of currency, compared with non-US vehicle production which was up 6%. And our US sales were down 17%, consistent with US vehicle production which was down 18% during the quarter.

Now, it is no surprise that we are managing our global business in two very distinct operating environments. In Europe and Asia, our businesses are expected to experience sustained growth. Conversely, in North America our operations remain focused on fuel efficiency and cost management, especially given recent dramatic production declines.

As a result, we have made the proactive but difficult decision to restructure our North American operations in the third quarter, specifically during the first week of August. I grew up in the North American auto industry and it is personally very distressing for me to see the difficulties facing our industry here in the US and knowing that these difficulties affect the families, the lives and the people in our employee base. Our decision to restructure was not made lightly or without regard for the interest of our employees. However, our people take pride in working for a successful company. But even our global success does not make us immune from the recent significant declines in North America, nor from what we believe is the continued fundamental and permanent shift in the marketplace.

We believe that we need to take action now to align our North American operations with the realities of these market shifts in order to maintain a healthy future. We will be reducing our North American workforce by approximately 1,000 people or 16% of our North American employee base. About 22% of the reductions are salaried employees, and the remainder are from the hourly workforce. This reduction will be spread across all of our operations in the US, Canada and Mexico. By taking action now, we expect to successfully manage our business through an extremely difficult period. Our actions are expected to provide a strong, a solid base for -- to address the needs for future fuel reduction and fuel improvements for cars and trucks.

As we continue to adjust our North American operations to remain competitive, our growth in the rest of the world is keeping pace with our expectations and remains strong. We still expect Company-wide sales growth in the range of 8% to 10% in 2008, and results that will outpace the industry. We have adjusted our earnings guidance slightly to a range of $2.80 to $2.95 per share and our revised guidance includes the benefits of the restructuring and adjustments for currency, and excludes expected charges related to the third quarter restructuring and our final adjustments for BERU purchase accounting. Our guidance also includes projected North American schedule declines and global commodity pricing pressures, which are expected to be offset by our continued strength in Asia and Europe.

Now let's talk a little bit about Europe. I know that many of you have concerns about the outlook for Europe for the rest of the year. I can assure you that we are monitoring our customers' schedules closely. While we believe that the European auto industry in general will experience a slowdown in the second half, we see positive growth for BorgWarner in Europe during this same period.

There are a number of reasons for our positive expectations. First, even with sales weakness in Western Europe, demand for fuel efficient cars is driving increased penetration of down-sized turbo charged diesels and turbo gas engines as well as demand for fuel efficient dual clutch transmissions. The trend towards smaller vehicles drives demand for BorgWarner products like turbochargers for VW, Peugeot, and Renault, as well as our dual clutch transmission modules for Volkswagen and new customer programs being launched this year. These programs include those with the Getrag Ford joint venture for their twin clutch transmissions which will be used at Ford,Volvo, and Mitsubishi. We will supplying the track for the BMW transmissions and Audi for their seven speed dual clutch transmission for the Q5.

The second reason for our positive outlook is that the projected sales growth in Eastern Europe is expected to increase demand for diesel engines, and our other engine and transmission products. Third, the increased -- we'll continue to see increased localization of the Japanese and Korean engine production in Europe, which also drives demand for our products. And fourth, the commercial market continues to remain strong for BorgWarner.

Now let's talk about how engine down sizing will continue to drive our growth. In the next seven years, four cylinder engines will account for about 80% of the incremental global engine growth and about 60% of the European engine growth. In North America, four cylinder production will grow by about 30% during the period 2007 to 2014. Six cylinder engines like the Ford Eco Boost will replace many V8s. And BorgWarner has been chosen for the turbo charger supplier for the high-volume three point five liter rear wheel drive Eco Boost six cylinder engine at Ford. For us, the engine downsizing trend is an opportunity to help customers develop and deliver turbo charged engines that are not only fuel, but also meet customer expectations for good performance.

So now, let's talk a little bit about hybrids. Hybrids are also gaining importance as part of our engine down sizing story and offer interesting new opportunities for our Drivetrain Group. Hybrids are only a small portion of the market today and use many of our traditional engine and drivetrain products. As fuel prices increase and battery technology improves, hybrids are expected to become a larger portion of the vehicle population.

