博格華納 (BWA) 2010 Q3 法說會逐字稿

Good morning. My name is Angela and I will be your conference facilitator. At this time I'd like to welcome everyone to the BorgWarner 2010 third-quarter results earnings conference call. All lines have been placed on mute to prevent 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 Ken Lamb, Director Investor Relations. Mr Lamb, you may begin your conference.

Thanks, Angela. Good morning and thank you all for joining us. We issued our earnings release this morning at approximately 8.00 AM Eastern Time. It's posted on our website, borgwarner.com, on the Investor Relations home page. There will be a replay of today's call available through November 3rd. The dial in number for the replay is 800-642-1687. You'll need a conference ID, which is 14403369. The replay will also be available on our website. With regard to our IR calendar, we will be attending a number of conferences over the next few months. In November we'll be presenting at the Gabelli after market symposium in Las Vegas, the Verde Industrial conference in Chicago, the Barclays global automotive conference in New York, the Morgan Stanley automotive technology symposium in Los Angeles, and the Baird Clean Tech technology conference in San Francisco.

In December we'll be presenting at the Goldman Sachs auto conference in London and in January we'll be at the auto analyst conference in Detroit. One additional note, we plan to announce our 2011 through 2013 backlog on November 9th, the day that we'll be presenting at the Baird conference. 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 here today. Now 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'll turn it over to Tim.

Thank you, Ken, and good day, everyone. Once again I'm very pleased to review our quarterly results and accomplishments followed by comments on the state of the industry and our revised guidance. I'll begin by briefly highlighting our third-quarter results. We posted record third-quarter sales of $1.4 billion, up 37% from the same period last year, with earnings of $0.71 per share, excluding nonrecurring items. Our earnings performance in the third-quarter was the result of increased global demand for our products, higher volumes in our base business, and well-executed cost controls. Our operating income of $123 million continued to show strong improvement from last year, reaching 8.7% margins, which is sharply higher than a year ago.

We also repurchased 1 million shares of common stock and we are raising our full-year guidance again to $2.85 to $2.95 per share. At the group level, the engine group sales were just over $1 billion in the quarter, up 39% from the same period a year ago. A key driver of the engine group's performance was strong growth in the Asian markets, led by turbochargers and timing systems in both China and Korea. In Europe strong turbocharger sales and sales related to the ENSA acquisition boosted the engine group result. And drive train, in the drive train group sales were approximately $397 million, up 34% versus the third-quarter of 2009. Our four-wheel drive business in Asia, along with higher DCT module sales in Europe, were key contributors to the drive train group's quarterly results.

In addition, traditional automatic transmission component sales were higher around the globe. Our balance sheet remains strong with a net debt-to-capital ratio of 25%. Our capital spending continues to grow judiciously to support our future growth with productivity improvements. Also we continued to invest for the long-term as shown by our spending for R&D and new program launches, which was approximately 3.3% of sales. But because of the strong sales level, R&D as a percent of sales was slightly below our normal level of 4%, but the actual dollars that we spent continued to increase. In addition to our strong financial performance, there were several exciting developments during the quarter. We announced that we are supplying the engine timing systems and transmission components for the all new 2011 Jeep Grand Cherokee, the first vehicle to feature Chrysler's all new 3.6 litre Pentastar V6 engine.

The construction of our DCT joint venture plant in Dalian, China is progressing and we expect to produce our first production parts by September of next year. And the EPA and NHTSA announced plans to develop new fuel economy standards for light duty vehicles for the period 2017 through 2025. If implemented fuel economy standards could be in the range of 47 to 62 miles per gallon by 2025. The agencies are evaluating a number of different technologies to achieve these standards, many of which are from Borgwarner, including next generation gasoline engine technology and reduced vehicle mass. We consider this announcement a strong positive development for Borgwarner's long-term growth. Our capacity utilization continues to improve. We estimate that the average utilization rate is in a range of 75% to 85% and this varies by region and by product, but this range is a good proxy for the overall Company.

Now shifting gears I would like to make a few comments on the broader auto industry. Globe production was higher in the third-quarter compared with the same period a year ago and Robin will cover that later in more detail. But in summary vehicle production in North America and Japan was significantly higher. China and Korea production rates were marginally higher, while Europe was down slightly. A closer look at Europe reveals that the mix of vehicles continued to shift in our favor. Preliminary data indicates that C, D, and E segment vehicles represented 67% of vehicles produced in Europe for the third-quarter. And that was compared with 64% in the third-quarter of 2009 and just under 65% in the second period or second-quarter of 2010. Diesel penetration in Europe, an important measure for our turbocharger and diesel coal start business, is also on the rise. Preliminary data indicates that more than half of the vehicles produced in the third-quarter had diesel engines.

Now compared with second-quarter of 2010, global production volumes were down. However, we continue to outperform the market with strong sales and strong operating margins and our backlog, cost control, and structural improvements drove our good results. Now let's take a look at our industry outlook for the remainder of the year. In the US we now expect annual production of approximately 11.8 million units in 2010, up from our previous guidance of 11.6 million units. In Europe, we expect annual production of approximately 18 million units in 2010, up from our previous expectations of 17.3 million units. As I said earlier, vehicle mix compared with 2009 will continue to shift toward higher BorgWarner content vehicles including diesels. As we go to Asia, our outlook for India and Korea is unchanged from the end of July, which was up slightly.

