博格華納 (BWA) 2008 Q4 法說會逐字稿

Good morning, my name is Thea, and I will be your conference facilitator. At this time I would like to welcome everyone to the BorgWarner 2008 fourth quarter and full year 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 Mary Brevard, Vice President Investor Relations. Ms. Brevard, you may begin your conference.

Thank you very much. Welcome. And we appreciate all of you joining us this morning. We issued copies of our release this morning before the market opened. It is also posted on our website at com at BorgWarner.com under investor information. The conference call today will be replayed through February 19. The phone number at 800-642-1687. Our conference ID is 80716755. There is also a replay available on our website.

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

I'll now turn to Tim Manganello, our Chairman and CEO, who will be providing comments on the quarter and the year, and then Robin Adams will discuss operating results. Tim?

Thank you, Mary, and good day, everyone. Before talking about the quarter I want to look back on 2008. The incredible disparity between the two halves of the year is truly amazing. During the first half of 2008, 2e enjoyed strong demand for our products with particular strength in our turbocharger and dual clutch transmission business, leading to record sales and record earnings. However, with the mid-year escalation of gas prices, vehicle production in North America contracted. In addition, the economic crisis and sharp downturn in consumer confidence caused a dramatic reduction in global auto production in the second half of the year.

So let's talk about our full year highlights. Against this backdrop 2008 sales were basically flat at $5.3 billion. This compares with worldwide auto production that was down 4%. Full year 2008 earnings per share for BorgWarner were $2.07 excluding nonrecurring items. And our operating income margin was 6.3% excluding these same one time items. For the fourth quarter sales were $932 million, down 32% from last year's fourth quarter. And we were break even for operating profits excluding one-time items in Q4. These items include major restructuring charges and a warranty issue on a transmission product sold in Europe for the period mid 2007 through May of 2008. And Robin will cover more of this in detail in the financials.

So let's talk about our restructuring actions. In the face of these very challenging market conditions, BorgWarner has acted swiftly. Our focus has been and continues to be aimed at improving operational efficiency and sizing our business to manage through these very uncertain times. The deep declines in North America and sudden cuts in European product schedules late in the year made it difficult to reduce our costs fast enough to match those rapidly changing conditions. However, we proactively and aggressively restructured our business in the second half of the year, to position BorgWarner to weather a difficult 2009.

We have reduced our global employee work force 24% from the mid 2008 levels. This is a reduction of about 4,400 people, including temporaries and contract employees. We shut down our North American and European operations for an extended holiday period from December 12 through January 12. Four-day work weeks have been implemented in many of our European facilities and we will consider further cuts if needed, including three and two-day work weeks. Wage freezes for employees have been instituted. And officers and board members have taken a 10% pay cut.

We are closing two Drivetrain facilities that produce four wheel drive systems, once in Muncie, Indiana in April of 2009 and another in Margam, Wales in 2010. We are modifying our operations to respond to evolving customer and business needs and this includes reducing inventory and cutting capital spending. While we improve our operational efficiency we continue to spend wisely on research and development to enhance our future growth.

Let's talk about our 2008 accomplishments. Despite the turmoil, 2008 had many accomplishments for BorgWarner. These accomplishments continued to strengthen our position as a global power train technology leader. We are associated with a record number of awards in 2008, about 20 total, and these include recognition for technology that helped our customers win environmental honors and industry innovations for our turbo chargers, all wheel drive systems, dual clutch transmission technology, variable cam timing and ignition systems. We were especially pleased that the clean diesel Jetta, with our turbo charger, instant starting system and dual clutch transmission technology won a number of green awards in the United States and Europe. During 2008, customers continued to adopt our solutions for improved fuel economy, and had a number of major launches of our dual clutch transmission technology in Europe and in Asia with their OEMs.

And the pace continues. Over the next five years the market for dual clutch transmissions is expected to grow four-fold from one million units today to about four million units in 2014. And at Ford, Ford awarded us a major portion of their new six cylinder Eco-boost gasoline direct injected engine program. We expect the GDI engine market to grow about 260% over the next five years from three million units worldwide to 11 million.

In October we announced our net new business of $2.1 billion over the next three years. While 2009 new business launches may lag our projections, over the full three-year period, the net new business is expected to continue to build.

Let's talk a little bit about China. We also made significant progress in China. One of the most important company developments in 2008 was the formation of a joint venture to produce dual clutch transmission modules with a consortium of top Chinese OEMs. This collaboration is significant, because it positions our dual clutch technology as the preferred automatic transmission for China and its major automakers.

Our joint venture partner is a government coordinated company owned by twelve leading Chinese OEMs, including First automotive, Shanghai Automotive, Dongfung, Cherry, and Gili, and Great Wall. Together these vehicle manufacturers account for over 90% of the domestic passenger car volumes in China, and will source dual clutch transmission modules exclusively from our joint venture. 80% of the automatic transmission passenger cars from these 12 OEMs are expected to use our dual clutch transmission technology. The JV will assembly various dual clutch transmission modules with BorgWarner supplied components, and this arrangement will help protect our intellectual property. Production is scheduled to begin in 2011. And we hold a 66% majority ownership in the JV. Production of dual clutch transmissions with BorgWarner modules is expected to reach 1.7 million units at full volume in China.

So now we are done with China, let's talk a little bit about 2009. Looking at 2009, our visibility for the year remains very limited. We expect reduction in industry schedules of 25% to 30% in North America, and 20% to 25% in western Europe from full year 2008 levels. In both North America and Europe we expect first quarter volumes to be worse than those in the fourth quarter of 2008. For the full year, even though we expect sales to decline from 2008 levels for BorgWarner, we expect our earnings and cash flow will both be positive in 2009. In addition, the underlying fundamentals of our business remain strong, and our financial structure is sound.

Now let's talk a little bit about power train technology. Beyond the current crisis, power train continues to be the major area of emphasis within the auto industry, and BorgWarner will be a major beneficiary of this focus on power train. We believe that power trains for the foreseeable future will include down-sized advanced internal combustion engines, either gas or diesel, there will be hybrid power trains and electrical vehicles. We are developing new products for all types of power trains and have intensified our work around hybrids and electric vehicles. However, as many of you have heard me say, I personally continue to believe that clean diesels are the most viable economic and technical solution to improve fuel economy.

As a founding member with Bosch, BorgWarner has announced the new Coalition for Advanced Diesel Cars. The purpose of this coalition is to promote the energy efficiency and environmental benefits of clean diesel passenger cars in the United States. The coalition will urge legislators and regulators to support technology neutral public policies that foster energy independence, reduce CO2 emissions and create jobs in diesel power train technology. Now I'm also encouraged to see that the new US administration was bringing fuel economy to the forefront of their discussions. And I welcome the vigorous debate among the legislators, the press and our customers on this issue.

So let me close by reminding you that we have a seasoned executive team here at BorgWarner that has managed through difficult market environments before, all the way back to 1973. And the underlying fundamentals of our business, what I have always called the BorgWarner difference, remain strong. While the market remains highly challenging, we continue to benefit from our technology, leadership, customer and geographic diversity, robust balance sheet with ample liquidity. These factors combined to position BorgWarner far more favorably than our industry peers to ride out the economic storm.