In addition to adapting our current products to hybrid use, we see hybrids and the electrification of vehicles as viable opportunities for new BorgWarner products. There is a variety of activity around hybrids in our advanced engineering areas at both the corporate and business unit level within BorgWarner. These activities are focused on new hybrid and electric vehicle transmissions, electric all wheel drive, and technologies for air management and cooling. We presented some of these technologies and concepts to our Board of Directors just yesterday.

Our powertrain technology is at the forefront of solutions to improve fuel economy. At BorgWarner, we expect to continue to distinguish ourselves as a fuel efficiency leader. High fuel prices, while currently disruptive, highlight the global need for our fuel efficient technologies. We expect to manage successfully through this difficult period in North America, in order to take full advantage of the growth opportunities before us globally at BorgWarner. With that, I'll turn the meeting over to Robin.

Thank you, Tim, good morning, everyone. We had another record quarter as Tim said, despite significant declines in the North American market. Production in the US was -- as Tim said, down about 18% with the Detroit three light truck SUVs down about 21%. And as you look at Europe, production was up 5%, production in Asia was up 6% in the quarter as well. As Tim mentioned, our second quarter sales grew 11% or 2%, excluding the impact of currency. And that 2% growth rate is in line with global production in the quarter which was 2%.

However, again, Tim talked about the story is dramatically different for BorgWarner by geography. Our sales in the US were down 17% in the quarter, in line with the decline in the US industry production. This is the largest quarterly drop in US sales in BorgWarner's history, since going public in 1993. Our sales in the US now represent 27% of the total versus 37% in the second quarter last year.

And despite that dramatic decline, we still achieved record second quarter overall sales and record second quarter earnings. This is a direct result of our strategic focus on leading powertrain technology and our customer and geographic diversity. Our sales outside the US excluding the impact of currency continued to grow at a double-digit rate of 13%, which doubles the 6% non-US industry growth production rate.

Now, before I get into the details of the financial statements, let me try to explain the accounting implications of recent actions with respect to BERU. During the second quarter, we completed a domination and profit transfer agreement with BERU, giving BorgWarner effective 100% control of BERU. Under this agreement, minority shareholders of BERU have no future interest in the profits or losses of the Company or capital distributions. Minority shareholders can either sell their shares to BorgWarner at a Euro71.32 per share price or receive an annual dividend of Euro4.73 into perpetuity. And I should tell you, neither of these amounts were offered by BorgWarner but they were determined by a German court appointed independent auditor which is in line with German law.

As a result of this agreement, although we now own approximately 82% of BERU shares, from an accounting perspective we now account for BERU as if we had acquired 100% of the Company. In the second quarter, we recorded a balance sheet liability of approximately $200 million related to our future obligation to BERU minority shareholders, a portion of that's long-term, the majority of it is long-term. We also eliminated balance sheet minority interest related to BERU.

We increased goodwill and other purchase accounting related assets. And finally, we incurred an immediate write-off of $5.1 million pretax, $4.5 million net of tax or $0.04 per share. Related to purchase accounting for in-process R&D, order backlog and inventory write-up that immediately gets expensed. On a go forward basis, we will no longer report minority interest expense for BERU, but will have increased amortization of purchase price intangible assets of about $4 million a year. And an interest charge will be incurred on the $200 million future obligation to BERU minority shareholders, which is approximately $12 million a year.

With that behind me, let's get back to the income statement. In the quarter, our gross margin and operating margin were 18.5% and 8.3% respectively, excluding the impact of that BERU agreement. That's compared to 18.1% and 8.3% in the second quarter of 2007. The 8.3% operating income margin was not only comparable to the second quarter 2007, but was also a continuation of the first quarter's strong performance.

Sales in our base US operations declined approximately $80 million in the quarter. As I said, that's the largest decline in BorgWarner's history, at least as far back as I can go. The decline in sales was due to continuing reduced production volumes in the US, particularly the Detroit three light trucks and SUVs. The lost operating income on those sales was $0.31 on the dollar and this is above our 20% to 25% target range for detrimental margins and is part of the reason that Tim is talking about restructuring actions this morning.