However, we now believe that fourth-quarter production in China will be stronger than expected and China now represents 6% of our sales in China plus -- including the business we ship into China from Europe, it's actually more than 6% of our total sales. In our last earnings call we said that we expect solid growth in the commercial market in the second half of 2010 and to date this has proven to be correct. Third-quarter production in Europe and North America was stronger for commercial vehicles than expected and we continue to have an improved outlook for the remainder of the year, primarily in Europe. As a leading supplier of both turbochargers and cooling systems for the commercial truck market, we expect to benefit tremendously from this growth. Now moving to the full year, a combination of favorable trends has caused us to raise our guidance for 2010 and we're pleased to do it. The combination of higher volumes, improved mix, and new program launches are enabling BorgWarner to significantly outplace the global market.

For the full year, our sales growth is now approximately 40% compared with 2009 sales and our revised earnings guidance is now $2.85 to $2.95 per share, as I said earlier, up from our previous guidance of $2.60 to $2.80 per share, which is the guidance we gave three months ago. Now our outlook for the Company in 2010 reflects our positive view that global volumes will continue to recover and we will continue to outpace the overall market through 2010 and 2011. Longer term, the demand for our technology continues to gain momentum since improving fuel economy is one of the major long-term trends in the global auto industry, including the commercial truck markets. Now as a result and as we have said many times, the high demand for our leading edge technology will continue to drive solid BorgWarner growth for years to come. And lastly, BorgWarner will have a record year for sales and profits in 2010. With that, I'll turn it over to Robin.

Thank you, Tim, and good morning and good day to everyone. Before I go through the financials in detail, let's again review the macro industry environment for the third-quarter to put our performance in perspective. As Tim mentioned, third-quarter global production was about 16.6 million units, which is up about 10% from third-quarter of last year, actually down 8% from second-quarter 2010, which is not unusual because typically the third-quarter due to model changeovers and shutdowns for vacation, third-quarter is typically lower than second-quarter production. Compared with the same period a year ago, our sales were up 37% in the quarter. If you exclude the impact of foreign currency and the impact of the ENSA acquisition we made earlier in the year, we were up 39% and that's 29 percentage points better than the 10% year-over-year growth in the global vehicle market and another quarter where our sales growth significantly outperformed the global vehicle market.

Our sales significantly up from the market in every major region of the world in the quarter. In the US our sales were up 39% versus third-quarter last year, while the market was up 20%. In Europe, excluding currency and the ENSA acquisition, our sales were up 36% while the market was projected to be down 3%. I actually think that when all the numbers get settled that the European numbers will be revised upward a couple times, but regardless, make it flat and we still beat the pants off the market in Europe. In Japan and Korea our sales are up 41% while production was up 12%. In China our sales were up a remarkable 67% while industry production was up about 3%. Clearly our strong backlog of net new business with market penetrating new technology continues to differentiate BorgWarner from the rest of the industry and the overall market. On a quarterly sequential basis or compared with second-quarter 2010, our sales were down 4% excluding currency, again with the global market down 8%.

And this is typical, a third-quarter is typically lower, sales and production, versus second-quarter, again, due to summer shutdowns and model year changeovers and this year was no different than the past. Sales for the first nine months of the year are up about 46%, excluding currency and ENSA sales, compared to global production of plus 29% or we are up over 17 percentage points stronger than this industry. For the quarter, as Tim mentioned, US GAAP earnings were reported as $0.87 a share. The results for third-quarter 2010 and for year-to-date 2010 include what we consider nonrecurring or unusual items and we've detailed those in a table in the press release for you. We provide this table to help you reconcile the US GAAP earnings measures with the financial performance of the continuing operations this Company and to aid you in the comparison of results from one period to another. And as we always try to remind you, we think this is an important part of the release and we encourage you to review all this information.

I'm going to focus primarily right now on our earnings from continuing operations for the third-quarter as we go forward. Excluding a nonrecurring tax expense item in the quarter, third-quarter 2010 earnings were $0.71 a share, a sizable improvement from the $0.15 per share we earned in third-quarter 2009. Gross profit as a percent of sales was 19.4% in the quarter, compared with 14.8% for the same period a year ago and 19.4% or the same level the second-quarter 2010. The improvement year-over-year reflects the effectiveness of our past restructuring activities, a well-executed and continuing execution of a cost control program and the benefit of our operating leverage as sales growth returns to this business. Raw material prices were up about $12 million in the quarter year-over-year. SG&A costs were $150 million or 10.7% of sales in the quarter versus $126 million or 12.3% in the third-quarter of last year and $138 million or 9.7% in the second-quarter 2010.

The $24 million increase in SG&A spending year-over-year compared with the $383 million increase in sales translates to an incremental SG&A rate of only 6% year-over-year, a pretty strong performance. Net R&D spending was up $4 million in the quarter year-over-year. As Tim said, that's a strong 11% growth, but because of our sales being up 37%, R&D as a percent of sales declined slightly to 3.3%, below our 4% target. But as we've said before, we are increasing spending in that area and you can see that in the numbers. Operating income in the quarter was $123 million compared with just $27.5 million a year ago. The $96 million increase in operating income relative to the $383 million in sales increase, again year-over-year, translates to an incremental margin of about $0.25 on a $1.00. If you exclude currency and ENSA, the incremental margin is about 24% year-over-year. And this is pretty consistent with our second-quarter and first-quarter incremental margins, year-over-year margins, and very strong performance on a relative basis for this Company.