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

Thank you, Tim, and good morning, everyone. Before I get into the financials, let's go over the industry environment in a little more detail. For the full year, global vehicle production was down about 4%. In the US, production was down 19%. When you look at the light truck portion of the market, it was actually down 38% year over year in the US. You look at production outside the US, it was down 1% for the year. In Europe production was down 5% and Asian production was actually up slightly about 2% during the year.

For BorgWarner, in the US our sales were down 18%, pretty much in line with the US production declines, and 2% outside the US, excluding currency, which is better than the global market. Excluding currency, our sales were up 2% in European versus European production which was down 5%, and our sales were up 5% in Asia.

As Tim mentioned, the world and the light vehicle production market changed dramatically in the fourth quarter. We saw vehicle production fall in every region of the world with the exception of China. Vehicle production in the US was down 28% in the quarter and our sales were down 27% in the quarter in the US. Production outside of the US was down 17% and our sales outside the US excluding currency were down 22%. European industry production in the quarter was down 25%. Tim and I remembered a discussion back in I think it was September, the Paris auto show, about the fourth quarter. I don't think anyone was expecting that type of performance in Europe. Nonetheless, production was down 25%. Our sales were down 18% in the quarter in Europe.

As we look at the full year and consolidated fourth quarter and full year consolidated results from an income statement perspective, our sales in the quarter were $931 million. Down 32% from the fourth quarter of the prior year, as Tim said. The impact of foreign currency in the fourth quarter, primarily the euro, actually had a negative impact on us, and that is the first time we have seen that in almost eight quarters. And actually decreased sales by $114 million. If you exclude currency, our sales declined in the quarter by about 24%.

For the full year, the sales were $5.3 billion, down 1% from last year. Basically flat. The impact of foreign currencies, however, primarily the euro, added $190 million to sales. So excluding currency our sales were down about 5%.

As we look at the makeup of our sales, sales in the US represented 28% of our total in 2008, versus 34% in 2007. So a dramatic shift continues in this company with respect to geography and customer. Put it another way, our sales outside the US represented 72% of our total. Sales to GM and Chrysler are each less than 4% of our sales, and combined are a little bit more than 7%.

Looking at earnings, we provide a table in the press release which we issued this morning to identify our US GAAP reported earnings and identify the nonrecurring items in the quarter and the year that we believe should be understood and considered in reconciling our financial performance to prior periods to your current period expectations and for assessing future expectations. We also intend to file our 10-K by the end of the day, and so for those of you who really want to dig into the details, you can get through that later tonight or tomorrow.

For 2008 fourth quarter, US GAAP earnings were a loss of $0.70 a share. For comparison with other quarters, fourth quarter earnings per share were break even excluding the nonrecurring items. And these nonrecurring items on a per share basis included a $10 million pre-tax goodwill impairment charge related to the investment in our Beirut subsidiary, which is about $0.09 a share, a pre-tax restructuring charge of $102.5 million or $0.56 a share after tax, a $23.5 million pre-tax warranty related charge which caused by a supplier and associated with a transmission product sold in Europe. And as Tim mentioned, that event was limited to production from mid 2007 through May of 2008. That impact was, on an after tax basis, about $0.14 a share. $0.07 a share positive impact.

The effective full year tax rate turned out to be 23% for the year. And for the first nine months we had used 25%. So the first nine months of the year actually were $0.07 a share better once you adjust for the full year 23% tax rate. And we had a $2 million favorable tax account adjustment in the fourth quarter of approximately $0.02 a share.

As we look at the pre-tax charges for restructuring and goodwill, the $125 million pre-tax charges which again was about $0.65 a share combined, approximately $76 million of that was noncash. For the year US GAAP earnings were a loss of $35.6 million or $0.31 a share. For comparison with other years, full year 2008 earnings were $2.07 a share, excluding the nonrecurring items. The nonrecurring items totaled up to $2.31. Approximately $230 million of the $284 million pre-tax charges for restructuring and goodwill again were noncash.

Let me quickly go over the two of those most significant nonrecurring items. The first is the goodwill adjustment. As of the end of the year, we recorded an impairment charge, It was charged in the third quarter and the fourth quarter combined $157 million or $1.35 a share to adjust good BERU's goodwill to its estimated fair value. The pre-tax and after tax amounts for this charge are the same, as there is no tax benefit to this goodwill charge. The carrying value of our adjustment in BERU has been negatively impacted by the rapidly declining European economic conditions. And with equity valuations around the globe down significantly in 2008, many other companies are faced with the same investment impairment issues related to recent acquisitions. In addition, the German legal process of acquiring control of BERU through a domination and profit transfer agreement required court dictated share payments to the BERU minority shareholders which are in excess of the fair market value of the company.

The other major portion is the restructuring charge. During our last call for the third quarter we discussed our restructuring actions to that point in time. And in December, we announced that more restructuring actions were being implemented in the fourth quarter. In line with that announcement we have taken additional actions throughout the world to improve our cost structure and operational effectiveness in response to the further declines in global economic activity. As a result of the combined third and fourth quarter restructuring actions, we have reduced, as Tim said, our total work force by approximately 4,400 people. By region that is 2,400 people in North America or about 34% of the work force, Europe approximately 1,600 people or 18% of the work force and our Asian work force reduced about 400 people or 17%. And remember, in addition to the headcount reductions, as Tim mentioned as well, we have instituted four-day work weeks in most of our European facilities.

The restructuring expense recognized for employee termination benefits for those 4,400 people is $54.6 million, of which $10.3 million was paid out in the third and fourth quarters of 2008. The remaining liability of $44 million will be paid out over time and completed by the middle of 2010. In addition to employee termination costs, we recorded $73 million of asset impairment charges related to North American and European restructuring. So the combined restructuring expenses of $127.5 million or $0.72 a share, broken up by segment would be enjoin $85.3 million, drive train $40.9 million and corporate of about $1.3 million.

As we look at net income in the quarter, we reported a loss of $81.4 million or $0.70 per share compared with earnings of $71.2 million, or $0.60 a share in the fourth quarter of 2007. Excluding the nonrecurring items, operating income was $4.4 million or 50 basis points, or 0.5% of sales in the fourth quarter 2008 versus $126 million or 9.2% of sales in the fourth quarter of 2007. The decline in operating income relative to sales, or in other words a decremental margin, was about 28% in the quarter, higher than our targeted 20% to 25% range. The impact of foreign currencies in fourth quarter 2008, primarily the euro, increased the net loss by $9.6 million or $0.08 a share versus last year.

For the year, the net loss was $35.6 million or $0.31 per diluted share, compared with 2007 net income of $288.5 million or $2.45 a diluted share. The impact of foreign currencies for the full year 2008 actually added about $13 million in net income.

Gross profit as a percent of sales in 2008 was $15.9 million, down from $17.8 million in 2007, again primarily a result of the declines in the global automotive market in the third and fourth quarters of 2008. Operating income margin for the year was 6.3% excluding the nonrecurring items, which is below our historical 8.5% to 9% range, and also below the 8.2% level that we enjoyed in the first six months of 2008. So, as Tim said, it was really a year of two separate halves.