The base US operation sales decline was more than offset by $108 million in growth, and that's excluding currency, in our operations outside of the US and US turbochargers with about $0.23 on the dollar contribution margin positive. The impact of foreign currency alone added approximately $25 million in sales at about $0.11 on the dollar in operating income and net earnings per share impact of $0.07 a share in the quarter.

Within these incremental operating income numbers, there is a $24.7 million increase in SG&A cost in the quarter versus 2007, and an increase as well as a percentage of sales to 10.5% from 9.9%. $11.9 million of that increase or roughly half was currency related. $1.1million was related to increased R&D investments, and another $3.3 million was related to a portion of that BERU immediate purchase price write-off.

SG&A spending in the quarter was actually in line with first quarter spending levels and we remain on a trend at about 10.5% for the year. R&D was 3.8% in the quarter versus 4.2% last year. Raw material costs net of recoveries were relatively flat in the quarter with increasing steel prices being offset by lower nickel prices. Below the operating income line, equity affiliates earnings of $11.9 million increased about $3 million compared to the second quarter last year, driven by the strong performance of our Japanese transmission components joint venture, and SK Warner and about $1 million of currency related to the stronger Yen.

Second quarter interest expense of $10.8 million was up $1.5 million compared with the second quarter of 2007, and was $4.3 million higher than the first quarter. The increase is primarily due to the flip of that first quarter $2.5 million favorable measurement of ineffectiveness of a cross currency interest rate swap. I know that's a mouthful. But if you remember on the first quarter call, I mentioned that interest expense in the quarter was low because of a $2.5 million favorable swap measurement and that it would probably reverse itself in the second quarter, which it did.

So if you look at interest expense, smoothing the first and second quarter, interest expense is about $8.6 million per quarter, more of a run-rate basis. We got a little benefit in the first quarter, little bit of penalty in the second quarter, year-to-date all evens out. Tax rate in the quarter was about 24.5% versus 27% last year.

And this puts our year-to-date rate at 25% which is what we did in the second quarter. We adjusted our year-to-date to 25% which is our new projected global effective full-year tax rate, and that reflects further declines in US income versus where we thought we'd be when we started the year. Obviously, declines in US income with higher effective tax rate reduces our overall global tax rate.

Net earnings were $87.5 million for the quarter or $0.74 a share, including the one-time BERU write-off. Excluding the write-off, earnings per share were $0.78, an increase of 22% or $0.14 a share over the previous year's second quarter or $0.07 a share, 11% excluding currency. A very strong quarter in what was as I said, a record decline for US business activity for BorgWarner.

Now, let's move on to our operating segment performance. For the second quarter, engine segment sales increased $153.6 million or 16% and segment EBIT margin was 11.9% excluding that BERU purchase price write-off. And that 11.9% compares to 11.3% in the second quarter last year, so good, strong improvement and fairly consistent with the 12% we reported in the first quarter this year. There's pretty strong consistent performance in the engine side of the business.

Excluding the impact of currency, sales increased 5% for the engine group in the quarter. The engine segment continues to benefit from European Asian automaker demand for turbochargers, timing systems and emission products, and European demand for diesel engine ignition systems. This was offset by declines in timing systems, cooling systems and emission systems product sales in the US.

For the quarter, the drivetrain segment net sales decreased $3.3 million, a little bit less than a percentage point. Excluding currency, sales actually decreased 5%. The EBIT margin was 5.3% in the quarter, down quite a bit from the 8% last year, but an improvement from the 4.5% that we saw in the first quarter and in line again with what we said in the first quarter that we expected drivetrain margins to at least get above the 5% level and trend -- continue to trend upwards towards the end of the year.

Drivetrain sales decreases were heavily impacted by lower North American production of light truck and sport utility vehicles, which offset continued growth of DCT product sales in Europe. Drivetrain earning before interest and taxes, while continuing to be disappointing, do reflect an improvement over the first quarter as we better manage startup costs related to our dualtronic transmission modules in Europe. Lower North American sales of light truck and SUVs however, continued to exacerbate some product rearrangement activities we've got going on in our North American manufacturing facilities which is also negatively impacting our margins.

