博格華納 (BWA) 2009 Q1 法說會逐字稿

Good morning, my name is Takia, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. (Operator instructions).

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

Thank you Takia. Good morning, and thank you all for joining us. We issued copies of the release this morning before the market opened. They are posted on our website BorgWarner.com under Investor information. The conference call today will also be replayed through May 7. The dial-in number is 800-642-1687, conference ID 80716755. There is also a replay on our website.

We have a number of conferences we will be attending this summer, the KeyBanc Conference in Boston on June 2, the Deutsche Bank Alternative Energy Conference in Washington DC on June 10, and the Wachovia Conference in Boston on June 23.

Before we begin, I need to inform you during this call we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our results may differ significantly from the matters discussed today. And moving on to our results, Tim Manganello, Chairman and CEO, will be providing comments on the quarter and industry trends, and then Robin Adams, our CFO, will discuss operating results and the rest of the year.

With that, I will turn it over to Tim.

Thank you, Mary. Good day everyone.

Let's start with first quarter highlights. It has been a difficult quarter for all of us in the auto sector, including BorgWarner. Our first quarter sales were over $819 million, and US GAAP earnings were a loss of $0.06 per share, and on an operating basis the loss was $0.12 per share. The engine group sales were down 43% before the negative impacted currency, and Drivetrain was down 52% before currency.

However we distinguished ourselves for the quarter in several areas. We reported positive cash flow from operations, our cash on hand and cash generated in the quarter allowed us to repay a $137 million public debt that matured in February, and we have strengthened our capital structure and financial flexibility. In early April, we completed the convertible senior note of $374 million, and we have completed a $250 million 18-month extension of our revolving credit facility today. In addition, our 2008 restructuring actions have resulted in improved decremental margins, with decrementals at 21%.

During the quarter we also continued to make structural cost adjustments, including work force reductions, reduced work weeks, and global pay cuts. We are also focusing on operational excellence within BorgWarner. We are resizing our operations to match our current Q1 sales level, or we are taking Q1 sales times four for the full year. We are flexing our work force to manage unpredictable customer schedules, we are reducing FA&O expenses, inventories, and capital spending.

Profitability and cash management is a major focus at BorgWarner, and as a result, we have adjusted our EV-based incentive compensation program for the year, to focus on cash flow and cost management. We are also giving special attention to Drivetrain profitability. Our disappointing first quarter results in that group were caused by declining volumes, European employee costs tied to operational issues, and dual clutch growth-related costs, mainly in China.

Going forward Drivetrain will benefit from the previously announced closing of our Muncie, Indiana plant, and operational improvements in Europe. Another Drivetrain plant in Margam Wales will be closed in 2010. In addition we continue to evaluate product lines and manufacturing facilities for long-term strategic viability. But one thing that has not changed, however is our commitment to R&D spending to maintain our future growth.

In the area of new business and new awards, we announced our first business award of dual dry clutch transmission technology. We will supply the hydraulic actuation module for Fiat's dual-dry clutch transmission launching in late 2009. We also announced new, regulated two-stage turbocharger programs for the Volvo 2.4-liter diesel engine, and for the new Mercedes 4-cylinder diesel engine. The Mercedes engine is expected to be the backbone of their diesel engine lineup in the future. These engines are patented turbocharger technology, it helps improve fuel economy and reduced emissions, while improving vehicle performance.

It is very encouraging that the technologies driving our growth are also getting industry recognition for our innovation. This month, our dual clutch technology and regulated two-stage turbochargers were selected as two of the Top 25 innovations, in the 15 year history of Automotive News PACE Awards. Just last week two additional BorgWarner technologies were honored as 2009 PACE Award winners. These awards were for camshaft phasing systems for Morris Tech. and this patented technology improves engine performance and fuel economy, while reducing emissions on the Ford Duratec 3-liter V6.

Also honored was our pressure sensing glow plug for the diesel engines from BERU. This innovation is the first technology that allows OEMs to implement closed-loop combustion control in a mass produced engine at a reasonable cost. Both of these technologies are first-to-market game changing products. However, one of my proudest moments at the PACE Award Ceremony this year, was standing beside Tony Brown from Ford, to receive a Partnership Award for our Ford BorgWarner collaboration. Together we accepted the PACE Collaboration Award for the launch of our new camshaft phasing system.

Now we are also active in Washington, DC. The auto industry is a hot topic in Washington, DC these days, maybe even too hot. At BorgWarner, we have been a part of the action. We supported our customers by lobbying for government loans. We work to include suppliers in guaranteed receivables and quick pay programs, although we have elected not to participate ourselves. And we continue to be active in the efforts to define future CAFE and emission standards.

If there is a bright spot in the current economic crisis, it is the focus on green technology as a way to improve fuel economy. This is good news for BorgWarner in the US, and BorgWarner globally. A CAFE standard of 27 miles per gallon has been set for model year 2011. Proposed CAFE standards for individual models are based on their size. This approach promotes innovation and a wide variety of technologies to improve fuel economy.

As a Company with a broad portfolio of fuel efficient products, BorgWarner offers solutions to fit individual customer needs. The next step is to develop standards for 2012 and beyond, which should be getting underway this summer by the Federal government. In Europe, the drive is towards Euro 6 standards, which take affect for the 2014 model year. However, vehicles that comply with these standards are expected to be available sooner. Typically in Europe tax breaks are given to consumers, who purchase compliant vehicles, one or two years before a new regulation takes effect.

So that brings me to the outlook for the year. We had hoped to have more visibility for the year by now, but we don't. Customer schedules remain uncertain, and provide little clarity for the rest of year. And rather than relying on macroproduction forecasts, like I said earlier, we are resizing our Company, or have resized our Company, based on the assumption that first quarter production levels, will continue throughout the rest of the year 2009.

And although 2009 is growing more challenging, we continue to target positive earnings and positive cash flow generation for the year. Despite all of the uncertainty, the interest in our technology has not been dampened by the recession. Customers continue to develop fuel efficient engines and transmissions, and we continue to execute our long-term strategy, and invest in R&D that will foster our growth. With our current focus on operational efficiencies, strengthened financial flexibility and technology for long-term growth, we are in great shape for the recovery.

And with that, I will turn the meeting over to Robin.

Thank you, Tim. Good morning, everyone. Before I give you the financials, let's go over the industry environment in the quarter, which as Tim indicated, was pretty dismal. Global production was down 37%, to levels we have not seen in many, many years, and levels that frankly we could not have imagined just six months ago. The global economic recession has had a devastating impact on the auto industry.

However, at BorgWarner we actually did a little better than the market in most major geographies, in the US industry production was down 55%, while our sales were down 40%. The same is true in Europe, Japan, and Korea down 42 to 43%, compared with BorgWarner at 40% excluding currency.

As Tim said, our sales in the quarter were approximately $120 million, down 45% from the first quarter of 2008, or 40% excluding the impact of foreign currencies, which is primarily the dollar versus the Euro, which averaged $1.32 in the quarter, versus $1.50 in the quarter last year. That is about 12% strengthening. And frankly, the first quarter 2008 seems like such a long time ago.

For earnings as Mary pointed out, we did provide a table in the press release that we issued this morning to help understand our US GAAP reported earnings, and also the unique or one-time item in the quarter. And this chart should help you in reconciling our financial performance to both prior and current periods, and also for assessing future expectations. And we think this is an important part of the release.