Selling, general and administrative expenses as a percent of sales were 10.3% in 2008, compared with 10% in 2007. The increase from a dollar perspective is primarily related to additional amortization recognition for acquiring the remaining 18% of BERU. R&D was $206 million or 3.9% of sales in 2008 compared to $211 million or 4% in 2007. While net spending was down slightly, gross spending actually increased by $27 million but was offset by a $32 million increase in customer reimbursements. Raw material costs net of recovery increased $15 million for the quarter, pretty much in line with our expectations of $35 million for the year. And if you remember, raw material cost increases were about $5 million for the first six months of the year. We expected $30 million in the last six months and unfortunately we saw that $30 million increase. And it was primarily related to steel.

Below the operating income line for the quarter and the year, equity and affiliate earnings were down primarily due to fourth quarter Japanese Drivetrain customer schedule reductions, which we expect to continue into 2009. Interest expense was up and minority interest net of tax was down, pretty much reflecting our domination agreement with BERU. The effective tax rate for the quarter in the year was 23% on a run rate basis, or after excluding the nonrecurring items.

As we move onto the operating segment performance, on the engine group side fourth quarter sales were $680 million. Earnings before interest and income taxes at that segment level was $36.5 million. Sales outside of the US were down 22% excluding the impact of foreign currencies, while sales in the US were down 19%. For the full year, sales in the engine group were up slightly to $3.861 billion, with segment earnings before interest and income taxes of $395 million. For the year, sales in the engine group outside the US were up 2% excluding the impact of currencies while sales in the US were down 12%.

In the first half of the year, the group continued to benefit from European and Asian automaker demand for turbochargers but second half production declines reduced sales of the company's engine products in every region of the world.

For the Drivetrain group fourth quarter sales were $255 million with a segment loss before interest and income taxes of $42.1 million. As we said earlier, segment earnings in the quarter were negatively impacted by that $239.5 million supplier related transmission component warranty charge. Sales outside of the US were down 22% in the quarter excluding the impact of foreign currencies, while sales in the US were down 37% in the Drivetrain group.

As we look at the full year, sales were $1.4 billion in the Drivetrain group for the year with a segment loss before interest and income taxes of $18.6 million excluding, again, the warranty impact. Sales outside of the US were up 3% excluding the impact of foreign currencies, while sales in the US and the Drivetrain group were down 25% for the year. Dramatically reduced global production volumes significantly depressed second half demand for all the Drivetrain products.

Now let's talk about the balance sheet and cash flow. In the quarter, net cash provided by operating activities was $137 million. Capital spending was $104 million, resulting in $33 million of operating cash flow generated in the quarter. We purchased an additional $88 million of BERU shares in the quarter that was tendered under the domination agreement, driving debt up approximately $60 million for the quarter. For the year, net cash provided by operating activities was $400 million, compared with $600 million in 2007. The decrease in 2008 versus 2007 was primarily due to working capital management, or lack thereof.

CapEx including tooling was $370 million or 7% of sales for the year versus $294 million in 2007. After deducting the $370 million of CapEx for the year 2008 from the $400 million of net cash provided by operating activities, operating cash flow was about $31 million for the year. Balance sheet debt increased $144 million at the end of 2008 compared with the end of 2007, primarily related to $134 million for the purchase of additional BERU shares as a result of the domination agreement. Consequently we now own 96% of BERU shares and have started the German legal process to acquire the remaining 4% outstanding and attain 100% ownership of BERU through what is known in Germany as a squeeze out.

The company's capital structure continues to remain strong. The ratio of balance sheet debt, net of cash to capital, at the end of the year was 25.2%. The company has ample liquidity with $103 million of cash on hand at the end of the year, and no outstanding borrowings under our $600 million revolving credit facility.

Let me talk a little bit about liquidity. We have a bond maturing on February 17, or Tuesday of next week, with the principal amount due of $137 million. We have already deposited with the bond trustee the cash required to pay the bond holders on Tuesday. So in effect, that obligation has already been met. Funds came from available cash on our balance sheet, which I said was $100 million at the end of the year, dividend payments from our NSK-Warner joint venture and cash from our foreign operations. Note that we did not need to tap into our existing $600 million revolving credit facility to fund this bond maturity, and that credit facility continues to remain unutilized.

The credit facility itself which is scheduled to mature at the end of July, is subject to the usual terms and conditions applied by banks to investment grade companies. The agreement has two financial covenants, a net worth test and a debt to EBITDA test. We continue to be in compliance with these covenants and find it difficult, frankly, to come up with a scenario that would put us in jeopardy of not meeting either financial test before the July maturity. We currently intend to either extend or replace this facility at or prior to its maturity date.

From a credit quality perspective, the company was downgraded two notches at the end of the year by both rating agencies, along with the rest of the auto sector companies. After the recent down grades, we are currently still carrying investment grade ratings of BBB from S&P and BAAA3 from Moody's, although Moody's does have us under review.

As I stated earlier, our net debt to capital ratio was 25% at year end, and debt to EBITDA was approximately 1.2 times, which are solid investment grade statistics. And we currently expect to maintain investment grade credit statistics throughout the year 2009 and beyond.

Let's talk a little bit about 2009. Tim mentioned it already. Our visibility into 2009 is currently a bit cloudy as we wait for customer schedules to stabilize and give us a sense of industry run rate production for the rest of the year. While we do expect sales to decline in 2009 from 2008 levels, it is due to significantly lower global light vehicle production. But we also anticipate, as Tim mentioned, that both earnings and cash flow will be positive for the year, based on an assumption of North American vehicle builds of approximately 9.3 million units versus 12.7 last year and 16.6 million units for total Europe versus 21.2 last year. Our currency assumption is currently $1.25 to the euro.

I should point out that many of you have different assumptions for 2009 and they are all over the place. But those are kind of where we sit right now. The restructuring activity recently completed in addition to the four and even three-day work weeks at many of our facilities positions us favorably to achieve our targeted 20% to 25% decremental margins for 2009. In addition, raw material costs should be favorably impacted in 2009 versus 2008, primarily by approximately $25 million of lower nickel prices and nickel related hedging activity.

We currently estimate the impact of our net new business backlog for the year 2009 to be at about 80% of the $600 million we had discussed last October. R&D spending is still targeted to be at least 4% of sales, and capital spending is currently estimated to be close to the $200 million level. Quite a bit below, over 60% below the $370 million we invested in 2008.

We also see the need to significantly reduce our inventory levels in line with current business activity and there is a major initiative going on right now to achieve that. Turns, for instance, declined last year to 9.8 times at year end versus 10.5 from the prior year end. While our sales were down 32% from prior year end, our inventory levels were essentially flat.

For the first quarter, current indications are sales will be 7% to 10% below fourth quarter levels. And second quarter sales could be 10% higher than fourth quarter 2009 levels. And this is primarily as a result of more production days in the second quarter than the fourth quarter of 2008, and the first quarter of 2009. However, as we continue to point out, customer schedules do continue to change.