Let's look at the sequential incremental margin from Q2 2010 to Q3 2010. Reported sales were down $10 million, but currency had an impact here and if you exclude currency, sales in the third-quarter were actually down about $50 million relative to the second-quarter. If you look at operating income, pre-nonrecurring items and currency, it was down about $18 million third-quarter versus second-quarter. That translates to about $0.36 on a $1.00 off sales. However, in the third-quarter we did have the good fortune of seeing our Company's stock price increase 40% relative to the second-quarter, which resulted in equity-related compensation increase of about $7 million quarter over quarter and hopefully some happy shareholders as well. Adjusting for the equity-linked compensation would put the decremental margin below 25%, more like 22%, 23%, more reasonable level.

As Tim mentioned, the operating income margin in the quarter was a strong 8.7%. Along with record third-quarter sales in this quarter, this third-quarter operating income margin is the strongest we've seen since the third-quarter of 2004 and that puts our operating income margin at just under 9% year-to-date, excluding nonrecurring or unusual items. As you look further down the income statement, equity and affiliate earnings were $10.5 million, up from $6.5 million a year ago, very strong growth. And this primarily reflects the performance of our drive train systems' 50/50 joint venture, NSK Warner, which is located in Japan and China and services our Japanese customers for transmission products. Light vehicle production was up 15% in Japan in the quarter compared with last year, which helped drive the year-over-year increase in demand. However, it was penetration of our products that obviously showed the significant improvement year-over-year.

Interest expense and finance charge were up to $18.4 million versus $13 million last year in the third-quarter, primarily due to higher debt levels and some interest rate derivative expenses. During the quarter we did issue $250 million of a 10-year senior note and we increased the size of our receivable securitization facility from $50 million to $80 million. The provision for income taxes on a US GAAP basis was $4.2 million in the quarter, which translates to an effective rate of about 3.7%. However, as we detailed in the press release, the provision for income taxes includes a $21 million gain related to the reversal of evaluation allowance on foreign tax credits. If we exclude this item, the tax rate was about 22% in the quarter, which is in line with the first six months of the year and also in line with our general expectations for the full year. Earnings attributable to noncontrolling interest, which was formerly known as minority interest, was $4.8 million a quarter, up from $2.8 million last year and this reflects our minority partner share of the strong earnings performance of our Korean and Chinese unconsolidated joint ventures.

Consolidated joint ventures, I'm sorry, those are consolidated. That brings us back to net earnings, which on a GAAP basis were $106.7 million in the quarter. Excluding the gain from the reversal of the valuation allowance on foreign tax credits, nets earnings were $85.5 million in the quarter compared with $70 million in the third-quarter of last year. You'll notice at the bottom of the press release income statement, just as in the second-quarter press release and in our 10-Q, there's additional information related to the calculation of diluted earnings, net earnings. And this information is required because, and it's related to the accounting for our convertible debt that we've issued in April of last year. US GAAP rules require the use of the if-converted method to calculate earnings per share, which basically assumes the debt is converted to equity. And if we look at the, our equity, say, relative to convert price, there's no if-converted concern here, it will be converted.

So in the calculation we exclude the interest expense related to the convertible debt from the income statement and that include the additional shares as if the converted in a diluted share account, which amounts to approximately 13 million extra shares. Note 18 in our 10-Q has all the gory details behind this calculation and I encourage you that are interested to read note 18, that the Q will be filed by the end of the day. Having said all that, our fully diluted earning per share, again, $0.87 on a US GAAP basis or $0.71 excluding the nonrecurring item discussed earlier. Very strong performance for what is traditionally a weak quarter for the industry. On a year-to-date basis, excluding nonrecurring items, we earned $2.14 a share versus a loss of about $0.03 a share in 2009. Now let's take a look at the performance of our operating segments. We saw strong double digit growth in virtually every product area of the business. And so for those of you that follow up our BorgWarner, it is important for you to recognize, this is not just a turbo story. We are seeing growth in every part of this business.

The Asian segment's sales were over $1 billion in the quarter. Excluding currency and acquisitions, that's an increase of 39% compared with the third-quarter last year and relatively flat from the second-quarter 2010. Adjusted earnings before interest and taxes were $136 million or 13.4% of sales. The year-over-year incremental margin excluding currency and acquisitions was 28%. On a sequential basis, or third-quarter 2010 versus second-quarter 2010, segment earnings were flat despite having lower sales and we had a great quarter from the engine segment in the third-quarter. Looking at the drive train segment, sales were $387 million in the quarter. Excluding currency that's an increase of 39%, as well, compared with the third-quarter of last year. Again, significant outperformance of the global industry.

Down 5% from the second-quarter 2010 level, though again, as a result of summer shutdowns and a general slowdown in industry production in the quarter. Adjusted earnings before interest and taxes were $31 million or 7.8% of sales. The year-over-year incremental margin calculates to 24%, excluding currency it was 21%. On a sequential basis, also excluding currency, the decremental margin for the drive train segment was a little bit higher than we like, 34%, but the change in sales and the change in operating income was so small you could easily get a big 10 percentage point swing by a movement of $1 million of operating income. So it's not that relevant. Let's move on to the balance sheet and cash flow statements. Net cash provided by operating activities was over $300 million during the first nine months of the year, a strong improvement from approximately $225 million in the same period a year ago.