As I said earlier, we still expect to improve both of those situations. We have made some improvements as you see in the second quarter. And we see drivetrain margins improving as we progress throughout the year. Not quite back to the 7% historical levels as we said earlier, due to further significant declines in US customer production levels.

Now, let's talk about the balance sheet and cash flow. Our investment grade capital structure continues to be strong. A debt-to-debt plus equity ratio was 19.7% at the end of the quarter, versus 21.5% at the end of December.

Net cash provided by operating activities was strong at $267 million for the first six months, compared to $223 million for the first six months of last year. Capital spending including tooling was about $162 million, compared to $123 million in 2007. Again, further investment to support the growth of our business outside the US market. We also repurchased about $28 million of our common stock in the first half of the year. After tax return on invested capital at the end of the period continues to improve to 13.6% on a rolling four-quarter basis versus 11.9% a year ago. We continue to be very well-positioned to weather the difficulties in the US market and also are prepared to take advantage of strategic opportunities as they present themselves.

Let me talk a little bit about our guidance. After the first quarter, we told you that we would be reviewing our full-year earnings guidance in light of the positives and negatives that are occurring in the industry. The negatives being North American production declines and global commodity prices, the positives for us being continued demand in Europe and Asia for our products along with stronger currencies.

The biggest negative has been the significant sales decline in our US operations. And I already told you the the impact it had in the second quarter. We started the year projecting a sales decline of about 5%, $100 million to $125 million, based on a North American vehicle build of about 14.3 million vehicles. We are now projecting more than twice that level of decline, about a 12% to 14% decline in US sales, or $250 million to $275 million. Again, we're expecting a decline in our US operations of $250 million to $275 million versus where we started the year at $100 million to $125 million. And we are now expecting North American vehicle builds much closer to 13 million, than the 14 million level we talked about as we started the year.

And again, this projected decline in sales resulted in the restructuring actions Tim outlined this morning with the intention of limiting the detrimental margins on those sales declines to the $0.20 to $0.25 margin range versus the $0.31 plus that we've experienced in the first six months of this year. The significant decline in our US operations and the detrimental margins associated with those sales declines has reduced our expected operating income margins to the 8.5% range from the previous 8.5% to 9% range. As you lose $150 million of sales in a detrimental margin of 20% to 25% on the dollar, it's very difficult to maintain operating income margins at consistent levels.

It is also resulted in lowering our projected tax rate for the year to 25% from 26%. We've also updated our currency exchanged rate assumptions, closer to current market conditions with the dollar at a Euro 1.50, Yen at 1.05. As Tim said -- dollar 1.50 to the Euro, I'm sorry. As Tim said, we have revised our guidance slightly $2.80 to $2.95 per share for the year, from 2.85 to $3, given all these puts and takes. That translates to a record strong year, this revised guidance, a record strong year for BorgWarner with over 15% earnings growth versus last year.

As Tim mentioned, the earnings guidance does exclude the currently estimated restructuring costs of $10 million to $12 million which is about $0.08 a share and the one-time second quarter BERU purchase price adjustment write-off which is about $0.04 a share. But does include any 2008 related benefits of the North American restructuring that Tim discussed. Including the restructuring cost and BERU one-timer, Guidance on US GAAP basis is $2.73 to $2.88 per share, still 12% to 18% growth versus last year's $2.44 a share performance.

Very strong year for BorgWarner. We are now expecting net raw material increases, primarily steel, around the $35 million level for the year. If you remember, our original guidance was in the $20 million to $25 million range. Year-to-date raw material has increased about $6 million for the year, so that means we are expecting approximately $30 million in the last half of the year, split evenly, about $15 million per quarter.

Our guidance also includes no changes to net cash provided by operating activities which we expect to be about $550 million this year, a very strong year. Capital spending including tooling, about $400 million; so net cash after capital spending of about $150 million. R&D spending still about 4% of sales. Return on invested capital creeping up above that 14% level, moving towards 15% target.