Let me finish up by reiterating Tim's comments. We have taken and continue to take actions to mitigate the downside of the current global economic situation while continuing to position ourselves for future additional growth. We have a growing backlog of net new business. We continue to have a strong investment grade balance sheet. We have retired our only outstanding debt maturing this year, without having to draw down on our revolver. Our next public debt maturity isn't until the year 2016 or seven years into the future. And that may be the next CFO's worry.

Despite the external economic environment that is beyond our control, BorgWarner employees around the world are focused on effectively executing our technology driven growth strategy. When this global economy turns around, and it will, BorgWarner will once again be at the forefront of this growth curve for this industry.

With that, I'll turn the call back over to Mary.

Thank you very much, Robin. I will have the call coordinator, Thea, now to give you the procedures for the Q&A session. Thea?

(Operator instructions). The first question is from Brian Johnson with Barclays Capital.

Good afternoon, or good morning. As we look forward to 1Q we saw 28% decremental margins from 4Q. When do you get margins back to the 20% to 25% decremental that you are looking for in '09? And when does that -- and what gets you to flexible staffing? How do we get comfortable around that?

I'll start with that, Brian. We continually target the next quarter to get to 20%, 25%. But as you know, we have been chasing volumes here for the last couple of quarters. If we get some stability here, which we haven't seen, the restructuring actions we have taken and the four-day work weeks in our European operations should get us close to that 20% to 25% range.

Second relate to that, if we are stuck at $12 million to $13 million (inaudible), in, say, Europe that is more like $18 million instead of $20 million production, could you get back to your old level of profitability in each business unit? If so, what is the time frame for getting there?

I don't know whether we'll get exactly up to that level. But I think we'll have a really good shot at it. We have really leaned out this company and like I said, Brian, we are going to be staffed right now. Roughly by starting with the beginning of February, we are staffed at close to a 9.3 production build in North America and about a 16.6 in total Europe for production schedules. If we get those kind of volumes, we should be in pretty good shape in terms of having pretty good operating margins. We are going to be really tight on bringing anybody back. I'll tell that you. It is hard to get them out. Once I get them out, it is going to be very difficult in my mind for me to allow them to come back. But we'll bring back what we need to make those meet those kind of volumes. I would hope if we get those kind of volumes soon, you are going to see those operating margins, our historical 8.% to 9% operating margins, reasonably soon.

So it's the planning assumptions which you are making more conservative, your planning assumption, does that mean you shoot for break even at that level? Or does it mean that you would be making a profit or a loss at that level?

Brian, as we have said, based on those assumptions, we expect to generate positive earnings and positive cash flow in 2009 at those levels.

I would be happy with $1 positive cash flow at those levels.

One longer term question. The $1.7 million or $1.4 million for Chinese DCT, was that included in your investor presentation slides and your projection of the DCT market? Is that incremental to that?

Almost none of it was included. If there was any included it was just a touch of it in the end of the third year or something like that. But there is really almost none of it. That is a longer term projection because that is a full market number, not a ramp up number.

Brian, I think if you are talking about the chart in there, it is 2009 to 2014 that has the full market for transmissions. So there is some of it in there, but not in the backlog.

Yes I was talking about the backlog. I thought when you were talking about the chart I was talking about the backlog, Brian.

So if it wasn't in the backlog some of it might have been in the market projection?

Right.

The bottom line is it gives us more comfort in the overall market projection and we'll see where it takes the backlog with whether it rolls in.

Yes and I'm glad you brought that question up because I actually think the market somewhat underestimated the importance of that joint venture project in China. This is a big deal by the Chinese OEM standards and actually a big deal in terms of the opportunity for BorgWarner. We actually have positioned BorgWarner as the major supplier of almost the preferred and major transmission product for a whole region or whole market, like China.

When do we get a sense, when do we expect to see those go into the backlog? That is how far before 2011 will you get production?

I think some of that starts to ramp up in 2011. So you'll start to see it in 2012, '13, and '14. I think we have a touch, we start doing a little bit of ramp up towards the end of 2011.

Okay when do you know if the programs are actually in place? Because of the commitment to put DCT in (inaudible)?

We haven't announced any programs. But there are definitely programs in China that will be the purchaser of these products, coming out of this joint venture. This is a module joint venture for clutch module and his control modules. Which means in order for the twelve OEMs to to put in the money to support this joint venture they plan on having transmission manufacturing. So what we haven't announced is the transmission programs that this product will sell to.

Roughly what time frame could we expect those announcements?

I can't tell you. And not that I wouldn't like to, it's just that we are still in negotiations.

Okay thanks.

Thanks, Brian.

The next question is from Himanshu Patel with JPMorgan.

Hi, good morning, guys. I just wanted to go back to the question on decremental margins. The 20% to 25% number you threw out there, Robin, should we think of that as sort of an average for '09 but maybe the first half could be higher and the second half gets to below that level? Or do you think you can actually get there as early as Q1?

No, that's a great point. We are still, although we announced 4,400 people, some of those people were not out the door by December 31. We took the charge for them and they'll work their way out of the system within the next few months. So it will be more of an average for the year. And a way to help you think about that is 4,400 people at an average of $50,000 of costs is about $220 million. And at, again depending on your revenue assumption decline, that would cover about $900 million decline in sales 2009 versus 2008. Then you need to factor in the four day work week versus the five-day work week in our European operations for the rest of the sales. Maybe that will help you visualize how you can get the savings on the labor side you need to get to maintain the 20% to 25% decremental amount.

As we said before, about 52% of a sales dollar is purchase components, raw material. And we expect that when you don't have a sale to not have to make the purchase and not incur the costs. And wages and benefits are about 25%. So again, if you look at on average $50,000 for the 4,400 people, that is $220 million in savings, which would support about a $900 million decline in sales to maintain that decremental margin, and then you have to look at our European operations which which is currently about 60% of our sales and look at that work force and look at about a 20% decline in costs there year over year because of the four day work week versus the five, and line that up with the overall sales decline of the company. That should help you get in line with the efforts we have made and the expectations we have to have those impact our financials.

Then just on the Europe four day work week, I understand the working hours goes down by 20%. But would the actual labor savings be 20%? You would still retain some of the benefit costs, wouldn't you?

The government supports most of that 20% that the employees that we don't have to pay. The government back fills that with government subsidies. We have to pick up a little bit of the benefits cost. But it varies from country to country. But we pick up a small percentage of it as compared to what they pick up. So we may be picking up 15% of it I don't know in that range plus or minus. Where they are picking up the other 85% of that gap.

The other thing, Himanshu, in many of our European operations the employees first worked off accrued overtime. The work didn't get paid for. It sat on the balance sheet because of liability. In some of those early work week reductions were actually, from an accounting perspective, paid for by liabilities on the balance sheet.

Then the CapEx decline, could you just repeat that again? What was the guidance for 09?

We are looking at capital spending close to $200 million.

And the big drivers of the decline there?