We also intend to file our 10-Q by the end of the day, and for those of you who really want to dig into the details sometime later in the day, you will be able to pour through all the notes, and every other little detail you want to know about the quarter. I am going to provide you the highlights. For the quarter US GAAP earnings were a loss of $0.06 per share, compared with a gain of $0.75 per share in the first quarter 2008.

The first quarter 2009 loss included three items, again which we laid out in our press release. A $0.03 per share costs, or about $5 million pre-tax upon adoption of FAS 141-R, which is the treatment of ongoing acquisition related activity, and that charge was reported in the SG&A line item. Also, we had a $0.06 per share loss, or about $11 million pre-tax from interest rate derivative agreements. And that loss was reflected in the interest expense line item. I think when you look at the income statement you can see the big increase there.

And then finally, a $0.15 per share net gain, or about $28 million pre-tax, related to retiree obligation, resulting from the closure of the Muncie, Indiana Drivetrain facility. And that benefit was also reported in the SG&A line item. Let me go over that Muncie closure item in a little bit more detail.

We announced the closing of the facility at the end of 2006, and we indicated that it would close prior to April, 2009. As a part of that closed down in February, we entered into a plant shutdown agreement with the workers at that facility, and began to wind down production activity at the plant at that time. The financial impact of that settlement resulted in expense recognition of approximately $14 million.

Our operations effectively ended at the facility at the end of the quarter, March 31. And as a result of the quarter end closure, we also recorded a post-retirement benefit curtailment gain of approximately $42 million in the quarter. When you net the two transactions together, it approximates $28 million, or that $0.15 per share benefit, that I mentioned in the quarter that is included in the SG&A line item.

Gross profit in the quarter as a percent of sales was just under 10% for the first quarter, down significantly from approximately 19% in the first quarter 2008, and fairly close to the 10.5 that we reported in the fourth quarter 2008. In the reduction year-over-year, is primarily a result of sales volume decreasing faster than our ability to reduce our cost structure. We have talked before about how in some regions of the world we continue to chase our sales downward. I think you will see as we finished discussing the quarter we are doing a pretty good job of catching it.

First quarter SG&A costs were reported at $74 million, or 9% of sales. However I mentioned there were the two unique items in the quarter, the FAS 141-R costs, and the Muncie closure benefits, and excluding those SG&A was approximately $97 million, or about 11.9% of sales, compared to 10.4 in the first quarter a year ago. Tim mentioned our investment technology, R&D costs which are also included in SG&A, decreased $25 million on a net basis in the quarter to $32.5 million.

However, customer reimbursements were actually up a little over $6 million in the quarter, so gross spending was actually close to 6% of sales in the quarter, versus 4.5 in the first quarter last year. And on a net basis it is 4% in the first quarter 2009, versus 3.8 in 2008. And again, we continue to invest for our long-term growth. But as you can see by the increase in customer reimbursements, we are also encouraging our customers to share in some of this advanced project funding in these times.

Raw material costs, frankly not much of an event for us in the quarter, up slightly, versus the prior year, about $7 million, and most of that is steel related. For the year as we have said before, we still expect nickel to provide about a $25 million benefit for us, as existing hedges start to roll off in the second quarter and beyond, and lower prices relative to last year, net of customer reimbursements run through our income statement.

Operating income on a reported basis was $5.5 million, or 0.7% of sales in the quarter. Again excluding the unique items, operating income was actually a loss of $17.6 million, versus a gain of about $125 million in the first quarter a year ago. Now if you look at the decline in operating income relative to sales year-over-year, as Tim mentioned, it was about 21%, that is a significant improvement over past quarters, and in-line with our targeted 20 to 25% decremental margin range. While sales in the quarter were lower than we originally expected when we started the quarter, our operations did an excellent job adjusting the cost structure to those lower volumes.

Below the operating income line for the quarter, equity and affiliates earnings of about $200,000, basically zero, decreased about $9 million compared with 2008. Predominantly that is our NSK-Warner joint venture in Japan, which was especially hard hit in the quarter, by production cuts from our Japanese customers. Their sales were down over 60% in the quarter, and as a result, earnings broke even. But when you consider a sales decline of 60% breaking even from an earnings perspective, that is pretty good cost containment for our operations in Japan.

Interest expense and finance charges of $19 million increased $12.6 million, compared to the first quarter last year. And as I mentioned approximately $11 million of that is due to some cross currency and interest rate swap ineffectiveness, and terminations in the quarter. While the swap activity resulted in additional interest expense in the quarter, the termination actually resulted in a $30 million cash inflow, which is reflected in the financing section in the statement of cash flows. So it was a financial benefit from a cash perspective, GAAP accounting required some additional expense.

Excluding the swap related items, the unique items with respect to interest expense, interest expense was up about $1 million in the quarter, versus first quarter of a year ago. The tax rate in the quarter was in the 40 to 45% range, excluding the unique items, and reflects really a geographic mix issue in the quarter, compounded by the low level of earnings, both in the US and outside of the US. It is what it is in the quarter. That reflects our actual experience. All of that translates to the $0.12 a share loss in the quarter that we reported, excluding the unique items.

I would like to now spend a few minutes comparing the first quarter to the fourth quarter of 2008, which is something we don't normally do. But I think in this environment, it will help you understand the progression of the business in these unprecedented economic times. Sales in the first quarter relative to the fourth quarter were down about $112 million, or 12%, primarily due to extended customer shut down periods in January. January was kind of a non-event from the sales perspective for the industry.

Operating income was $22 million in the fourth quarter, compared to first quarter it translates to a decremental margin of about 20%. Whether you look at the business year-over-year in the quarter, and as I said, first 2008 was a long time ago, or look at the business relative to fourth quarter, we are consistent in managing the cost structure within our 20 to 25% target range, and pretty close to the better end of that at $0.20 on the dollar.

And that gives us confidence that the restructuring actions we have taken, and the continuing cost structure adjustments that Tim talked about, and we continue to make, are really effective in enabling us to manage the cost structure. It also positions us well, which we are all excited about and waiting for, strong earnings growth when this market eventually turns around.

Let's look at the operating performance by segment, in the Engine group reduced global vehicle production cut demand for all of our products, and that was no different than the Engine group. Engine segment sales decreased $625 million. That is a whopping number. 37% excluding the impact to currency. Earnings before interest and taxes were still positive at approximately $36 million in the quarter. If you look at the change year-over-year, it is down $100 million, but that translates to decremental margin of $0.21on the dollar. So good cost containment on the Engine side of the business.

On the Drivetrain side, first quarter sales down 52%. A little bit below $200 million, versus $410 million in the first quarter of 2008 a year ago. That is about 48% excluding currency. So a much bigger decline in Drivetrain sales versus Engine year-over-year. If you look at earnings before interest and taxes, the Drivetrain segment actually had a loss of about $33 million in the quarter, which is a decline of $51 million versus the first quarter last year.

On a decremental margin basis, actually not bad performance, about $0.24 on the dollar. Engine at the low end of our target range, Drivetrain getting close to the high end of the range, but certainly both businesses, and BorgWarner in total, continues to do a good job of managing the cost structure in response to the unprecedented decline in sales.

If you look at the segments relative to the previous quarter the fourth quarter again, kind of where we are in this whole environment, engine sales were down about 8% first quarter versus fourth quarter, with decremental margins of only 2%, so tremendous improvement on the Engine side of the business on the cost reduction side. Drivetrain sales were down first quarter versus fourth quarter much more, about 22%. However decremental margin was about $0.25 on the dollar.

Whether you look at it year-over-year, and take into consideration all of the cost reduction and restructuring actions we took throughout 2008, or if you look at it first quarter versus fourth quarter, I think we have done a pretty good job managing the adjustments required for the lower level of sales activity.