As Tim said, our overall outlook for 2008 remains generally positive. However, we do remain concerned about North America and that is why we are taking proactive measures to adjust our employee levels at our North American operations. We're currently faced with dramatically lower industry production levels in North America. In fact, we have not seen these levels since 1992.

Sixteen years ago when BorgWarner was still a private company and my hair was all black, there wasn't any gray in it, and some of you may have been in college or even high school at that time. And if you look at relative activity, Japan and Korea will build more vehicles this year than we will in the US. This is a dramatic change in this industry. However, despite those conditions, we still expect our sales to grow in excess of a projected moderate global vehicle production environment with growth in Europe and Asia expected to offset significant declines in North America. And that really shows the strength of BorgWarner.

We've had a good, strong start to the year and are taking the necessary, but difficult steps to ensure we finish the year just as strong. We intend to stay on top of our cost structure around the world to ensure that we provide solid incremental earnings growth on our incremental sales. We continue to have a strong investment grade balance sheet, and these unprecedented industry volume reductions has not materially changed the strong financial performance of BorgWarner or endangered our ability to continue to execute our technology-driven growth strategy. With that, I'll turn the call back to Mary.

Thank you very much, Robin. I'll now ask the call coordinator, Tina, would you please announce the Q&A portion of the call?

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. Our first question will comes from the line of Brian Johnson with Lehman Brothers.

Questions are more strategic this morning. Can you give us any update on the likely pace through '09, 2010, 2011 of turbo rollout for turbo charged gas in the US?

Well, what you're going to see is a continued increased penetration of gas turbo charged engines as they come -- as they're developed and launched through the US just like you said. I don't know the whole market but I can tell you on the BorgWarner side of the equation, we're going to be rolling out 22 gas turbocharged vehicle platforms or vehicle engines in the next couple years. That's a pretty healthy rollout plan and pretty healthy launch schedule for gas. And we're going to have a significant amount of diesels that will be rolling out.

Now, these vehicles maybe start out as European vehicles that are sold in North America, and some of them may be North American vehicles that are manufactured by North Americans. But it's going to be a very healthy penetration of turbocharged gas engines in North America.

On the Ford ones in particular, could you clarify which eco boosts you're on versus your competitors.

Very easily. We are on the high volume rear-wheel drive 3.5-liter V6 Ford Eco Boost which we've been told by Ford will be the high-volume portion of the V6 eco boost family.

Okay. Have they said what platforms they'll put that in?

Well, I don't know if they've said it or not, but let's just say this. It will be replacing V8s. In V8s -- there's a significant amount of V8s used in rear-wheel drive vehicles, so you can pretty much figure out that the rear-wheel drive platforms within Ford are mainly -- rear-wheel drive passenger car and trucks.

Pickups and taxicabs.

And some SUVs.

Right. Is that a move forward of their plans?

Well, I know -- I can't tell you what their plans are, but I can tell you this. Ford in general is accelerating their focus on fuel efficient engines in North America. They're pulling their programs ahead as fast as they can to improve fuel efficiency. As you already know, they're moving very quickly to bring European powertrains and European vehicles over to North America to increase their fleet, fuel economy average.

Okay. Final question. Was this reflected in last November's backlog guidance? Or will this be part of the puts and takes rolling in -- that we're going to hear about this November?

Brian, help me out with specifically what -- ?

Well (multiple speakers) backlog through last November. Did it contemplate this level of North American turbocharger development in this timeframe?

No.

Okay. Okay. Therefore, we could think that's going to be a net add to backlog?

It's a net add on the turbocharger side. You've got to remember that we do have some content on some of the engines that are being replaced. But all in all, it makes for a healthy BorgWarner.

And where could this taken engine margins over time? Do you have a long-term goal?

I couldn't hear that. What was that last question?

Where could it taken engine margins over time? Does it have a long-term goal?

We don't talk about margins on specific -- but let's just say this. All of our programs that we launched are focused on returning at least a 15% return on invested capital.

Okay. Thanks, Tim.

Sure.