Significant decline in demand for product in the current year and the ability to delay some capacity. We have obviously more excess capacity than we intended to have in 2009. Therefore we can delay some of the capital spending for these programs. You want to go through some examples, Tim?

Example, there is some capacity in North America and Europe that we are using now to fulfill schedules in China. Whereas originally we had some plans to put the capacity in China, we are going to delay the capacity in China because we can now fill orders out of Europe and North America. There is a lot of little examples like that all over the company, where we are utilizing excess capacity. We were going to put transfer cases into Mexico, when we shut down the Muncie operation. We have now put a small annex on to our transfer case plant in Seneca. We basically have not, we stopped as much of the equipment as we could for Mexico and slowed down on CapEx. And the building is now sitting empty. Although the building's built, it is now sitting empty because we are using, we shifted all that production into Seneca and we are just going to have one transfer case plan.

Okay. Then two last questions. Could you give us some commentary on just what's happening with incoming schedules you are getting from European OEMs? Any sign of relative stability sequentially? Or does it still feel like it is a falling knife?

It's a falling knife. I think the Europeans have been in denial, and I don't mean a river. They have been in denial in terms of schedules, they have been too optimistic, now they basically are cutting schedules . We are seeing one week to here, one and two week shutdowns in February and another one and two week shutdowns in March. They basically are -- Volkswagen is a good example, I think. They said the European market was going to be down 20%. They said this about a month ago. The European market was going to be down about 20% but they were only going to be down about 10%. In January, Volkswagen came down minus 20%. They are now correcting schedules. We are seeing a lot of that in Europe. And the schedules aren't as stable in Europe as we need them to be in order to run a smooth

Okay and then last housekeeping question for you, Robin. On the revolver, how do you think of that as you go into extended or replace it? Amendment fees and repricing, I think that would be normal on this environment but would you feel, is it unreasonable to think that the actual commitment size could be shrunk, as well?

That facility was $350 million for like 10 years, and the last time we extended it, we upped it to $600 million. Frankly, we have never used any of it. And at the pricing we are seeing for commitment fees you have to think twice about whether you want to pay a commitment fee for $250 million of debt that you have never used and probably won't continue to use. That will be part of the whole process. You ever right, in this market the cost for these facilities are quite a bit more than they were a few years ago. So there will be some trade off there for costs relative to size.

And the other thing we should point out, some of the European banks, if you look at our bank group we have a pretty international group that supports us because of our international nature from a business perspective. Some of the European banks that are getting government funding may have some issues with respect to providing loans in the US markets but are more than happy to continue to provide the type of commitment to companies like ourselves in Europe.

Which works okay for us because our growth is in Europe and Asia.

Yes. So we may end up with a couple different pieces here rather than what we have today.

Okay great. Thank you.

The next question is from Richard Kwas with Wachovia.

Hi, good morning. It seems like on the restructuring fund you are done for now, Robin. You have a fair amount of, you are staffed at current levels for 9.3, and 16.6, in total Europe. What kind of level, what kind of stairstep down would you need to see before you have to commence another program?

Rich, we are managing this business almost weekly with respect to adjusting our cost structure. And so what you'll see right now, what we expect to see right now is a little bit of tinkering. I think that at the levels that Tim has laid out for us, to use as an assumption for manning our operations and planning our business for 2009, we feel comfortable that we are not off 20%. To the extent, again, there is any need to adjust the cost structure, we think it will be more week to week plus or minus adjustments rather than a requirement for a big reduction in work force here.

I'll give you a couple of thoughts. Of the 4,400 people, approximately, that we have laid off, about 55% of that was in North America. So we are in pretty good shape in terms of being sized right for North America. And actually, schedules, I think are, the US OEMs have actually taken their schedules down to the point where I think they're going to be a little bit more stable than we've seen for the last two months, so that should help and we should be sized right.

In Europe, I can't remember, I think we took somewhere, it was about 35% reduction in Europe. We have some plants in Europe that are on the verge of going from a four day work week to a three day work week. There will be some hit and miss. Right now, every plant in Europe is on a four day work week. We have a couple of BERU plants that are on three day work weeks. We have some other plants that are tipping into a three day zone right for you. But the good news is, Rich, we can react very quickly. We actually have the ability to go down to a one day work week or zero work weeks in a lot of our German plants.

Okay. That's really helpful. On just for a housekeeping question, on the 16.6 for total European production, what is the western European assumption?

I'll give you that. It's 11.7.

So that's pretty much unchanged from when you spoke in Detroit a few months ago.

What I think has come down is everybody was higher than that and most everybody seems to be coming down closer to our number. Which, you know, I wish our number was going up instead of their number coming down.

On the warranty issue have you replaced the supplier? Should we expect anything further on that front?

I hope not. I don't know of any warranty issues, as we speak right now. That was a supplier that caused us a problem. We take their parts and build them into our sub assemblies and we shipped it to our customer. The customer, it is something that you don't find until you get miles on the vehicle. We were able to capture the time period and now we are in negotiations with that supplier to us.

Okay. And then on the '09 contribution from the backlog, Robin, I think you mentioned going from $600 million originally to 20% lighter. How do we think about '10 and '11? I know that you are not going to update that until later this year but is it reasonable to assume that '10 and '11 contribution would come down that much? Or is that just too aggressive and you expect volumes to gravitate back up?

Our expectation, Rich, is by the time we get to 2011, most of these programs will get much closer to what our expectation was for a build perspective. When we put that backlog together in the fall, we already had kind of an expectation of a tough environment for the next few years. Obviously not as tough as what we have here in 2009. But our expectation looking at these programs -- again this is a three-year ramp, by by the time you get to 2011 we ought to still be pretty close to that gross number.

Okay. That's helpful.

Let me add something there, Rich. We actually have -- I'm looking at the business that was awarded to us in the fourth quarter. And it was a pretty high rate of reward. So I think that some of this stuff may backfill, some of the losses you have seen may backfill, some of the volume losses, some of the new orders may backfill some of that, and when you get out into outer years.

Great. Thank you.

Thanks, Rich .

The next question is from Itay Michaeli with Citi.

Thank you, good morning. Robin, I want to hit a couple points on your '09 cashflow assumptions. I know you mentioned CapEx around $200 million. Can you share what you are thinking about working capital? Does that become more of a tail end for you as you clear some inventory? And also anything you can shed on cash restructuring and maybe the pension as well?

Yes, we expect significant improvement in working capital in 2009. As I said earlier, sales were down year over year substantially and our inventory's relatively flat. So we do have some work to do on the inventory said. As I said, capital spending will be closer to 200 this year. Not 200 but closer to 200. So capital spending should be a significant reduction. We should see some improvement in working capital versus the outlay we had in 2008. We do have some pension funding outside the US, which is minimal and pretty much consistent with the funding levels we had last year. I forget what your other question was.

On the cash restructuring.

Cash restructuring, there is about $44 million left at year end 2008 that needs to be paid out. And, as I said, that will be paid out fairly evenly over a period of time in 2009 with a piece coming due in mid 2010.

That's helpful. Then just on the bond maturity, Robin, I think you mentioned a dividend from NSK. Can you quantify that? I think last year it was maybe $16 million. So was it quite a bit higher in this quarter?