While we can't say we are happy with current industry conditions that are causing dramatic declines of sales in the industry and for BorgWarner, as well as earnings, I can say we are pretty pleased with the results of our cost containment efforts, and the resultant decremental margins in our business.

Let's talk about the balance sheet and cash flow for a few minutes. Net cash provided by operating activities was $68 million in the quarter, capital spending including tooling was a little bit under $40 million, significantly down from $75 million in the first quarter of 2008. But pretty much in-line with our full year expectation of $200 million for the year. After deducting capital spending from that net cash provided by operating activities, operating cash flow was approximately $30 million in the quarter.

And as we told you in our last earnings call, we were focusing on inventory. We felt we had too much inventory at year end, and in-line with our plans, we lowered inventory by $100 million in the quarter, or 22%, of which about $20 million was really currency, $80 million was true reduction of inventory, which helped generate the positive cash flow in the quarter for us. As Tim will tell you, and he reminds me almost every other day, there is still room to go on the inventory side.

The balance sheet debt in the quarter decreased by $63 million, with cash increasing by only $13 million, resulting in a decrease of net debt of $50 million in the quarter. This is after additional BERU share purchases of $12 million, and a first quarter dividend of $14 million. While others in our industry are focused on the amount of cash burn in their business quarter after quarter, we continue to be a net cash generator.

Now let me talk about our capital structure and liquidity, we finished the quarter with a balance sheet that was even stronger than when we started the quarter, with net debt to capital of 24%, versus 25% at the beginning of quarter, and we continue to have ample liquidity. We repaid $137 million of public debt that matured in February, in fact I think just the day after our last earnings call, ended the quarter with $90 million of cash on hand. And didn't touch our revolving credit facility not one day in the quarter.

Since the end of the quarter we completed a very successful three-year convertible senior note offering approximately $374 million of principal, after fees and the bond hedge overlay, approximately $340 million of proceeds. And we also extended and closed on today a $250 million of a revolving credit facility for an additional 18 months.

From a credit quality perspective, we continue to maintain a solid investment grade credit rating of BBB flat from Standard & Poor's, which was reconfirmed as recently as three weeks ago. In March Moody's took a different view of the Company, and downgraded our credit rating from BAA 3 to BA 1. The current outlook for Standard & Poor's and Moody's is negative.

Just a quick note, on GM and Chrysler exposure, which I am sure is on everyone's mind today. Chrysler was about 3.6% of our sales in the first quarter, and GM in the US was about 3.2% in the first quarter. Receivables outstanding for the two was approximately $30 million as of yesterday. And as you can tell we watch this daily for both customers, as well as how much of that falls within the last 20 business days, and how much of it falls outside of the last 20 business days.

Let me talk about 2009. As Tim mentioned, our visibility remains limited until customers schedules stabilize. At this time, there is a wide range of projections for North America and European production for the year. Frankly I have to admit, I don't know about Tim, but I am no smarter than all of these experts that make their living, based on understanding industry projection levels. You guys are a lot smarter than I am with respect to this issue. Having said that, I am going to talk slowly on this part, so you can follow me. I know I tend to talk quickly but I am going to try and slow myself down.

Let me give you some perspective of the wide range of possibilities for 2009, which you know gives us a bit of pause, with respect to providing some guidance beyond positive earnings and cash flow. If you look at first quarter performance, and assume it is indicative of the full year, and as Tim said, that is what we are managing the business from a cost containment perspective, but if you make that assumption, based our data analyzing first quarter production would translate to about 6.8 million units of production in North America for the year, and 13.2 million for Europe.

And if you assume our sales in this short-term period first quarter to the end of the year, are directly correlated to changes in industry volume, as Tim said, you just take our first quarter sales and multiply by four, and that is how we are viewing the business from a cost structure perspective. However, as I said earlier, January was basically a virtual shut down of the industry. If you exclude January from the first quarter and annualize it, you would be looking at about 7.4 million builds in North America, 13.9 million in Europe, or 9% and 5% increases respectively from just annualizing the first quarter. I hope you are with me.

Now if you look at the estimates from the 11 sell side analysts that cover BorgWarner from the auto industry, plus CSM and JD Powers, and this is as of April 27th, and I don't think anyone has changed the number since then, but if they do, I apologize, the range in North America is from eight million units at the low end to 10 million on the high end. Significantly higher than the first quarter annualized ,or February/March annualized. If you look at Europe the low end of the range of these experts is 14.3 million, and the high end is 18.6 million. And again, much higher than first quarter production annualized, or February/March annualized.

If you use the lowest end of the estimates from these experts for both North America and Europe, the eight million in North America, the 14.3 million in Europe, we should see an 18% increase in North America from first quarter production levels, and an 8% increase in Europe from first quarter production levels. If you use the mid-point of the range from these experts, again significantly higher, North America will be 35% higher for the rest of the year, and 23% higher in Europe.

And as you can understand, as you look at these numbers, and think about it, the lack of consensus, and the wide variation in underlying industry projections, results in a significant amount of uncertainty regarding future financial projections. It is abundantly clear that every one of the experts is estimating the rest of the year will be stronger than the first quarter. How much stronger, is the question.

And based on that, as Tim mentioned earlier, we continue to believe we will generate positive net income and operating cash flow for the year. To quantify how much with any confidence is really the difficulty. I think we can all do the math to extend BorgWarner's first quarter actual sales for the year, based on these different range of expert production assumptions. But we also, I think, need to get out our dartboards, to figure out really where production will end up for the year. I hope you all have better luck than I do, because so far I haven't even been able to hit the board itself, let alone find a sweet spot on the board. I think that gives you a sense of what the year could look like in the wide range of variations, and why we continue to say we will be net income positive and cash flow positive, but have difficulty in putting it into a tight range, that we can give some guidance on.

With that, let me finish by reiterating Tim's comments from this morning. We have taken and continue to take actions to adjust our cost structure. We have significantly improved our decremental margins, which are at the low end of our 20 to 25% target as a result of those cost reduction actions, and we have positioned ourselves well to benefit on the upside, as the economy and industry volumes start to pickup. We expect to improve Drivetrain profitability during the rest of the year, as a result of the closure of the Muncie facility, and continuing actions in our European operations.

Our capital structure remains strong, and we have strengthened our liquidity and financial flexibility. We have delivered positive cash flow in a very difficult quarter for the industry, and as Tim said earlier, we will continue to adjust the cost structure to industry conditions as required going forward.

I think most importantly, we have not forgotten the criticalness of leading Powertrain technology, with respect to the continued long-term success of BorgWarner. We remain focused on effectively executing our technology driven growth strategy. We have a strong dedicated work force around the globe, that continues to ensure make sure that BorgWarner maintains it's reputation and position, as the leader in Powertrain technology. And when this global economy turns around, which it will at some point in time, BorgWarner will be well-positioned both financially and technologically, to remain at the forefront of the growth curve in this industry.

With that, I would like to turn the call back over to Mary.

Thank you very much, Robin. We will turn to the Q&A portion of the call. I would ask the call coordinator Takia, to please announce the Q&A procedure.

(Operator instructions). q-and-a Your first question comes from Rich Kwas with Wachovia.

Good morning everyone. Nice job on the quarter. Especially on Engine. Good job. Robin, should we assume that the decremental margin from Q1 level, can it come down any further? Improve any further from here? Is this kind of good levels that you are targeting? I know you talked about 20 to 25, but I just wanted to get the level of cadence going forward?