Our next question will come from the line of Chris Ceraso with Credit Suisse.

Hi, Chris.

Chris?

Sir, your line is open. Please go ahead with your question.

Okay. Thanks, guys. Can you hear me?

Hi, Chris.

Go ahead, Chris.

We can hear you.

I'm sorry, sir. He has disconnected his line. Next, we will hear from the Rich Kwas with Wachovia.

Good morning.

Hi, Rich.

I think, Tim, you mentioned commercial vehicle strength. That's going to help you in the -- I guess it helped you in the second quarter and you expect it to continue to help you. Is that a global comment? Or is that specific to a particular region?

Specifically, it's global, but we know firsthand that we're seeing continued strength in Europe, Eastern and Western Europe. It's more European-oriented than North American-oriented in terms of the strength of the commercial -- the growth in the commercial sector, but we're not being hurt on the North American side. There's slight growth in North America, also.

Okay. And then on --

Rich?

Yes.

One thing I would add is we're continuing to see increased strength in the off highway side of the commercial side of our business, which would -- puts us well-positioned with the traditional players like Kat and Deere.

And that's helping your North American business?

Yes, it is.

All right. In the press release, you talked about Europe, you expect some slowing there. How comfortable are you with the potential downside in Europe? How much cushion have you baked into your guidance for the rest of the year?

Well, we're still comfortable with our guidance relative to Europe. We are watching Europe closely, like I said. There's some softness in Spain, Italy and the UK. But there's continued strength in Germany, because Germany's not only seeing some strength or holding in solid in Germany, but they've got a lot of export into Eastern Europe. France is still strong, but maybe not as strong as it used to be.

What we're seeing now is there's been a slight softening, but what it's done is it's relieved some of the pressure between our -- the demand, which was very high, and our capacity which was slightly less than demand. We still have more demand than capacity, but it's taken a little bit of the pressure off. Like you already know, Rich, there's a continued shift from large size engines to downsized smaller engines, and that plays to our strength.

Okay. And then Robin, on the restructuring, is that largely cash?

Yes. At this point in time, it's all cash.

And then you mentioned $12 million related to this BERU transaction in terms of interest. Is that -- should we assume that that hits -- starts to hit in the second half and then -- ?

On an annualized basis, it's interest and its amortization of excess purchase price. That's an annualized number and you'll see half of that in the back half of the year. When you think of our guidance for the year, we did roll in about a $0.03 a share penalty for this change in ownership of BERU and the accounting implications.

Okay. And then but going forward, you talk about interest expense running about $8.5 million and you strip out the swap, the swap treatment. But should I -- should we assume that the $12 million is going to be another $4 million a hit a quarter or is that -- ?

That's right. A portion of that will be operating income and a portion will be interest expense. About $8 million of the $12 million will be interest expense related, and then the other $4 million will sit above operating income as amortization of intangibles.

Thank you.

Our next question will come from the line of David Leiker with Robert W. Baird.

Can you hear me all right?

Hey, David. How you doing?

I'm doing well, thanks. A numbers question first. The BERU item here in the quarter, what line item did that fall in?

The one-time charge in the income statement?

Yes.

3.3 of it sits in SG&A and the other 1, 8 is in cost of goods sold.

Great. Thanks.

Just want to ask, how are the Brewers doing against the Cubs, David?

Won't go there. I'm grumpy today, okay?

All right.

We'll see what happens at the end of the year, all right?

All right.

Tim, can you give me some perspective of the competitive landscape on gas turbos?

I think that the market is increasing globally for increased penetration on gas turbos. We're getting a significant share. I don't know what the proportions are. All I can tell you is I think BorgWarner's been able to demonstrate we're the technology leader and the market leader for gas turbocharged engines.

As such, we are getting a significant number of programs awarded to us on gas engines. Like I said, in the next couple years just in the North American market, not all these vehicles will be manufactured in North America, but there will be 22 gas applications in North America with BorgWarner turbochargers on them.

Do you think you have a stronger competitive position in gas than diesel? Or do you think they're comparable?