It was a nice, healthy dividend.

Okay. And I think you mentioned cash from foreign subsidiaries. Was that cash extracted or was that borrowing in foreign subsidiaries you brought back to use to pay that?

Some of that was just cash extracted. As we said, we had $100 million of cash on the balance sheet at year end. Some of that was overseas. In fact, most of it was overseas so it was a matter of bringing that cash back home. Plus some cash generated by some of our foreign operations and little bit of foreign borrowings.

Would it be safe to assume that between now and the July maturity, the revolver, you do not expect to need to tap significantly into that?

It is hard to forecast liquidity day by day. But we have not used the facility. It is there to be used, obviously. It is hard to say if we'll ever tap into it. My crystal ball is not that good on a daily basis. There is so many potential events here that could swing cash on a daily basis here. You have a customer that pays late at the end of the month or something. But we don't anticipate. To the extent it's used it's an overnight use and we don't expect to draw on it meaningfully.

If somebody could guarantee none of our customers or suppliers are going to go into bankruptcy, and all orders will stay stable, we could probably make have those kind of discussions. But I don't think anybody can guarantee people are going to stay out of bankruptcy as we look forward to the next two to three months.

Absolutely, and just a final one for you, Tim. Can you weigh in on the whole EPA situation as California's momentum to get to whatever is increasing? How do you think that ultimate outcome affects your business longer term? What are you hoping is going to happen here? And what are some of your particularly European customers, how are they weighing in when you talk to them about the situation?

I think the situation can best be described and I think it is a good question, Itay, it can best be described as all indications are that we are going to have tighter fuel economy standards and tighter emissions standards. I won't say anything about emissions but I'll just say we all want clean air so I think that's a good thing, we all want better fuel economy. Anything that drives an improvement in clean air or drives an increase in fuel economy requirements is a big plus for BorgWarner. So if everybody zeros in on the California standards, and that goes to all 50 states, it is probably going to be beneficial to BorgWarner. We would just as soon not have, as an industry, every state have the ability to set their own emissions regulations or fuel economy regulations.

Great. Thank you so much.

The next question is from Chris Ceraso with Credit Suisse.

This is Joe Durham on for Chris. Looking at the EBIT breakout for the segments and the corporate bucket, the corporate bucket's been lower for a couple quarters now. Can you detail some of the savings that you are hitting in that segment? And what do you expect that corporate line to look like for 2009?

That is a painful discussion for me because most of that so-called savings is incentive compensation that the vast majority of employees of BorgWarner will not receive in 2008.

Let's just say this. We're not receiving any annual bonus in 2008. There is only one business unit in the whole company that actually is going to get a bonus.

So when we are thinking about that for 2009, do you expect it to be more consistent with the run rate you saw coming out of 2008?

We expect on the bonus portion of it, we do expect they have a bonus. For no other reason than we are going to, people are really working hard to make 2009 a year that is worthwhile.

We'll provide you the names and addresses of our members and you can do some lobbying for us.

All right.

Very fruitful, very interesting discussion in the last couple of days.

Okay. So on the backlog, thinking about the $600 million taken down about 20%. I know that is largely driven by declining industry assumptions, volume assumptions, globally. But is there any component of that that's due to delayed launches or launches that have been cancelled because of CapEx cuts, budget cuts at the OEs?

No. They are basically the same. We looked at our top programs. Those are about the top 12 programs. They are still already in production or going to be in production on schedule just at lower volume levels.

Then when we think about the fact it's lower volume what kind of contribution margin can we think about that, Robin, for the operating line?

As we look at new business, whether it's $600 million or $480 million, it's sizable and we would expect to generate at least a 15% incremental margin on that business. Given the capacity that we talked about earlier that we have in place and will not have to put in place this year, that could get closer to the $0.20 on the dollar range.

All right. Thanks, guys.

Thank you.

The next question is from Brett Hoselton with KeyBanc.

Good morning, how are you guys doing?

Doing great.

Just looking at your notes payable and the current portion of your long term debt, I assume the current portion is the bonds, $137 million. The notes payable of $184 million, what does that comprise?

Those are primarily bank facilities in different geographies around the world. The way we fund our operations, and we have talked about this before, to hedge our currency risk as we invest in new geographies, rather than put in equity, we tend to raise local debt. In most of the markets the predominant vehicle is bank facilities.

Okay. Given the current credit markets, do you see any challenges there in terms of renewing those facilities?

No. No. As I said earlier, I think that many of the institutions that are home-based in the different geographies are looking to do more business in their home geography, as opposed to the USBanks who not only don't want to do business internationally, but they don't want to do business here in the US, either.

And they don't like the auto sector.

The Chinese DC announcement, 8 million cars being produced in China, give or take, and 90% of them apparently are these companies that you are doing business with here. My question is, can you give us a sense of what you think or anticipate the breakdown between what some of the transmission styles might be? What portion of it specifically might be DCTs of that $8 million?

I think I said, the past car market for automatic transmissions, we'll probably have about 80% market share of the automatic transmission market, or DCTs will have about 80% of the market share. Right now, we tie pretty close to that percentage. There will be some CVTs over there. There is going to be some automated manuals. Automated manuals, I think when people see the difference between a dual clutch on the automated manual, they are going to gravitate to the dual clutch. You'll see some CVTs, you'll see some traditional traditional automatics, you'll probably see some AMTs.

But I can tell you right now that Chinese government and their technical experts surveyed the world for leading technology for automatic transmissions. They basically concluded the DCT was the transmission of the future and that's why they are investing their money in DCT.

And I apologize, I guess I don't necessarily fully understand. So are you saying that you think 80% of the cars produced in China are going to have automatic transmissions and the majority of those are going to be DCTs? Did I understand that correctly?

80% of the automatic transmission market will be DCT. And we think that's about 1.7 million units. The breakdown of how much, in China, how much each technology will use, what percentage of total transition market, you are not talking about the total transition market, how much of it's manual, how much of it's DCT, how much of it's -- I don't have that for the future. Today, the only thing I'll tell you right now is today it's predominantly manual transmissions, and manual transmission technology is easily convertible to dual clutch transmission in terms of utilizing existing CapEx.

When you think about the 1.7 million in DCTs, is that the manual transmissions that are being converted to the DCTs, which I think are more expensive? I'm thinking about $400 in content per vehicle? Or is it more of the fully, the new DCT that you just recently designed?

There is going to be some of the traditional DCTs, which have a fair amount of BorgWarner content. I won't reference your number, I'll just say it's a large BorgWarner content. And then some of it will be the new technology for DCT, what we call DCT Flex or DCT Light or whatever we have used over the years. So there will a combination of both technologies. Some will be the DCT flexible version, lower cost, will be used on the smaller scale vehicles, and the more traditional larger DCT or larger vehicles we'll use the traditional DCTs. Both of those products, the touch modules and control modules will be supplied out of that joint venture we have with our Chinese partner.

Thank you, Tim, and Robin just a couple of quick ones here. Automaker accounts receivables, any changes there at all?