I think as we have talked before, given the cost structure we have, we are very pleased to be able to react to sales volume declines, and maintain that decremental margin in that 20 to 25% range. I don't think you are going to see much less then, if you look at the business let's look at the first six months of 2008 is a good surrogate. 8% operating income margin, 5% depreciation and amortization. You are already at 13% right there.

And with some of the R&D expense, which is running about 4% of sales, you are up to about 17 to 18%. And getting much below $0.20 on the dollar really starts to cut into the fat of this Company. I think as Tim has said many, many times that is something we are not about to do.

We are don't mind cutting into the fat. We will be cutting into the muscle and the bone. There is no fat in this Company.

Thanks, Tim.

How do we think about when there is actually a recovery? How do we think about the upside on the contribution margin? Is it going to be much different than the $0.18 on the dollar you normally have gotten in the past? Or if there is a more meaningful increase in production, should it be higher than this?

I think there are two phases here. Initially as volumes start to ramp up, we would expect to be closer to that $0.20 on the dollar, a little bit north of $0.20 on the dollar, with respect to incremental margins. As the growth starts to extend, we get back into where we were before, some of this growth will take place in geographies of the world, where we will still have to put in an infrastructure, and that will be closer to the $0.15 incremental margin. But the initial pickup and growth here, we would see from levels today, we would expect to be closer to $0.20 on the dollar in incremental margins.

Okay. Great. How do you look at your Tier 2 and Tier 3 suppliers, and the health of those right now?

Rich, this is Tim. We continue to monitor them. I think every day that goes by, things get a little bit more tentative, and makes us a little bit more nervous. But right now, our suppliers are holding in there. We don't have any imminent threats of shutdowns, or anything like that, that I know of, other than what may happen in the next day or two, depending on what happens with Chrysler. And then a month from now, what may happen with GM.

But barring any unknowns from Chrysler and GM, which is a big question we all know, so far we are getting through, and we are getting through quite well. We are handling the situation. We have some, it has probably bumped up to about the 10% range now. But we monitor them and work with them, and we are not paying them money to fix things, we are working with them to get things straightened out. But it is something that we are conscious of every day.

How much cash did you expend in the quarter, in terms of accelerating Payables, and what not? Was there much there this quarter?

Nothing meaningful.

Minimal amount. Minimal amount, if any.

Okay. Last question on product with the Fiat announcement with the dry clutch technology for DCT, what is the relative content difference between that and the normal DCT?

Well, if you look at it roughly in half, I won't break it down specifically. But on a wet clutch, we do the clutch module and the control module, okay, along with some ECU. On the dry clutch, in this particular case, we will get about half the content we would get with the Fiat, as we would normally get on a wet clutch.

Okay.

Okay?

Great. Thank you.

Thanks, Rich.

Next question comes from Himanshu Patel with JPMorgan.

Good morning, guys.

Good morning.

Robin, going back to the margins, when we think about a recovery, I know you mentioned 20% incrementals, but I am trying to reconcile that with previous comments you have made about 8% normalized EBITDA margins for the Company. And I am just wondering how you think about the two of them? Should we still view 8% as sort of a normal margin, that perhaps the Company cannot get above? Or would you say that with recent level of cost cutting, as you see some sort of industry production improvement, could we see some changes to that 8% level?

Himanshu, that is a great question. Actually what we have said is 8.5% to 9% is kind of where we were running the business historically, before the economic issues here. And we feel good about getting to the 8.5 to 9% level, I would love to be able to tell you we can get beyond that level. But my experience in the industry, there is always increased raw material prices, there are customers who we try to support, and make sure their products are competitive in the marketplace.

But just for some reason or other, it becomes difficult for us to be able to consistently perform above that 8.5 to 9% range, not to say that we don't strive to do that, and we won't continue to strive to do that. But as we look at the sales growth here in the short-term, these are kind of easy pickings with respect to incremental costs. You basically we have work forces that are working four days, or three days a week.

There is, I won't say it's easy, but it is certainly a little easier to add an extra day of work in the week, rather than bringing in a whole new work force, and staff up for a new operation in a place like Poland, or China, or whatever. So I think there is a distinction in the short-term, and that is why I tried to make that distinction. In the short-term my operating guidance would be hitting me in the back of the head right now for saying this, because it is still a challenge.

But I think it is a lot easier in the environment we are in to be able to efficiently manage sales increases, much more so than as business starts to level out. And we start getting back to the growth mode requiring investment and capital, investment in people infrastructure, investment in technology, beyond just getting back sales from where we are today.

That is actually, maybe there is another subtext there. What level of sales increase do we have to cross after which you do have to start adding a lot more fixed costs to the business? And presumably the incrementals would be less at that point. You just mentioned the issue about people working four days a week instead of five days. If we went back to five, that would argue you could flex up by 25% on volumes, without adding a whole lot of fixed costs. Is that directionally kind of the way to think about it?

Yes, this is Tim. I would tell you that we can go back to the capacities we were in, in the first and second quarter of 2008 very easily. By man power, we have all of the capacity, physical capacity in place. We have actually put in like in the area of turbochargers, we have put in more capacity than we had in the first half of 2008. We put it in in the second half of the year. As volumes were shrinking but it was already bought and paid to.

The bigger issue is, if the volumes come back to some level, which nobody knows, if the customers give us enough lead time to get the raw material in, because we are actually reducing inventory. The bigger issue is not how quickly can I bring people back, I can bring people back fast. It is not the question of whether I have the physical capacity or CapEx to do it, it is do they give us enough lead time on incoming material to meet their schedules. But so far that hasn't been much of a problem. But there actually has been a couple of cases where they bumped their schedules up too quick, and we are fighting getting some inventory in quick enough to meet their demand.

Then on the raw materials comment, Robin I think you mentioned $25 million benefit for full year '09, how does that shake out per quarter?

Most of that is back ended. As I said, a lot of that is related to hedge contracts that are rolling off through the year. And the majority of those contracts roll off at the end of May.

Q1 was a headwind of $7 million you said?

That was total. Nickel was about a breakeven in the quarter for us.

Nickel was breakeven? Okay, last question, Europe obviously scrappage programs are helping volumes there, mix is changing though. How is that affecting your business?

We are benefiting from the scrappage program. But not as much as we would normally benefit under normal production conditions or sales conditions. We typically, right now they are selling more small, cheaper vehicles, some of which are turbocharged, some of which are not. Some of which are gas, and there is some diesel volume, actually diesel market share is actually shrinking a little bit right now.

But we benefit from downsized engines, and we benefit with turbocharged gas engines. But we are not benefiting as much as we normally do under normal production conditions an a normal mix.

Tim, is that because historically, you guys have been more aligned with sort of smaller displacement engines, whereas Honeywell sort of had more of the larger engines in Europe?

Yes, I think that I won't speak to Honeywell. But we have typically one on the smaller engines which has been good for us, as they down-size and they are buying smaller, cheaper cars. But when you go to a sophisticated downsized 4-cylinder engine with BorgWarner turbocharging, that is going to be a little more expensive than a 4-cylinder gas without a turbocharger.

That seems to be one of the options people are going to is gas engines, some of which are turbocharged, and some of which are not. We are losing a little content. But all-in-all, I have got to just say the strappage program is helping us, because without it, the sales would be even less. So we are getting some benefit.

And I have compared notes with other suppliers in Europe, and they are seeing the same thing. They are benefiting somewhat. But it is not as much as they would benefit under normal production mix.