Third-quarter cash provided by operating activities was over $100 million and double that of third-quarter 2009. Capital spending including tooling was $188 million for the first nine months of the year, up from $127 million during the first nine months of 2009. And this increase in capital year-over-year is, again, largely due to higher spending levels required to meet the increased level of program launches around the world, particularly in markets like Asia, eastern Europe, and Mexico. After deducting capital spending from net cash provided by operating activities, free cash flow as we define it was approximately $125 million for the first nine months of 2010. Also in the cash flow, statement of cash flows in the investing section, reported as acquisitions of $165 million, which includes the Dytech ENSA emission business, the remaining 50% ownership of an engine joint venture in Europe and the final payment related to the 2009 Editech acquisition.

In the investing section of the statement of cash flows, we show the proceeds from issuing the $250 million of 4.625 notes issued in the third-quarter, the $30 million increase in our receivable securitization facility, and close to $200 million year-to-date purchase of approximately 5 million shares of treasury stock. There are more details on these transactions available in the 10-Q for your review, which, again, will be filed later in the day. The repurchased shares themselves are intended to be used to settle our convertible debt obligations when securities mature in early 2012. We currently have on hand just under 40% of the shares required to settle that convert when it matures. Additionally, our Board of Directors authorized the repurchase of an additional 5 million shares of common stock in July, which when executed would put us in a position to have approximately 80% of the shares required to meet the conversion in early 2012. We ended the quarter with $430 million in cash on the balance sheet, a portion of which will be used to continue to purchase the shares required to settle the convertible debt, which we talked about, and the remaining portion available for potential strategic acquisitions.

As a result of all this activity, strong cash flow generation by our operations, the ENSA acquisition, the share repurchases and the debt capital raised in the third-quarter, the ratio of balance sheet debt net of cash to capital was 24.8% at the end of the quarter compared with 17.9% at the end of 2009. Net debt to EBITDA on a trailing 12-month bass is one time at the end of the quarter. Now again because this convertible debt is clearly in the money, it converts at $32 a share, we're really looking at our capital structure, and I think you should, too, on an if-converted basis. And from that perspective our net debt to capital is about 14% at the end of the quarter and net debt to EBITDA is approximately 0.6 times. That is a pretty strong capital structure. Furthermore, the Company retains over $900 million of liquidity.

I think we can safely agree here that our balance sheet is in excellent shape. Let's look at our revised guidance for 2010. With another strong quarter behind us, good visibility for the remainder of the year, and a solid footing on our historical growth trajectory, we've raised our sales and earnings expectations for the third time this year. Should be a final time because next time we talk to you we'll be telling you actually what happened and we should get it right by then. Think so, Tim?

I hope so.

Yes. We now expect to earn $2.85 to $2.95 per share for the full year on a continuing operations basis, up from our previous earnings guidance range of $2.60 to $2.80 per share. We've also raised our revenue growth expectation for the year to approximately 40% versus 2009, up from 32% to 35% previously. And as Tim said, barring any catastrophic changes to the industry or the Company, this will be an all-time record for BorgWarner in terms of both sales and earnings in 2010. Tim reviewed the underlining market assumptions that support our guidance, so I'm not going to go over those, but let me quickly summarize, again, our volume expectations, as Tim mentioned, for a number of our major automotive markets has improved. We continue to see a mix shift in Europe toward vehicles with higher BorgWarner content, including diesels, and our penetration of the global market with our industry-leading technology continues to accelerate. Now let me go over the underlying financial assumptions of our updated guidance for you.

The debt -- the dollar to Euro exchange rate in our guidance is now $1.32, which is slightly higher than our nine month year-to-date actual performance and an increase compared with our previous guidance, which was $1.25, dollar to Euro. The change in the dollar-Euro assumption increased the sales by about 2 percentage points and earnings per share by approximately $0.05 to $0.07 compared with our previous guidance. With regard to raw materials, we still expect commodity cost increases to remain about $35 million year-over-year, consistent with our previous guidance, and as I mentioned before, our tax rate remains at approximately 22% for the year. For dilution related to the convertible debt and the associated hedge overlay, we expect to be about -- expect it to be about $0.16 a share for the full year. In other words, if we started the year off without that dilution, we'd have $0.16 a share more earnings in 2010 than we do now. Year-to-date dilution from that convertibles cost us about $0.11 a share.

From an SG&A perspective, we expect it to be close to 10% of sales for the year. For the first nine months it was about 10.2% and that percentage of 10% is actually slightly lower than what we had previously expected. We've increased our expectations for operating income margin for the year. We now expect the operating income margin for the year, excluding nonrecurring items, to be close to that 9% level for the year versus our previous guidance range of between 8.5% to 9%. If you remember, we started the year saying maybe 8.5%, increased to 8.5% to 9%, and now we're feeling pretty comfortable we'll be pretty darn close to that 9% level. And I want to remain you, while there's a lot of talk about peak margins from others in the sector, this is not a peak margin level for BorgWarner. And we will see further operating income margin expansion next year.

With regard to our other guidance items, R&D spending will likely come in below our targeted 4% sales rate, as we just can't spend as fast as the sales growth in this Company, which is a good problem to have. Capital spending is still expected to be in the $250 million to $275 million range and cash provided by operating activities less capital spending will be approximately $225 million, $250 million. Now kind of let me put all this in perspective for you as I've done for myself the last couple of days. If you look at our sales growth in the last three quarters versus the market, up 50% versus 39% in the first-quarter, up 52% versus 29% in the second-quarter, and now up 39% versus 10% in the third-quarter. That's an average year-to-date growth rate of 46%. And it becomes clearer that we're not just participating in a market recovery here.