No, our customers to pay on standard terms. We did have one non US customer who used our balance sheet to pretty up theirs at year end, and we let them know that's not acceptable. But our US customers continue to pay us in time.

From a supplier level have you seen any alterations or changes in accounts payable demands or terms?

From time to time, as we've seen over the past five, seven years, we get a supplier that gets in a situation where there's a request to provide some assistance, and every once in a while, unfortunately, we end up providing a little assistance.

We've done a couple where we've done some quick pays. We haven't provided them anything we didn't already owe them, we just paid them a little bit quicker.

That doesn't sound necessarily unusual, is that correct?

Right.

Okay. Thank you very much, gentlemen.

On the transmission thing, we have the analysis on the transmission market for China, Brett. I just don't have it at my disposal but at one of our next presentations we'll present a breakdown of the China transmission market.

Great, thank you, Tim.

Your next question is from John Murphy with Merrill Lynch.

Good morning, guys. Believe it or not, I still have a few questions for you. Just to follow up on the revolver, and Robin I'm sorry to beat a dead horse here, but I'm just looking, cash balance at the end of 2008 was $103.4 million. Yet $137 million is due on Tuesday. So that leaves roughly $34 million or some-odd million that you at least pulled in from foreign subs, somehow. How much more capacity is there overseas to repatriate money? And really what kind of cash balance do you need to run the business on an ongoing business it doesn't look like there is a lot of cash in the coffers right now?

Historically I've never liked to have a cash balance on the balance sheet. I would rather be a net borrower. But we are in such a position that we had nothing to repay basically. That is why we had cash on our balance sheet. I forget what else the question was. Again, we had excess cash on the balance sheet. It's been sitting there. And we used it. We tend to not have cash sitting around. We tend to be a net borrower. That is basically our position.

Is there more capacity overseas to maybe borrow and maybe repatriate cash if necessary?

We repatriate cash a number of different ways from our foreign operations. There is dividends, there is royalty, and technical agreements, there is corporate service charges. So there is a number of means throughout the year where our foreign operations are required to send cash to, to the US. At the same time, we do expect to generate a little cash here in the US, as well.

Okay. Tim, if we think about your capacity utilization right now, clearly you are not running 100% in a lot of facilities and you have done actually it looks like a great job of moving tooling around to shrink your plant footprint, when we look at the CapEx this year in 2009, $200 million, does that support the backlog that we are going to see in 2010 and 2011? Or when we get into 2010 and 2011 is there going to be a bit of a ramp up in CapEx back to the 300 million unit level to support your backlog?

I think the answer is kind of yes in both cases. It will support the backlog as we start up. And so we are not, none of our backlog is at risk due to insufficient capital investment. We probably have, we are probably sitting there right now, worldwide, with 30% to 40% capacity. Under-utilization of capacity of 30% to 40% right now. While we have shrunk the work force, we haven't necessarily shrunk the capacity. So we can handle the initial stages of the ramp up of this backlog that's coming at us.

Yes, some business will be new that doesn't fit any of our existing capacity and we'll continue to make those investments, and that is going to fall in that $200 million number that Robin referenced. But as we continue to score new business and we go back to more traditional rates, you'll see our CapEx investment will probably fall in that 250 to 350 range, which is, you know, 300 plus or minus is our traditional range. But let's face it, for now, we are a smaller company. The first half of the year we were running at about a $6 billion run rate. We are not running that way now.

Then lastly, clearly your customer had some recourse to you on these warranty charges you had to take in the quarter. Do you have any recourse down to the supplier to potentially recoup some of that?

We are in negotiations as we speak. There is always a difference of opinion as to who is responsible. But we are in negotiations and I do expect a settlement one way or the other. But I hope it's amicable.

Unfortunately the accounting rules won't let us book a receivable from a supplier on a warranty issue but they certainly make sure we book the liability to our customer.

Got you, that is very helpful, Robin. Thank you, guys.

The next question is from Joe Amaturo with Buckingham Research.

I was wondering if you could just give us some granular detail what the Volkswagen Audi production assumption is in the 16.6 million European assumption?

I don't have that breakdown. I don't have that granularity, Joe. If you want, we can follow-up.

Is there any way you can give us what your current cash balance is?

I'm sorry, I didn't hear the second question.

What the current cash balance is?

What is the current cash balance?

Current cash balance, it's positive, I don't know what it is. But there is cash, too, on the balance sheet.

Okay.

It is more than 1 and less than 100, is what I can tell you. As far as the 16.6, Joe, I just want to remind you, I can guarantee you that 16.6 is going to be wrong. It is an assumption. It is an expectation. If you are looking for granularity down to how much is Volkswagen Audi, how much is Fiat, how much is GM, I don't think the level of accuracy really reflects what that 16.6 represents for us.

I don't know if you stated this but I'll ask again anyhow. Could you just tell us what your pension funding status was at the end of the year and if you have any additional contributions in '09?

No, we didn't mention that. Our pensions are unfunded in the US to the tune of what? 70? Yes. Somewhere between $70 million and $80 million. They were overfunded last year. Net. We have got two plans. They were overfunded last year on a net basis, under-funded this year obviously as a result of the equity markets.

Now is that going to cause any future cash contribution? Or?

We fund our pension plans globally to the tune of about somewhere around $5 million to $10 million a year. We expect to continue to fund at those levels.

Okay. And then just the last one. Could you give us a sense of if the European production environment falls to 15.5 instead of 16.5, what kind of impact that would have on your cash flow? Not earnings, cash flow?

That's about a 7% decline. And take our European sales, which is about 60% and multiply it by 6% and take the decremental margin of $0.25 on the dollar and that should be pretty much.

All right so it's the same exercise?

Yes. You might get a little bit of relief on receivables, hopefully you get a little relief on inventory, but predominantly, it is operating income. One more thing, Joe, about our pension plans just so you understand. Those liabilities basically have been capped a long time ago. There have been no new hires in BorgWarner since about 1995 that have been hired under a defined benefit plan. So that liability represents a known population that is not growing. And therefore, the only real variable on that is movement in asset returns year to year.

All right. Thank you.

The next question is from Rod Lache with Deutsche Bank.

Good morning, guys. I had a company of things. Your sales outside the US being down 22% versus production being down 17%. I assume that excludes FX and the difference was mix? Could you just pass along some thoughts on how you think mix progresses looking forward into 2009?

Rod, actually the decline, and I know I went through it fast, we actually did better in Europe. So the decline relative to the production was in Asia. And remember, if you look at production, China was still up a little bit. There were regions of the world where, frankly, we don't have the penetration we'd like today. So, I wouldn't call it mix. I would call it --

Regional?

Yes. Regions that had a little bit more growth where we are not as represented as we are in Europe or North America.

Okay. That's helpful. And of the $220 million of savings that you were talking about, how much did you recognize in 2008?

First, Rod, those are theoretical at $50,000 per employee. Could be higher, could be lower. As you know, most of that activity took place late in the year. So, that portion of that benefit, we'll be seeing in 2009, not much in 2008, although we did see some benefit. But certainly close to 80% of that we would expect to see in 2009.