Okay. Thank you.

Next question comes from Brian Johnson with Barclays Capital.

Thank you. A couple of questions. First around Europe. Your business with Fiat is about 3%? At least the last time we looked. So do you see Fiat coming in to Chrysler as a positive? Would some of that Chrysler content go up, if their small end is based on Fiat platforms?

Let me just say this. I think Fiat going into Chrysler will be a positive for us, because we are growing with Fiat, and we have been shrinking with Chrysler. Fiat has got the kind of powertrain focus on technology that benefits BorgWarner. Fiat has got a focus on turbochargers, they have got a focus on dual clutch technology, both wet clutch, and dry clutch. So we are growing with Fiat, independent of whatever happens with Chrysler, we are growing with Fiat, we are shrinking with Chrysler. Chrysler is about 3.5% of our sales right now, and Fiat is a little less than that, but on the uptick.

Okay, and Conti in Europe had a gas turbo contract. Kind of what end of the market was it in, and what does this mean for their potential market share gain?

Well they don't have any market share now, so it is a gain. But they are basically on the low technology end, I hear they have one application, smaller engine, but it is a less sophisticated technology. And we tend to focus on the more sophisticated technology, that has better price points, which is also the way the market is going, in terms of technology trends and market trends and volume trends.

The European market will be moving toward smaller down-sized engines, with sophisticated turbocharger technology. We will benefit from that. But like everybody else, the OEMs want some competitors. And basically, they are going to want to bring somebody in, and somebody is going to try to get in at the low end, the easy part of the market to penetrate. It is also very price competitive, it is not the part of the market we tend to focus on.

And finally probably for Robin, FAS 14-1 and your new convertible, we took an estimate last week that there could be a $0.21 dilutive impact under strict GAAP accounting. Going forward as you think about your profit for the year guidance, is that with or without that maybe doesn't make a difference then? Do you think you are going to be looking, when do we kind of know if that is going to be, you are going to report EPS on a pro forma basis, or after the impact of that?

Well, first of all, as you point out, being positive from a net income perspective, a little bit more interest expense doesn't really make any difference in the equation. We will consider the cost of that financing as just part of our normal run rate. Think of it this way, Brian, we talked late last year about trying to go to the fixed income market, to replace the maturing $137 million bond, and also to get some additional liquidity. The fixed income market pretty much shut down, and look at this as basically as a surrogate for fixed income. An average is about on a net/net basis is about 9.5 interest expense for the year.

Just think of it as we issued net proceeds of about $340 million, with an effective rate of about 9.5%, and it is just nothing more than debt. That is the way we are going to consider it, and we are not going to set it aside as a unique item, it is just part of the capital structure. We raised it at 9.5%, paid down a little bit of existing short-term debt, and the rest will be sitting on the balance sheet at cash, with a negative carry. In these times, we feel that liquidity is important, and we are willing to bear the costs of the negative carry.

And can you quantify the potential anti-dilutive impact, knowing that GAAP won't recognize it of course, of the call option strategy you overlaid?

Well from our perspective with the bond hedge overlay that we have, there is no dilution from this transaction, unless our stock exceeds $38-something per share. Then we do have the option to settle this in cash or in shares. If we settle it in cash, there is no dilution. There is a cost of settlement, but we are looking at this as a debt financing.

Okay. Thank you.

Thanks, Brian.

Next question comes from Itay Michaeli with Citi.

Thanks. Good morning. Just a couple of questions. On the outlook to generate positive earnings for the year, are you implying that the Q1 schedules, is that under that production level for the full year, similar to Q1?

What we are saying is that we are focusing our costs reduction activities based on Q1 production schedules. It is not an indication of where we think production levels will be in North America or Europe for the year. And what we are suggesting is, at least I am not smart enough to tell where in that wide range of all of the experts, production is going to come out for the year. But certainly based on all the experts that spend a tremendous amount of time focused on this sector, I believe there is a pretty resounding consensus, that the year is going to be better than the first quarter times four.

Another way of saying it I think you have heard us say this, we have said before that we are going to right-size the Company, so that as we went forward, no matter what the world could throw at us, the chances are we had upside surprises not downside surprises. That is what we are trying to do is to get the Company to the size where the proportion of downsize is much smaller than the proportion of upside surprises.

Absolutely. That is helpful. And then just on CapEx, are we still looking at about $200 million for the year? Or is there any room to come in a little bit below that? I think the Q1 number was a little bit light.

I think that relative to prior years first quarter is typically a little light, relative to the spending for the year. If you take the first quarter times four, for instance last year we spent $75 million in the first quarter times four, how much is that? 300, I have got my crack accountants here helping me do the math. We ended up spending 375. So first quarter certainly not an indication of the full year, and we still expect to spend about $200 million for the year.

Okay great. Just quickly on raw materials you quantified the nickel impact for the year, and the steel impact for the quarter. Did you quantify the steel impact for the full year?

No. That is still up in the air. We have a lot of discussions with our purchasing people, with respect to where steel is going in the back half of the year, and frankly that is another one of the uncertainties that we have, with respect to our cost structure for the rest of the year.

Great. Just lastly for Tim, you talked about the European scrappage program. Could you weigh in on how a US scrapping program could affect you, both in terms of volume and how you think you are positioned in terms of mix, understanding we are still early, and there could be some changes in that legislation. But just curious to see what you are thinking about it at this stage of the game?

We haven't put any numbers to paper because, my opinion is if there is a US scrappage program, it will be months before it is ever incorporated because Washington can't do anything very fast. But it will be of some benefit to BorgWarner, because our products tend to be pretty generic. They are across most engine lines and most transmission lines for the Detroit three. If it helps sell European or Asian cars in North America, that is going to be a benefit to us also. So I see it as a benefit.

But I look at scrappage programs as just another rebate program, rebates work somewhat, and they work for a while. But you can't run a business on scrappage, and an unfortunate part of all these things, whether it is scrappage or rebates, they pull ahead sales, but somewhere along the line somebody has to pay the piper.

Right. Terrific. Thanks so much for that.

Your next question is from Chris Ceraso with Credit Suisse.

Thanks, good morning.

Morning, Chris.

Can you go into a little bit more detail on the issues that you are having with the start up on dual clutch?

Well we are not having start up problems. When we mentioned growth costs, it is basically there are costs to do the dual clutch business, that we are doing to start up the business in China. And we have costs with no sales right now. In the joint venture we are setting up with the 12 Chinese OEM partners on the assembly side.

We are working with some Chinese OEMs on dual clutch transmission designs. We are spending money on the designs for the new transmission, which we expect to get reimbursed for, but we don't know how much, and we don't know when. So those are costs that we are incurring.

In Europe we have still got some things that are improving on the operating side for dual clutch. But the low volumes have helped somewhat, in terms of solving some of our launch problems, but we continue to have some challenges, operational challenges in Europe on some of the dual clutch componentry, and slowly but surely we are working our way out of those.

Is it a supplier issue in Europe?

A little bit of both of the, some supplier and some BorgWarner.

How many quarters until you get offsetting revenue in Asia on dual clutch?

The dual clutch in Asia will start to launch in the middle of 2011. We may have some, I think it is 2011, middle of 2011. So we will probably have some launch ahead of that. But we won't see sales for a while. And the problem with transmissions is they have a long gestation period, just like engines.

How much is this weighing on you? Can you ballpark it?

Well when we had normal schedules, we could absorb all these things. But now that we have had a 45% reduction in sales, it is tougher for us to absorb all of this stuff. So I don't know, I hate the ballpark the costs, because we don't break it down, we don't give out that kind of detail. But it is not huge, but it is definitely noticeable.