I think we have a strong competitive position in both and the market is increasing for both. What I will say is we're increasing our market share in an increasing market. We're doing it both in turbochargers in total and I can tell you, we're really strong in gas. We're doing extremely well also in diesels.

And the commercial vehicle business that you talk about, a piece of that is turbos. Is it all turbos or is there something else in there?

I couldn't hear. What was that question?

Commercial vehicles.

Yes.

In terms of product offering there, I would guess that a meaningful amount of that is turbos. But do you have other products that you're selling into the commercial vehicle market?

Yes. Yes. We have cooling products, fan and fan drives. We're doing very well on the fan drive. It's a profitable business. It's a growing business. I wish it was a larger business for us. But we're doing extremely well. We've got about a million units of turbo charged gas engines, coming at us in the United States for this year.

Okay.

Globally. I'm sorry, that's globally.

Global.

We have a million units of gas engines globally.

That you're selling?

For turbochargers, yes.

One last item. In terms of the restructuring actions you're taking, what's the savings from that?

Savings on the restructuring.

Is that a one year payback on that?

It's less than one year, David.

Thank you.

(OPERATOR INSTRUCTIONS). Our next question will come from the line of Chris Ceraso with Credit Suisse.

Better luck this time, guys. Can you hear me?

Yes, Chris. Thank you.

Thanks.

All right. I think Honeywell had some comments on its quarter that turbos in Europe weren't going so well. Is that a function of the engine size bias where you're better in smaller engines? Are you picking up share on diesel turbos in Europe?

Yes. It's a very easy answer. We're picking up share because the market is shifting from larger engines to smaller engines. We have significant market share on small engines.

What is the trend these days in diesel penetration in Europe? Has that slowed down at all or is that still increasing?

The rate of increase is starting to slow down. People are starting to look at the price of gas versus the price of diesel since diesel fuel has risen recently. We don't know if that a short-term or long-term phenomenon.

But diesel's hanging in there around 50%. It's been in the like 53%, 54% range. There's projections that it's going to slow down to maybe -- the penetration is going to slow down to like 50%, 51% while at the same time gas' penetration on turbochargers is increasing significantly.

Okay. Can you take us through briefly your remaining exposure in the US market to truck-based products? We know you've got the transfer on the Ford trucks. Can you take us quickly through the overall US market and let us know where you've got content on truck-type vehicles? Body on frame?.

We have significant content at Ford. But a lot of the volume has been washed out of the pickup and SUV markets. There's not a whole lot -- let's just say this.

We can't be hurt too badly in the future, based on truck -- reduced truck sales because a lot of that stuff has been washed out. We're down to the point where the people that are just -- that have to buy trucks are buying trucks and that's where we're at. We have some content on GM and some content on Chrysler.

Chrysler, it's pass car. GM, it's pass car and some truck and at Ford, it's mainly the truck. Our transfer case volume is -- the major customer is Ford, followed by GM and Chrysler. That's the Detroit three.

We're shipping transfer cases to Audi on the Q7. That's holding strong so far. We're doing well in Asia so far with -- in Korea and China. We're shipping transfer cases.

We're manufacturing in Asia and shipping to Russia. Those parts of the world are still holding up well. It's just North America that's causing us a big problem.

Okay. Last one, Robin. If you hold everything else equal, what did the change in your foreign exchange assumption do to your guidance for the year?

That's a good question. Here's a real easy way to think about it. North American sales declined versus what we thought before is about $150 million at a 25% incremental rate. That's about $0.24 a share decline from our previous guidance.

Currency will give us about $0.14 a share so that's net down 10. The tax rate will give us an improvement of about $0.04 a share. The BERU acquisition with the additional run rate cost is about $0.03 a share, so it's about an $0.11 a share swing.

Perfect. Thanks.

We have no further questions at this time. I would like to turn the call back over for closing remarks.

Once again, thank you all for joining us. If you have any follow-up questions, you can direct them to me. We will talk to you again and hope to see you at some of our upcoming conferences. Thank you very much.

Ladies and gentlemen, this does conclude today's BorgWarner 2008 second quarter results conference call. Thank you for joining and you may now disconnect.