We have the right products for the market of today and for the future and we are significantly exceeding general industry market growth. In addition, we have been able to leverage that industry-leading top-line sales growth with plus 25% incremental margins to generate record levels of profitability for BorgWarner in a market that is far from recovered. Just imagine the type of earnings this Company will be generating in the future as the global automotive market gradually recovers and we continue our historical trend of significantly outperforming the market in both top-line sales and bottom-line earnings. I think most of you know I've been with BorgWarner since the mid-1980s and I've never felt more bullish about the future of this Company. We believe our product strategy, focused on improving fuel economy, reducing emissions in the vehicle performance, is proven and sustainable for the long-term and our track record of managing the cost structure speaks for itself. We continue to remain focused on the key driver of this Company's long-term success and that's our people and our strong power train technology leadership. We are positioned both technologically and financially to remain at the forefront of the growth curve in this dynamic, growing industry. And with that, I'd like to turn the call back over to Ken.

Thanks, Robin. We'd like to now turn to the Q&A portion of the call. We'd like to ask the call coordinator to please announce the Q&A procedure.

(Operator Instructions) Your first question comes from Rich Kwas with Wells Fargo Securities.

Can you hear me?

Yes.

Hi, Rich, how you doing?

Hi, Tim, Robin. A couple quick questions. First on engine, in terms of EBIT margin. Very strong, you usually don't see a sequential uptick. How much of this is kind of onetime maybe in nature and related to mix, just better than expected mix versus things that are structurally improved?

Rich, this is Robin. As I said, the increase in operating income margin in this business is really a result of all the cost controls we have in place, the restructuring we've gone through in the last two years, and that strong top-line sales growth. As I said, this is not a peak margin level for us, we expect margins to increase from here. It certainly is a high level of profitability relative to a third-quarter, and as I said, you have to go back to 2004 to see this type of margin improvement. But there's nothing unique in this quarter or out of line that would suggest those margins are higher than they should have been based on the way this business is running. And again, if you look at where we've been year-to-date and our expectations for the fourth-quarter and again, these are not peak margins for us. We've said before that we expect margins to exceed our previous historical range of 8.5% to 9%, and this is just more evidence that that is going to be the case going forward.

Yes. Rich, you are also seeing increased penetration of the engine group in China, with very favorable sales and profits to go with it. This -- these numbers for the third-quarter, we are only seeing diesels at about, in Europe, diesels in Europe at about 51%, 52% market share and so those are just normal historical diesel penetration rates for Europe. So the -- like Robin said, it's actually an improvement in sales penetration across the board. And you're seeing the effects of better margins or, I'm sorry, the better cost improvements, which are helping our margins. But we haven't had the ecoboost kick in yet for the Ford North American business. That kicks in later this year, beginning of next year. We haven't seen DCT kick in in China yet. So we've got a lot of good tailwind coming at us in the future that will probably keep both engines and drive train margins in pretty good shape.

Okay. And then on mix as you look at Europe, big improvement this year. I know we have to wait until January for ' 11 guidance, but as we think about mix, is that going to continue to improve in Europe from what you know now?

Yes.

Yes. It will continue to improve. Diesels are going to continue to go up based on our forecast. I think you're going to see C, D and E segments continuing to improve on the luxury side, if for no other reason than exports alone are going to drive European -- improve European sales for the premium vehicles. And I think the premium vehicles in Europe are still strong as compared to maybe some of the other smaller vehicles.

Okay. Then a last question, big picture, Tim, with you as well as others achieving peak margins this year, how is the industry pricing behavior right now at the OEM level? Are you seeing any change in behavior?

Rich, before you answer that, I want to remind you once again, these are not peak margins for us, go ahead, Tim.

I said above peak, above historical average. Say that.

We will be doing better at margins. If I haven't said it, Robin certainly did. And I truly will say it. But-- what was the question again?

It was about pricing. The pricing -- .

The pricing pressure, yes. Pricing pressure is actually just -- is normal. We're not seeing any huge pressures that we haven't seen in the past, nor are we seeing anything that's really light in terms of pressure. I think in North America the OEMs are basically becoming, how should I say it, out quote for best. Profitable growth for all is their mantra. And I think Ford, GM, and Chrysler all realize that suppliers have to be profitable to invest in the future. And so we're seeing normal levels of pressures on pricing, but not abnormally high or abnormally low. I would say the same thing in Europe, there's a much better, for us, there's a much better focus on fuel economy technology, and emissions technology than there is on the last $0.01 on the price.

Okay. Great. Thanks.

Thanks, Rich.

Your next question comes from Brian Johnson with Barclays Capital.

Yes, just following up a couple things. A small point on Europe and then continuing on the strategic margin discussion. On Europe, are you benefiting from the steady growth of the LCV market over there? Do you see that in your mix. Are those typically -- do those kind of vehicles have Borg contents on them?

You talking about steady growth in light vehicles, or light commercial vehicles.

Light commercial vehicles (multiple speakers).

We're doing -- we're actually -- what I said in my little talk was we're continuing to see growth in the commercial market both medium, light, medium, and heavy. And we're actually seeing more growth in Europe or a little heavier growth in Europe than others. And the other statistic I can give you, out of our top 25 customers for new business that we're starting to have, that we've been awarded this year, so of all the new business we've been awarded this year, you take the top 25 customers, eight out of the 25 were basically light vehicle or light commercial vehicle programs, which represent about 40% of the total. And so we're seeing a lot more awards on light, on commercial vehicles and we're seeing more growth in Europe and North America.