Can you talk about any changes in your contracts with customers broadly, that provide you with protection, or escalation on commodities? Maybe some percentage of your business that is now covered with commodity escalators?

Go ahead.

I can talk specifically about nickel. As you remember when nickel spiked, we didn't have much coverage at all, in 2006-2007 we spent a lot of time getting coverage. We have approximately 70 to 80% of our business in the turbocharger area, where we have some form of sharing on movements in nickel prices.

Steel, we have very few contracts where there is sharing. But that is a part of new business going forward. Some our contracts we share. Movements in aluminum, approximately maybe 50%. And copper probably less than that. It is all across-the-board. But certainly that is a focus for us on new business awards, getting a little bit more sharing in both the risks and rewards, with respect to certain commodities.

We have done a pretty good job of matching our supplier contracts with our customer contracts. And we have got a fair amount of pass-through now in general on commodities in general. At least the high impact ones. The only one that we probably don't have because there is no index, is steel. But the rest of them have a pretty good mix of pass-through.

You didn't ask, but I will just continue on, we continue to negotiate with our suppliers on pricing and price increases due to schedule cuts, even though some of our customers, I should say, we are in negotiation with our customers on schedule cuts, and we are asking for price increase due to the schedule cuts, even though some of our customers are asking for continued price reductions due to contractual obligations, or just because they feel they are in sorry shape financially, so they need price cuts, and we are resisting price cuts.

That was going to be my next question. Have you put contracts in place, where you have either reduced or eliminated the contractual productivity 1 or 2 or 3%, whatever typically it would have been?

Chris we don't necessarily have contracts, but some of that stuff, it is all under negotiations right now. Basically some companies understand, and have actually just kind of taken a hiatus on price cuts. Or pushed the request for price cuts.

Not all our product is under contract. It is an annual negotiation which right now actually helps us, because we don't have to do anything. And if they ask for cuts, we just continue to negotiate real hard. I mean, you have heard this before from BorgWarner. We are tough negotiators on price, and we just continue with that.

Okay. Thanks a lot guys.

Thanks, Chris.

Your next question is from Brett Hoselton with KeyBanc.

Good morning Tim, Robin, Mary.

Good morning, Brett.

Steel. Most of your peers are expecting a pretty significant tailwind in the back half of the year. I know you are not necessarily providing a number. Is it reasonable to assume that you will have a tailwind as well, although the magnitude is in question?

That is a discussion as I said, we continue to have with our purchasing people, I personally expect a tailwind. Our purchasing people continue to tell me that might not be there. I think we are going to have to wait until we get there.

It is one of those things where I agree with Robin. Everything I read says there is going to be a glut of capacity in steel, and all of this stuff. But it depends on the region of the world. Some parts of the world steel prices were under market value, and now we are paying below market value, and now they are getting caught up. But we should be seeing increases, they are negotiating, our suppliers are negotiating increases, where we think we should be expecting decreases, and the reason is these guys are playing catch-up to the market.

I will make sure I get a copy of the transcript of the call, highlight the question, and send it to all of the purchasing guys, to reaffirm my view in life.

There you go. Restructuring. As we look at the moves, let's say from the first quarter to the second quarter in terms of your earnings, sales up 20% contribution margin in a normal swing up. But obviously you have got some restructuring benefits there, and I am specifically thinking about Muncie. I mean I would anticipate that you would have the normal 20% contribution marks, and a nice bump-up as a result of restructuring, possibly a large portion being Muncie. Can you tell me how I should think about that?

You are right. We will get an improvement from Muncie, specifically. I don't know what a huge bump-up is, but certainly there is an improvement in the Drivetrain business, that comes with the closure of that facility. The incremental margins for $0.20 on the dollar that you are pointing out, if there is increased sales, certainly would be fair, and would exclude the benefits of the Muncie closure. So yes, there is, as sales increase in the second quarter, we would expect the benefit of the Muncie closure, plus the normal incremental income on additional sales.

Brett, I would add, we continue to size the Company to the proper level. As we go forward, we are continuing to push for lower employee costs in Europe, and lower costs where we can. And you won't see the wholesale restructuring that we have done in the last few quarters. But we will continue to focus on resizing the Company, to get after some of the stickier costs, that we couldn't get out in the fourth quarter of 2008, and the first quarter of 2009.

As Tim mentioned, the focus here is managing the cost structure to first quarter type of sales levels. And as much as we tried we didn't quite get to a breakeven, or a profitable level, so there is more activity that needs to take place.

The US Treasury program, are you not participating at all? Or are you just not taking the quick pay? And then of course why?

We are not participating at all. We don't really feel the need to participate, because the whole program is way too unknown. We personally don't want to be attached to any government programs if we can help it. We think that we may lose some of our legal flexibility in bankruptcy, under the normal bankruptcy proceedings. So we are willing to take our chances if there is a bankruptcy, we are willing to take our chances in bankruptcy court with our full flexibility, and we fully expect to be classified as a critical supplier.

The other thing, Brett, we are pretty disappointed that the government provides the type of help and support to the rest of the auto industry, and other industries in the country, and puts a program in place that basically costs 16% annualized just for the guarantee, and somewhere around 24% annualized for the what they consider quick pay portion. Obviously, those aren't attractive financial terms to anyone in the supply base.

Then finally, some of the, again some your peers with a letter balance sleet like yourself, are looking at the current scenario economic conditions, as an opportunity to acquire some technology, and at a lower price. My question is, is there anything out there? I know you generally are constantly looking at things. But what is the probability that you would make some sort of an acquisition over the next six to 12 months? Is it high or very low? Or what are your thoughts there?

I can't say we are going to make an acquisition over the next six to eight months of any significant size. We continue to look at acquisitions. We walked away from a couple of nice acquisitions, particularly one in the fourth quarter of 2008, we will obviously have a chance to go back maybe in the future and look at it. We may pick up some small technology that would help us, hopefully we can find some small game changing technology to help us in the future. And other than that, and I will tell you, the OEMs have definitely had an interest in a movement in trying to consolidate some of the supply base. I think that probably will benefit BorgWarner.

Great. Thank you very much.

Next question is from David Leiker with Robert W. Baird.

Good morning. I have a couple of questions. Robin and Tim, following up on some of the early questions on the cost savings. Can you quantify for us what you think your incremental savings are going to be during 2009 from restructuring actions?

Versus 2008?

Yes.

We tried to do that on the call at year end last year. But I will go over it again. As we talk about the benefits from the restructuring, I think as we mentioned before, on the employee side, approximately about 4,400 employees that were planned to have been taken out. We announced at year end. Now some of that will fall into 2009, and some of that took place kind of the third quarter timeframe. It is not a true year-over-year.

On average, we expect annual savings to be about $50,000 per employee. That translates to about $220 million on an annual basis. Our rough estimate is somewhere around 80% of that benefit gets reflected in 2009 versus 2008.

Okay.

So that is step one. The asset impairments we took, we expect to improve, there was about $73 million fixed asset charge last year. Average remaining life of about seven years, that translates to about an $11 million deduction, depreciation expense we expect 2009 versus 2008.

And then the savings in Europe with respect to the short workweek, think of it this way. Going from five days to four days, you would expect to save about 20% of labor costs. Unfortunately, there are still some costs that we provide. And it is somewhere between 70 to 80% of that number that we end up saving. So at 20%, 80% would be instead of 20, you would save about 16%. So that is kind of the relative savings we are looking at 2009 versus 2008.

