博格華納 (BWA) 2011 Q1 法說會逐字稿

Good morning, my name is Jannette and I'll be your conference facilitator. At this time I would like to welcome everyone to the BorgWarner 2011 first 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 the call over to Ken Lamb, the Director of Investor Relations. Mr. Lamb, you may begin your conference.

Thank you Jannette. Good morning and thank you all for joining us. We issued our earnings release this morning at approximately 8.00 AM Eastern time; it is posted on our website BorgWarner.com on our home page. A replay of today's conference call will be available through May 5, the dial-in number for the replay is 800-642-1687. You will need the conference ID which is 58609412. The replay will also be available on our website.

With regard to our investor relations calendar we will be attending a number of conferences over the next few months. On May 9, we will be at the UBS Mini IR Conference in New York. On May 10, we will be at the Wells Fargo Industrial and Construction Conference also in New York. On June 1 we will be at the KeyBanc Automotive and Industrial Conference in Boston. And finally on June 14, we will be at the Deutsche Bank Industrials Conference in Chicago.

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 on our 10-K. Our actual results may differ significantly from the matters discussed today.

Now moving onto our results. Tim Manganello, Chairman and CEO will be providing comments on the first quarter and industry trends and then Robin Adams, our CFO, will discuss details of our operating results and also our outlook for the rest of the year. With that, I will turn it over to Tim.

Thank you Ken and good day everyone. Today I'm very pleased to review our first-quarter results and accomplishments. I will also be commenting on the state of the industry and our guidance for the year.

But first I would like to say that our thoughts and prayers are with our Japanese employees, customers and friends for the devastating disasters that they have had to endure. I am proud that they have helped each other and helped BorgWarner during this very difficult period. Also, I am pleased to report all of our employees are okay. All of our production plants in Japan are okay and unharmed, and our total Japanese supply base can cover BorgWarner with an uninterrupted supply of parts. BorgWarner Japan is open for business thanks to the hard work and dedication of our many BorgWarner employees throughout the world, especially our Japanese employees. Next, I would like to thank all BorgWarner employees around the world for a great first quarter.

Now I will begin by briefly highlighting our first-quarter results. We kicked off the year with a strong first quarter. Sales reached $1.7 billion, up 34% from the same period last year. Our reported operating income margin was 10.4%; excluding the Haldex acquisition, it was 10.8%. US GAAP earnings were $1 per share, significantly higher than the $0.63 per share posted 1 year ago.

Our strong results were driven by 3 key drivers. Number 1, increased global demand for our products. 2, higher volumes on are based business. And 3, well executed cost controls. And every major region of the world, automakers are adopting our leading-edge powertrain technology at a rate that outpaces vehicle production.

So let's take a look at the first quarter results at the group level. In the Engine Group, first quarter sales were about $1.25 billion, up 38% from last year. Growth in the engine timing systems, turbo systems and fan drive systems drove our exceptional results. Engine timing system sales were up with Ford and Chrysler North America and with several OEMs in China. Turbocharger sales were also higher.

In North America the Ford EcoBoost engines are ramping up, that's the 6-cylinder that we're on for the rear-wheel-drive and will soon be shipping and making 4-cylinder EcoBoost engines and turbochargers. In Korea, our turbocharger technology is gaining appeal. And Europe, turbocharger penetration is once again on the rise. Diesel share is increasing along with adoption of gasoline turbochargers.

Also the commercial vehicle market is experiencing a resurgence in North America and Europe. As a result, sales up fan drive systems are accelerating and fan and fan drives help our customers meet tough emissions regulations and improve fuel economy. Both are major issues for truck fleets and off-highway vehicles, and we've helped improve their results. Of course, ENSA related sales also contributed to our year-over-year growth.