And do you consider that when you do your revenue breakout commercial, or is that one of the -- .

Anything that's class five or above we consider commercial. If it's off highway, like cat or deer, we consider that to be commercial. So we have commercial, we follow a commercial truck. If we say commercial in general, it's kind of includes the off highway. And just to give you another factoid, for the third-quarter and roughly for the year, when you think that the classified trucks and above and the off highway vehicles, it's about, just a hair less than 16% of our sales and growing.

Second question is when we had lunch with you in Detroit at the, when it was beginning of the year, you basically said we'll never get over 10% margins, don't go modeling prior peak margins, be very cautious. Is it just the manufacturing -- what's really changed in your thinking on that? And how do we know that this isn't when Robin gets positive, it's time to get worried?

(Laughter) I will say this, I would say that I think we have sustainable margins and that -- and looking forward the 9% to 9.5% range sustainable. Can we peak from periods and quarters from time to time above 10%? Maybe. Maybe even if you look at on a sporadic basis, we may be above 10% probably. But on a sustainable range for the long-term, I'd say 9% to 9.5%, which is a lot different than what we said in the past, which was typically 8.5% to 9% or 8% to 9%. So I think we've kind of made a step change here at 9% to 9.5%, sustainable. Yes, we'll see peaks above 10%. It's just a matter of what quarters, what happens in the quarter, and how things lay out.

Brian, that's Tim's opinion. Give me a couple months here and when we release guidance for 2010, maybe I'll convince him that sustainable margins should be a little bit higher than we are making them.

Yes, well. I got to deal with the operating guy. He's got to deal with me.

Okay. Thanks.

All right.

Your next question comes from Colin Langan with UBS.

Thank for taking my question. Just one quick one on commodities. I think you said that the full year impact would be $35 million. It was $12 million in the quarter. What is the year-to-date number, because it's going to be much bigger in the fourth-quarter.

Year-to-date's about $28 million. So we're looking at about $7 million in the fourth-quarter.

Okay, smaller. Okay. And the second question, can you give some color on what kind of business you currently have in China? You highlighted four-wheel drive vehicles, is that -- kind of surprising to me with small cars being more prevalent there. Is it mostly turbos and four-wheel drive components or -- what is the China business?

Our over at China business is turbochargers, four-wheel drive transfer cases, and chain systems, mainly timing drive systems. Those are the three hot products right now that are driving growth in China for BorgWarner today. Dual clutch transmission will kick in next year, probably the latter half of the year. And cooling systems. We have fan and fan drives for cooling systems, which is one of our larger areas, but it's not growing as rapidly because we've been there. It's more mature and it's more stable. But with changes in emissions laws that are going on around the world, we will see tremendous growth on our engine products with chains, variable cam timing, turbochargers and DCT. And China will be probably the hottest market for that growth.

Okay. And in terms of the four-wheel drive transfer cases, I guess, it did say, I think, Asia in the press release. I mean, is that on commercial vehicles or -- I mean, it seems like a small car market so I'm surprised.

No, that's pickup trucks and mainly pickup trucks and larger size SUVs. Some of the smaller SUVs, well I call them smaller, but like the Ford Explorer SUV is now gone. It used to be a rear wheel drive platform with a transfer case. Now it's -- it will not be a rear wheel drive platform, it will be a front wheel drive platform that doesn't -- does not utilize a transfer case for all-wheel drive. But that's already taken into consideration on our growth curves.

Okay. And just last question. You highlighted the pretty clear outperformance with the market up 10% and your sales up 44% in the quarter. That's quite a big gap and it seems even larger than your backlog of, I think, for the full year was $570 million, would imply. What point does that get a bit more normal where the outperformance, I think historically, has been around 12%, 13% above the market rate. I mean, is that going to sustain for the next few quarters or that large spread kind of correct rather soon?

I think we'll probably -- we should talk about that when we give our 2011 guidance and we'll probably have a little bit, we can give you a little bit better detail on that. And I will just say this that we have a long-term strategy to outperform the market growth by 10% to 12%. So if the market growth for the global auto industry is 3%, we basically want to outperform it by 10% or 12% on top of that, which put us in the, basically in the 13% to 15% growth rate, which typically would be 12% to 15%, or I'm sorry, 10% to 12% above market growth. That is what is a very sustainable target for us.

Now if you look over the last number of years, if you take out 2008 second half and all of 2009, we actually had market growth that was pushing 14%, 13%, 14%, 15% comp on the annual growth rates depending on each year. But I think those growth rates are very sustainable because the world is focused on fuel economy and emissions and not only is it focused on that for light duty vehicles now, but -- as you've seen the recent proposed legislation, they're going after commercial trucks and off-highway vehicles, which is going to be another major plus for BorgWarner because our technology just slides right in on those markets also.

Let me help you as far as current expectations. I think most of the experts expect global production in the fourth-quarter to be basically flat and we've given guidance for sales of approximately 40% of the year. If you back into year-to-date in a fourth-quarter number, you'll see we're going to beat the pants off the market again in the fourth-quarter.

Okay. That's very helpful, thank you.

Your next question comes from the line of Chris Ceraso with Credit Suisse.

Thank you, good morning.

Hi, Chris.