We announced in late in the first quarter a salary reduction around the globe of 10%, and a 15% reduction at the executive level. And on average, that should provide somewhere between 6 million to $8 million a quarter in savings. So those are the major items.

Other than the last item that you just mentioned, how much of the balances are we seeing in Q1 numbers? Three quarters of it, maybe?

We announced the restructuring action in the fourth quarter, still a good portion of that continued in the first quarter. If you look, when we get our Q filed today, we had $51 million of employer-related restructuring costs on the balance sheet at year end, and I believe at the end of the first quarter we still had about 35. So we still have got activity in the second quarter.

And then in Europe with the strappage programs there and volume moving higher, sales moving higher, do you have any gauge how much of that have stream translated into production, versus coming out of inventory?

You mean vehicle production?

Yes.

No, I don't. I would imagine some of it was production. We are seeing some increases in schedules at Volkswagen, and we are seeing some increases in scheduled in Renault. And maybe Fiat we may not be seeing schedule increases, but we are not seeing the kind of decreases we expected, so all of those I would say would probably be associated with benefits of the scrappage program.

Okay. Great. One last item. If we could take a cut I know you did this in November. But at your new business backlog, that three-year backlog, how much of that do you think given the current market environment is being pushed off? Or just not going to be there?

Well the programs are still there last we looked. And I said that at the last call, David. But the volumes are down on those programs. I would estimate the volumes are probably down 20 to 30% on some of those programs. What we are seeing is the industry is not launching as many new programs going forward, that we would normally see on an annualized, or quarterly rate annualized. Another way of saying it is we are just not seeing, it is not BorgWarner, because I double checked all of this. The industry is just not launching as many new programs. Or placing business for as many new programs in the 2011, '12, '13 range, as we are used to seeing under normal conditions.

Right.

The programs we are seeing are more out of Europe than North America, and that is kind of obvious. I mean Chrysler and General Motors are pretty much gone into hibernation on new programs.

Okay, great. Thank you very much.

Thanks, David.

Next question comes from Rod Lache, Deutsche Bank.

Good morning. Can you just refresh us on the additional savings left from Muncie specifically?

Yes, as you can tell, we have stayed away from that from those details, Rod. Basically you are looking in the first quarter we carried, first of all look at the Drivetrain business, about $200 million in sales in the quarter. Significantly down from where the business was run. In the first quarter we did carry pretty much two work forces to support some of that business as we transitioned over. There will be some savings. We are not going to quantify it exactly here. There are some good savings to come from that. It will be easier to talk about when we report second quarter results.

Right. When you add up all of the different initiatives, the 4,400 head count reduction, shortened workweek, salary cuts, these things looked like they were ramping up to $300 million of annualized savings, something along that line, could you either give us a feel for how much of that run rate were you at in this past quarter? Or approaching it may be differently, you had been talking about a decremental margin before savings in the mid-40s. Is that still a reasonable number?

Yes, I think we have talked through this before. I think from my perspective, the way I looked at this, Rod, is our target is to as sales decline, to get the margins to 20 to 25%, and that requires, again if you have 52% of material, percent of sales, to be fairly precise, to get to 25% decremental margins, you need 20-something, 23%, I think my math is right, a 23% reduction in other costs. As we have said before, you look at our compensation costs, labor and benefits relative to sales, it is about 25%. So we don't look at it as calculating a dollar savings.

What we look at it is what is required to get to that 20 to 25% decremental margin. and are we achieving that, and based on first quarter performance, I think we are fairly comfortable that the changes we have made and implemented, are getting us to that $0.20 to $0.25 on the dollar. It is not a savings from our perspective, it is actions that enable us to get our cost structure in-line, to support a lower level of business. So we don't look at here is profit of X, and we generated X amount of savings through all of these restructurings, and therefore we should have profit of X+. We look at it as we have got sales declines of Y, and in order to maintain decremental margins, we need to take out X amount of labor.

I guess I am just wondering if you have got, you have achieved this kind of impressive decremental margin, in a pretty stark revenue comparison, wouldn't that naturally imply that with somewhat less dramatic declines in productions, you would actually have an even lower decremental margin than this 21%?

As Tim mentioned, we have got some stickiness outside the US. When you go from a 5-day to a 4-day work week, that is a 20% reduction in activity, we have already talked about the costs. The next step down is a three day work week. You can't get to 3.5 or 3.7. So we don't have the ability, particularly outside the US, to match management actions on labor costs control directly with sales declines.

So there are some step functions there that you have to be careful about in looking at managing the business, and be cognizant of, and that is why we can't match this up directly plus or minus.

I am just moving in the opposite direction, if the production levels are somewhat higher in Q2, 3, and 4, not lower, do you still stay with this four day work week? And are you able to actually experience a lower percentage decremental margin, because the savings are kind of sticky, but the revenue decline is a little bit more moderate?

Well, let me just have a whack at this thing. If we start to see some incremental volume increases, where our first approach is going to be to keep labor where it is at, and basically try to maintain as much of that sales, or meet as much of that sales with current labor, the current labor force.

That being said, if it gets to a certain point, and we have to bring in some more labor, we will. But it is going to be somewhat as our last resort. Because I think every increase you see could be followed by a decrease. You just don't know when it is going to happen. So we are really trying to be fair with our employees, and we are not trying to treat them like yo-yos, where we bring them in, and take them out, and bring them in, and take them out.

Our first approach is what you said, we will try to meet sales without increasing the number of employees we have. We will see how far that goes. If sales increase to the point where we have to bring in people, I still think we are going to continue to have a Lean approach. We still have some labor costs to get out in Europe, and if sales increase it may help us, so that we don't have to take some of the costs out that we are struggling to get out right now. And I don't know if that answers your question, Rod.

I guess just another thing on this profitability. A few people have asked this. But you were at an 8.5% margin in first quarter of '08. The North American annualized production, I think was something like $14 million back then. Europe was certainly a lot higher than it is right now. When you kind of think about the savings that you are achieving, things like what you are doing here with SG&A, how much of that is permanent? I mean, can you sort of translated what you think is the normalized profitability, but at a significantly lower level of ongoing production?

I think you might be right. When we were running full bore in the first half of 2008, we probably have had some extra costs in there, that were being carried that shouldn't have been there, which I think is one of your questions. And as we have leaned out this Company, we have turned into, there is no fat.

What we have probably hit some every day my presidents tell me I am cutting muscle now, and every once in a while, they start to whine about bone. But we have leaned this thing out really lean.

So what is the permanent part of the cost savings?

I don't know. Well we haven't quantified that. As we bring people back, we are only going to bring back the people we need which are muscle, and hopefully we will never bring back any fat that we had previously, that I think was somewhat built into the organization, based on previous good times.

Okay, my last one is just, I think you may have answered this. But I wanted to confirm that there is no GAAP earnings impact from the call spread, is that correct?

Right. As I said, look at the net proceeds of that transaction.

Yes.

About $340 million. Use about a 9.5% average effective rate on that.

Okay. Thank you very much.

Thanks, Rod.

Next question comes from Colin Langan with UBS.

Good morning, you talked about the tax rate a bit. What was the tax rate? I kind of missed the tax rate in the quarter. And where should we think about it for the rest of the year?

It is somewhere between 44 and 45% on the continuing business here, or excluding the unique items. And frankly, we have been historically somewhere 23 to 25% range, that is kind of where we expected 2009, before the dramatic declines here in the business, and frankly what is driving the tax rate in the first quarter, is the different performance in the different geographies of the world, and because we are at a breakeven or loss level, and we are so tight to earnings, you get some strange answers with respect to calculating effective tax rate for the quarter, based on performance in these different geographies.