In the Drivetrain Group sales were about $486 million, up 26% from last year. Higher organic sales at Drivetrain was the result of growth in 3 key areas. First in our 4-wheel drive business across Asia, second in DCT module sales in Europe and third in global sales of traditional automatic transmission components worldwide. Also the Haldex acquisition boosted our sales. However, our Drivetrain profit margins were down due to operating issues that we expect to improve throughout the next 2 quarters. Additionally R&D expenses also added to the operating margin drop and that was -- those R&D expenses to support strong transmission sales, which we expect to see in China as we go forward. And also we had extra costs due to the Haldex acquisition.

Now at the corporate level, capital spending continues to grow and was about 4% of sales in the quarter. We also repurchased 2.5 million shares of common stock in the first quarter. We have accumulated all the shares required to settle our convertible debt application due in April of 2012. Finally, we continue to invest for the long-term and are spending for R&D, and new program launches was about 3.5% of sales. This is slightly below our target level of 4% but an increase from 3.3% a year ago.

Now in addition to our strong financial performance, I'd like to share a few noteworthy business wins by our team. BorgWarner is supplying our latest variable CAM technology for 2 new Subaru Boxer engines. They are 2.5-liter engines which features our award-winning Cam-Torque Actuated or also called CTA technology, compared with various models or previous models, this engine has 4% to 6% better fuel economy.

Now their 2-liter engine introduces our new CTA or Cam-Torque Actuated variable Cam technology with the new mid-position lock. This new technology was a finalist just recently in the 2011 PACE Awards, which we're very proud of, and allows more precise control of variable valve timing and it delivers up to 10% better fuel economy. And both engines meet US super-ultra-low emissions and Euro 5 emissions standards.

Now at the agricultural market, we supply turbochargers for the new Deutsche 6.1-liter heavy-duty diesel engine. Our advanced turbocharger technology provides outstanding performance and significantly better fuel economy. Most importantly, our turbochargers help Deutsche comply with tough Tier 4 interim emissions standards.

Now shifting gears, I would like to make a few comments on the broader auto industry. Global production was higher in the first quarter compared to year ago and Robin will go over more of the details in a moment. But in summary, global production growth was higher in all major regions of the world except Japan.

A closer look at Europe, reveals that the mix of vehicles continues to shift in BorgWarner's favor. Europe is our largest market at 57% of sales now. And C, D, and E segment vehicles represent nearly 68% of vehicles produced in Europe in the first quarter. That is 3 percentage points higher than the first quarter of 2010. Diesel penetration in Europe is also on the rise, which is a key indicator for our turbocharger and our diesel cold-start business growth. Also the diesel engine market share, which was up a few percentage points from a year ago, was essentially flat with the fourth quarter 2010.

So now let's look at the auto industry and our industry for 2011. Our outlook for the US, Europe, and China has improved since the fourth quarter call, which we did last February. We expect US production at 13 million units. Europe at 19.2 million units, and China at 16.5 million units. All of these estimates are higher than our previous guidance last February. In Europe, the vehicle mix will continue to shift towards higher BorgWarner content vehicles, including diesels. This is a continuation of the same trend we saw in Europe in 2010.

Now in Japan, we expect sharply lower vehicle production in the second quarter. The Japanese OEM production could be around 50% or 65% Japan as compared to their normal production, but nobody knows for sure. However, BorgWarner expects to run 65% to 75% of our normal production in Japan because we are shifting to China and Korea for some of our product. And in addition, we expect the Japanese OEMs to have higher production rates in the second half of the year. For the full year we expect US buy-ins in the US, Europe and China to offset lower buy-ins in Japan.

Now we continue to expect strong growth in the commercial truck market in 2011 as well. Truck production is still expected to grow nearly 35% in North America over 30% in Europe, and about 10% in South America. All of these developments are good news for BorgWarner. Our commercial vehicle business is largely based in these 3 regions and in addition, we are focusing more efforts on the commercial vehicle market in China where we expect to gain major share.

And finally, our earnings guidance for 2011 is unchanged. Our earnings guidance remains $3.85 to $4.15 per share in spite of Japan. We still expect our operating margins to be a minimum of 10.5% for the year. Sales growth in 2011 compared with 2010 is now expected to be 19% to 23%, up from 16% to 20%. The change is primarily due to the Haldex acquisition and improving market conditions.