Right. Can you tell us a little bit about how much of that might be in SG&A versus your other costs? You commented earlier about bonuses and this big decline in corporate overhead. But how should we be thinking about SG&A going forward?

I don't have the breakdown with me how much was salary and how much was hourly. I'm trying to remember now what the salary breakdown was.

The way we think of it is we try to maintain our SG&A at about 10% of sales. That is kind of what we are trying to target this year. As Tim said, I don't have the actual details on how much was SG&A related or how much was cost of goods sold related.

It's sitting on my desk. I have the breakdown between hourly and salary. I just don't have it right here.

We can get back to that.

But it was a fair balance. It was roughly in the range of 24%, 23%, somewhere between 22% and 25% salary on that 4,400.

My last one is just clarify something you said very early on, in the call. I heard you say that you would be in the black at this level of production. But did you say that you could get back up to historical levels of margins even if this low level of production was sustained? Or are you saying that, look, this is where we are at this level of production but a recovery could bring us up to historical 8.5% kind of margins?

If you remember the question, I don't know if you heard the original question. They said if volumes were at higher levels, would we be able to get back to those higher levels or normal levels of operating margins. And I said we would hope so. But I don't remember the numbers. Whoever asked the question threw out volumes that were in the $12 million, $13 million range for North America, and I can't remember the numbers they used, $18 million in Europe. That is a lot different than where we are at right now.

Sure. So this is where you are at for now. Getting back up there, a lot depends on where volumes are. Last one the ramp up in China, where does the capital come from, and when do you expect that? What is the magnitude and when does that begin to kick in?

Some of the capital is already there. Some of the capital will be spent as part of the $200 million or whatever it is in 2010 and '11, but 2009 Robin said it's around $200 million. Some of it's going to come out of that. Some of it will probably be shipped. We have some capacity that was we were planning on dual clutch transmissions in Mexico that was already previously announced for Chrysler. That is not going to happen now so we're going to take that equipment and ship it to China. Brand new, never been run. So we are going to basically, some of it's already been bought and paid for. Some of it we are not going to delay and some of it we are going to put in, in 2009. I don't have the exact breakdown, Rod, but it's going to come from all locations.

As far as source of funds, again we do have cash in China and, as our practice historically has been, we will borrow locally to fund as much of that as possible.

Okay. All right. Thank you.

We have time for one final question and that question comes from David Leiker with Robert W. Baird.

Good morning, everyone.

Good morning, David.

Tim, on this DCT in China, how much of that volume, for you, do you think comes from modules to existing manual transmissions versus your emerging market transmission you have developed?

You mean how much of it's going to be manual transmissions that are going to eventually be converted to automatics?

Yes. Versus your module, versus the transmission that you guys developed for emerging markets.

Let me back up a little bit. All of the dual club transmissions that we're going to be involved with will be new transmissions. But how much of it, I think the majority will be, I don't know, I'd probably estimate half and half between the traditional dual clutch that we supply in Europe right now versus the new design dual clutch transmission that we worked on for the last couple years for low cost countries. I'm just going to estimate it at 50/50. We can give you a better breakdown but they're still testing, they're still developing, we're still negotiating the contracts.

And you're saying that starts up in 2011?

Yes, that's roughly when that production will start to ramp up.

And when do you think it ramps up to where it's meaningful volume? Is that a couple of years, or does it ramp pretty quickly?

2015, 2016.

Great. Robin, on the depreciation number, what's the number we should be looking at on a go-forward basis given writeoffs and charges and things like that?

The benefit we expect from the structuring charges we took that were fixed asset related is about $11 million a year.

But some of that's reflected in your fourth quarter depreciation number, right?

No. Almost all that was done at year end. That's a full year 2009 run rate benefit.

So just depreciation in '09 could be, what? less than $200 million?

We have depreciation and amortization, and I want to say it's a $280 million number. I've got a bad memory, but, it's about a $270 million, $280 million number. You'll see two declines. You see the -- 260? I'm sorry, it's about $260 million. You'll see a decline of about, again, $11 million related to the restructuring activity, and also because of our assumption on the dollar versus the euro you'll see a decline in depreciation just as a result of currency, as well.

The fourth quarter adjustment, the $0.07 one, that's really just really truing up for prior quarter accruals, correct? Or is there something else there?

What it is, David, if you took our nine months financials and looked at our run rate business and recast it at a 22% tax rate, that $0.07 would be the benefit for the first nine months. We have a tax rate for the full year. Unfortunately, for nine months we had a guesstimate that we missed.

I understand. It's just really truing that up at the end of the year.

Yes, you can't take that $0.07 a share benefit in the fourth quarter and say it had anything to do with the fourth quarter. The first nine months of the year basically our estimated tax expense was too high.

Okay and what credit tax rate do you think you'd look at for '09?

Right now we're looking somewhere between 23% and 24%.

And then, two other things here. Tim, a couple weeks ago, a few weeks ago, you talked about, as it relates to Europe, that in the context that they're slow to recognize what's happening in the market, your comment was that the second quarter production cuts would be greater than the first quarter. Given that they seem to be catching up a little bit, do you still feel that way?

No, I think they're probably pulling some of those cuts ahead now. So what I would say is we're going to see the cuts in the first quarter, and maybe we'll have a chance at some degree of stability in the second quarter, albeit probably at a lower level than any of us would like.

And then, lastly, over the years you've continually done a great job of bringing out new technologies, the DCT and ITM and things along those lines. What would be the time line looking forward that we would see something else new along those lines from you? Is there something in the near term horizon or would it be further on down the road?

We're working on some technology that's hybrid related and electric vehicle related. You have to do your own analysis and form your own opinion on how big those markets are going to be. I still think that the global hybrid market is going to be somewhere around 6% or 8% globally. The electric vehicle market's going to bite into some of that. But we're working on technology for those. We're working on transmissions for electric vehicles. As we said earlier, we launched the transmission for the Tesla and I got to tell you, David, that's gotten a lot of attention. Anybody who's in the electric vehicle market or working on electrical vehicle development right now is talking to us about transmissions. And we're working on other types of technology besides transmissions for hybrids and electrics. So we'll probably have more to talk about with a little bit more definitive product lines to talk about in the future.

Is that something that we'd hear about that a year or two from now, or do you think during '09?

I'll just stick with your time frame, a year to two, but I'd say it's probably closer to a year than two. But it all depends on how our customers react and what happens in the marketplace. Customers don't have the money they used to have to invest in new technology. And I say that globally. So it's going to be interesting to see how fast some of this technology evolves because the global auto industry doesn't have the cash to handle all this stuff.

That's true. Okay, great, thank you.

One other thing, since there were so many questions, between your questions and Brett's questions on China and transmission markets in general, our next presentation that I'm involved with, I'll make sure we do a deep dive on China transmissions.

Wonderful, thank you.

Thank you all for joining us. That will conclude our call today, and if you have any follow-up questions you can just call me. Thank you.

That does conclude the BorgWarner 2008 fourth quarter and full year earnings conference call. Thank you for joining. You may now disconnect.