So I think the case for downsized engines and turbos over the next five to seven years is pretty clear and pretty compelling. But maybe we can talk for a minute about the next phase when the hurdle gets a little bit steeper in terms of fuel economy requirements in this country and in other countries. A lot of the stuff in your portfolio, outside of turbo, yields relatively smaller gains in fuel economy, 2%, 3%, 5%, 10% type of gains. Obviously when you add a lot of that stuff up, it moves the needle. But what are you thinking about down the road in years, five to 10, are there things in your portfolio that you currently have or that you're thinking about adding that can add big changes in fuel economy for car companies as they start to think about the next phase?

Well, when you get out in like 2020 time period, which I think is a good point in time for what you're talking about, we estimate electric vehicles are going to be somewhere in the 5% to 10% range, maybe closer to 5% by my opinion. To be honest with you, that leaves 90% to 95% of the market using traditional power trains with downsized engines and fuel efficient transmissions. And hybrids fall into that category. Hybrids typically will be using all of our traditional products. So that still leaves 90%, 95% of the market. We are developing electric transmissions. We're in production now slowly with small volumes for some of these electric vehicle manufactures.

We're working on thermal management systems for battery cooling, because the battery on electric vehicles has to stay within a 10-degree range or else you start to permanently lose battery life. So we're working on not just air cooling of batteries, but we had the tech -- our core competency is thermal management using hydraulic cooling, because that's what we do with automatic transmissions with our control modules and so forth. So we have that. We're working on starting, I'm sorry, heating systems through [baruse] technology for cabin heaters on electric vehicles. And we're also working on new transmissions for hybrid vehicles on the commercial side of the industry.

We have technology for hybrid, hybrid technology to be used in these trucks that will be basically driven around on daily runs, whether the delivery trucks or some kind of a truck that stays within the city and then basically gets recharged at the end of every day, either as an electric vehicle or as a hybrid. So we're working on that kind of technology. So we have a lot of technology in the hopper. There are others on top of that, but those are the big ones.

So are you saying that by the time we get to 2020, roughly, that the gains that we can squeeze out of the internal combustion engine will be largely tapped out so that's why you're focusing on hybrids at this point?

No, I'm not saying it's going to be tapped out. I think that the efficiency improvements on internal combustion engines will make it very hard for hybrids, electric, more electric hybrids and electric vehicles to justify their existence on a price basis, because the traditional vehicles are going to improve their fuel economy because the technology exists. But there will be a part of the market that will be electric vehicles, and we will play in that part of the market. So we will play in all parts of the market, whether they're traditional, downsized gas or diesel engines, whether they're hybrid engines that would start-stop technology that use traditional gas and diesels engines and transmissions, or whether they're electric vehicles and we're developing new technology for electric vehicles. So we will have products for all parts of the market.

Okay. And Robin, one quick one on the margin. I understand the idea of getting leverage as new volume comes through and you've got a tighter cost structure so you can kind of punch above where you used to be able to go on margin. But in light of some new competitors coming in, is this the time where you'll be able to make those new highs or is it still two, three, four years away before those competitors are at a critical mass where they can influence pricing at the industry level?

I think we've always had some level of price constraint in the industry. If it's not a competitor with our product, it's a competing technology. And so that we face that competitive pressure historically. And as Tim mentioned, the pricing environment from a customer perspective hasn't changed much. And so we don't see any increased pressure from a competitive perspective that's going to impact our margins. If you look at, and we've said this before. The competitors that are looking to get into some of our major product areas, they're all well disciplined companies. They all have very profitable businesses, their margins are high on a relative basis for this industry. And they don't have a history of selling products at discounted levels on a consistent basis. They're in this to make money just as we are.

We think we've got one of the most competitive cost structures in the industry in our product areas. Given the size of our market position we certainly are cost competitive from a manufacturing perspective. So we don't see any more pressure on margins from pricing that we've seen historically. And so it is the leverage in our sales, it's the cost structure changes we've made through the restructuring that are going to drive margins above the 8.5% to 9% that they were historically. And again, Tim's 9% to 9.5%, he and I will debate that. You'll see who the winner is when we give guidance for 2011. I'd put my money on me, but we'll see.

All right. Thanks, guys.

All right.

Thanks, Chris.

Your next question comes from Ravi Shanker with Morgan Stanley.

Good morning. Tim, can you just talk a little bit more about the commercial vehicle opportunity here. I actually don't think you guys have been very vocal about it in the past. But it looks like with this potential ramp in volumes in North America and Europe coming supposedly next year and potential new regulations, as well, I think what you're seeing in the light vehicle set could well be playing out in the commercial vehicle side, as well. So can you help us frame the opportunity here, how big CV can potentially be as far as your revenues going forward.

It is going to be hard for me to predict how large it can be, because both markets will be growing fairly rapidly for us. It's like which one is gong to grow more rapid than the other so it will change the balance. But we -- traditionally up to now we've participated in that market with turbochargers and cooling systems, which are fan and fan drives for commercial vehicles. And we just recently in the last year or two have made in roads on like diesel EGR valves and so forth. But -- and we've done very well in that market, but obviously 75% of our sales are in the light duty vehicle market. But what's happening now is as the market or the regulations around the world, particularly right now in the United States, move towards regulating fuel economy emissions for on and off highway commercial vehicles, our technology that we developed for passenger car trucks or passenger car or light vehicle trucks or light vehicle passenger cars and downsized engines for 3 forward and 5, 6 cylinder engines, that technology is totally universal and is very adaptable and can be used as core technology to apply towards the commercial trucks.