From a long-term perspective, we still believe the make up of our business and our earnings, would translate into an effective tax rate on a run rate basis somewhere around that $0.25 on the dollar. But you are looking at a US rate 33 to 35%, and a rate outside the US that is quite a bit below that. And again, you get into a mix issue. And when there is not a large base on the pre-tax line item to work with, whether it is positive or negative, you could end up with some numbers that might not be representative of the long-term perspective. That is what happened in the quarter.

Okay. You talked about diesel mix in the quarter. How about your customer mix in Europe? I know the scrappage programs excluded luxury. Are you more balanced for luxury did that hurt you from the programs that actually benefited, or are you pretty balanced?

We are pretty balanced but in terms of the customers and the vehicles we are on, with the exception that when it comes to engines, at least in the turbocharger world, when it comes to engine, we tend to be more on the smaller, down-sized engines, both gas and diesel. And we would have better penetration in the 4 to 6 cylinder range, our competition may have better penetration in the 6 to 8 cylinder range. Typically we feel we are in the best part of the market, as the world starts to down-size engines.

And what is your outlook for diesel penetration for the rest of the year? Do you think it is going to get better from here? Or is it going to continue at sort of the weak mix we saw Q1 in Europe?

That is a good question. I think it is anybody's guess. I think it will probably stabilize where it is at, to a little bit higher level than that. But it may not, until the recession picks up, and you start to see more higher end vehicles, even though they have smaller engines or down-sized engines, if you start so see more higher end vehicle sales in Europe, until then you won't see the diesels coming back to above 50% level that they were before. It also has a little bit to do about with diesel fuel versus gasoline price differentials.

That makes sense. Can you talk about foreign exchange and earnings? It was a positive impact in the quarter? Is that?

Yes. This is Robin. It was a positive, when you have a loss in a geography, and you convert that into dollars at current exchange rates, you get less of a loss.

Okay. Because your engine business I always thought was more concentrated in Europe. That sort of implies you were losing money Europe? Or is that the wrong way to think about it?

Outside as you could see in the quarter we lost money in the quarter at the operating income line, and believe me, performance wasn't discriminated by any geography in the quarter.

I think you actually had an accurate conclusion, in it goes to point to some of the stickiness that we have when we talk about in terms of labor costs.

Okay. Already. That was my last question. Thanks.

That we continue to work on.

Okay.

We have time for one final question that comes from John Murphy with Merrill Lynch.

Good morning, believe it or not I actually have a question left here. Just looking at the, I understand Robin your consternation in trying to forecast production, because we go through the same issue here, and it is very difficult to do.

But in the near term, are you seeing any changes in production schedules that you received recently for the next month or two? And particularly, if we see this bankruptcy of Chrysler announced today, is there indication they may take production down completely for some undefined period of time here?

Yes I will answer, have we seen any changes in the production recently? Yes, I think one of our customers General Motors made a pretty large announcement in the last week or so, that indicates their production plans for the quarter will change. And I don't know about Chrysler.

Chrysler has put out no indication of what they are going to do regarding production or shut down, or bankruptcy, or anything, in the last few days. So far, before we walked into this phone call, we still didn't know anything.

Okay.

You always have to ask yourself, is this a function of losing share, or is this just a function of end market demand, and those are things as well, that we are working through.

We did do a little bit of analysis on the GM production cuts, although there will be production cuts at GM, we are probably going to pick up some of that volume at other OEMs.

As we think down the layer of Tier 2 and 3 suppliers that you have, I understand the exposure of your first derivative is not a big deal for you, but the second derivative is looking at the Tier 2 and 3 suppliers. What sort of cross-pollination do you see between those suppliers among the auto makers? When they supply their parts up to the Tier 1s into the auto makers, do those suppliers have a lot of exposure ultimately to Chrysler, and is there a way to really mitigate that risk, or resource those parts to those stronger Tier 2s and 3s, if there is a real problem there?

Some of them do have more exposure to the Tier 1s in the OEMs, than people know, I don't know, nobody has an accurate feel for what is going on with the Tier 2s and Tier 3s, in terms of their exposure to GM and Chrysler, other than they know, people know that they are exposed, I can just talk about BorgWarner, most of the large Tier 1s that are basically publicly known to be distressed, and are really borderline right now, and may get pushed over the cliff, if Chrysler goes bankrupt, or GM. None of those well-known companies tend to be suppliers to BorgWarner.

The BorgWarner exposure will be some small mom-and-pop that has some GM business, that we are slightly aware of, or Chrysler business that we are slightly aware of, but we just don't, because they are not public, we can't get into their financials, and we don't know how close to the financial distressed edge they are. Although we work with them, and we talk to them, and they are continuing to typically ship on time, we just don't know how close they are to the edge, and if GM or Chrysler, a problem at either one of those locations, pushes them over.

Lastly Tim, real quick, Ford is launching the Eco-Boost on some of it's Lincoln products later this year, and then launching it as performance, and then downstream to some of it's smaller products in 2010. What kind of share do you have, what is your relationship with Ford on these GDI turbochargers? And what is the real opportunity there as Ford grows into this Eco-Boost sort of engine powertrain solution?

Well, I will be careful of what I say, but I will say this, we have a very strong partnership and very good relationship with Ford in general, and we have a very strong partnership with Ford in the area of turbochargers. Right now there are a couple of Eco-Boost engines that have announced, mainly 6-cylinder we are on the rear wheel 6-cylinder, and our competition is on the front wheel drive based.

But as we continue to work with Ford, we are continuing to see stronger and stronger interest and demand for our turbocharger products on other projects. And we are working very strongly with Ford on down-sized gas and diesel turbocharging.

Great, thank you very much.

Thanks John.

Thanks John.

This is Mary Brevard, we are going to be closing the call. Before we sign off, I want to tell all of you that I will be retiring at the end of May. This is a great Company, I have been here for 12 years, and I am very proud to have been a small part of BorgWarner's success. I have really enjoyed knowing and working with so many of you, so thank you for the experience.

We are leaving you in good hands, Ken Lamb will be returning to IR, as well as continue to do some M&A work. Ken and I will be in transition over the next month, but for follow-up on today's information, please give me a call. I think Robin wants to say something.

I just want to say publicly we are going to miss Mary, I want to thank her for all she has done for BorgWarner, I have been with Mary since she was hired. As I look at BorgWarner, and Mary's contributions to the Company, I continually look at how BorgWarner gets rated from an investor shareholder perspective, and BorgWarner continues to be ranked at the top in the auto sector, and I think that is a tribute to Mary and what she has done for BorgWarner, and we thank her for all her years of hard work, and success she has helped bring this Company. We are going to miss her, but we do wish her very well in her retirement, and want to thank her for all she has done for the Company. Mary, thank you.

Thank you.

I too want to thank Mary. I know Mary is excited about retirement, and I know that we are going to miss her, I also share Mary's belief that we will be in good hands with Ken Lamb, but I just want to say, one of the happier days of my career was when I had a chance to promote Mary to Vice President of BorgWarner, and handle the Investor Relations portion as a Vice President.

She had done a great job for me, and from day one when I stepped into this job, she has been a big help. I also agree with what Robin says, she has added value to BorgWarner, and we appreciate it. Thank you.

It has been my pleasure to work with both of you. I will miss you as well. With that, we will end the call. Thanks very much.

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