Turbochargers and diesel turbochargers with variable turbine geometry and downsized engines, you're starting to see downsized diesel engines on commercial vehicles now. We have more sophisticated technology on turbochargers that we've developed for pass car market that they haven't really hadn't applied yet in the commercial market. We have the EGR valve for -- the technology that we're, I think we're becoming the technology leaders in that market. We just did the acquisition of ENSA, which gives us the inner cooler technology to cool the EGR valve and cool the inlet air on the turbochargers so that -- and we also have variable cam timing, which we use that technology on passenger car, downsized passenger car engines for improved emissions and better vehicle performance. But that technology, all of those technologies will allow us to focus, to take it towards, take those technologies towards commercial diesel engines. Now I think we are the best positioned Company for, to put together an air management system for not just passenger cars but also diesel engine.

When you have the turbocharger, you have the EGR value, you have the inner coolers, you have expertise on timing drive systems, although they use different technology, they have, we have the EGR technology and a variable cam timing technology, we can do a complete air management system as the air goes from the inlet to the engine to the outlet of the engine. And nobody's in a better position to do that for the commercial truck guys than we are. And up to now they've done their, they've designed their engines by just doing component approaches with individual suppliers and they never done a systems approach. And our strategy is to focus on the system, not just the components.

That's great color, but given the inter-changeability of the technologies between light vehicle versus commercial vehicles, is there a significant difference in content per vehicle there or is it pretty similar?

Well, typically the products are more expensive on a commercial side.

So better margins, too?

Well, I won't talk about that.

You have got be very vocal on margins right now.

Well, somebody is, somebody sitting on my right. But, he could talk about it, but I got to deliver it.

And just finally on that point, in addition to the industry growth and the penetration story there, is there a share opportunity as well? On the turbo side I think it's you coming to Honeywell again. And I think you're fairly similar positions, if I'm not mistaken. Is there a share growth opportunity there or is it more industry?

On the commercial side?

Yes.

Yes, there's a share growth opportunity. We're doing very well on the commercial side. I think we've focused on it very well and we are picking up share. I will tell you right now there's a big opportunity for BorgWarner on turbochargers in China on the commercial side. My estimate is that of -- although we're probably the market leaders on turbocharger volume in China right now for light vehicles or passenger cars or we're fast approaching that position, on the commercial side we're only, we only have 5% or 6% of the turbocharger market in China for commercial vehicles.

And that's a whole opportunity for us, which is one of the largest commercial vehicle markets in the world. We have tremendous opportunity with these [diesely geravels] and inner coolers, like I said earlier. That inner cooler acquisition we did, they've only focused in Europe and they only focused usually on passenger cars in Europe. We have the ability to take them globally on passenger cars and we actually have the opportunity to take them globally on commercial vehicles. So that's going to be a very strategic and a hopefully opportunistic acquisition for BorgWarner.

Great. Thank you.

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

Guys, I'll sneak two in real quick here. First, quoting activity for the last two years and a lot of parts of the car have been, has been pretty slow for a lot of automakers. Obviously they've been focused on other things. I was just wondering as we look at the current environment if there's been a ramp up in quoting activity. Now obviously you guys are outpacing the industry and doing a great job there, but it seems like the industry was stalled for the last two years and the quoting activity is picking up in general. I was just wondering if you were seeing that particularly in your parts of the car.

Yes, John, I don't have all the statistics. We typically track them a couple of times a year on how many quotes we do and all that stuff. But what I do have is a summary of our new business wins for this year and I'm seeing some tremendous increases in our wins, which is basically the amount of business we've been awarded in terms of dollars this year by quarter. And we're picking up some tremendous, we're winning some tremendous opportunities here. And it will -- these sales will show up in mainly 2011, the end of ' 11, ' 12, and ' 13, and ' 14. But it bodes well for the future of this Company because we're being awarded a lot of business right now and it will show up in the next, roughly, two to five years. Our backlog will -- I can't talk about the backlog yet because it's a little too early, but the kind of wins I'm seeing today for this year should bode very well for the backlog numbers one to two to three years from now. And I won't say anything more about backlog because we're going to talk about it in the next couple of weeks.

Got you. And then just one last question on China and specifically the pull in luxury vehicles from China out of Europe. It sounds like there's some pretty highly contented BMWs and Mercedes and other vehicles that are being exported to China. Was that a big impact in the quarter and how do you see that trending going forward and potentially benefiting your European business?

Actually the short answer, it was a big impact all year, not just this quarter, but it's been a big impact for this whole year. And I've been reading reports lately, I don't think, they may have come from some of you guys, but they also come from some of the reports I read from the OEMs and bottom-line is the European OEMs are targeting China as really a tremendous growth opportunity. I think BMW said that they wanted to be the number-one premium car seller in China and they want to go after Mercedes and Audi. So as long as those, all three of those guys keep fighting over China and the Americans start to go into China and start fighting over China growth, we're going to be a beneficiary because we're supplying everybody right now on the premium side with good turbochargers and variable cam timing and timing drive systems and transmission components, including dual collected transmissions out of Europe.

Great. Thank you very much.

Sure.

Thanks, John.

I'd like to thank you all again for joining us. I think Robin mentioned in his comments that expect to file a Q here before the end of the day, probably within the next couple of hours actually, which should provide some of the details for you of our results. But of course if you have any followup questions, please direct them to me. Angela, you can close out the call now.

That does conclude the BorgWarner 2010 third quarter results earnings conference call. Thank you for joining, you may now disconnect.