We understand that there is concern about the global impact of the disasters in Japan and it is very difficult to predict the final results. But we have thoroughly investigated this issue and we expect the impact on our business to be limited, as vehicle demand in our largest markets, Europe, North America, Korea, and China remain strong and is growing.

Longer-term the demand for our technology continues to gain momentum. BorgWarner, as you all know, has been synonymous with improving fuel economy and lowering emissions. Both of these are major long-term trends in the global auto industry. And as a result and as I have said many times, the high demand for our leading-edge technologies will continue to drive solid BorgWarner growth for many years to come.

Now finally, and as I said at the beginning of my comments about the situation in Japan, our thoughts and prayers are with our employees, friends and business partners in Japan. It's hard to imagine dealing with the difficulties they have had to face every day, but they don't have to do it alone. BorgWarner has pledged $150,000 to relief efforts, combined with an additional donation of $50,000 from our employees. The Japanese people are strong, hard-working and resilient and we are pleased to help them with their rebuilding efforts.

Before we go into questions and answers, I would like to turn it over to Robin now to continue on and discuss our strong quarter.

Thanks Tim and good day to everyone. Before I begin my review of the financials, I would like to review the macro environment quickly for the industry in the first quarter and to put the performance we had in the first quarter -- it was record performance, in perspective. As Tim mentioned, first quarter global production was about 18.6 million units, up about 5% from the first quarter of last year; down 2% from the fourth quarter. So sequentially, actually production was down; our sales were up dramatically.

Year-over-year our reported sales were up 35%. The impact of foreign currency year-over-year was immaterial in the quarter. However, we do have 2 businesses providing sales in the first quarter this year than we did last year, primarily Haldex and the ENSA acquisition, which we acquired in the second quarter of 2010. And excluding those acquired sales, the year-over-year increase was 26%. Now that is 21 percentage points better than the 5% year-over-year growth in the global vehicle market, and another quarter where our sales growth significantly outperformed the global vehicle market, and that really is the story of BorgWarner.

When you look at sales from a regional perspective, our sales growth in the first quarter outpaced the market in every major region of the world. In the US sales are up 20% versus first quarter last year, while the market was up 15%. In Europe, excluding currency and acquisitions, again our sales were up 27%; the market was only up 8%. In Korea our sales were up 31%, production was up 14%. In China, sales were up 24%, production up 9%. So clearly our backlog of net new business, the growth of our leading-edge technology products continues to penetrate the market and continues to differentiate BorgWarner from the rest of the industry from an overall growth perspective.

If you look on a sequential basis as I said, looking at the first quarter versus the fourth quarter, our sales were up 8% excluding currency and acquisitions, the global market was down 2% so we outperformed the market sequentially by 10 percentage points. If you look at our sales by geography in the first quarter, sales -- this is on a consolidated basis, sales from the US represented 24% of our total sales; Europe represents 57%. Asia 15% of our total sales of which 6% is China. Our sales in Japan, consolidated sales, were about 2.5% of our total sales in the quarter. And if you look at total sales to Japanese customers around the globe including sales that take place in Japan, that's about 4% of our sales in the first quarter. To give you some perspective from a geographic relative sales perspective, where our sales are taking place, and again the vast majority is still in Europe.

As we look at the earnings per share as Tim mentioned, our US GAAP earnings were a record $1 per diluted share and that is an all-time record for the Company. First quarter 2010 results were $0.63 a share, which included a nonrecurring tax related item. We've identified that in the table in our press release and we traditionally provide this table and the press release to help you reconcile reported US GAAP earnings measures with the financial performance of the continuing operations of our Company and to help you in comparing these results with the results of other periods. And as always, this is an important part of the press release and we encourage you to review this information. If you exclude the nonrecurring item in the first quarter 2010, first-quarter earnings per share was $0.65 per diluted share, which puts first-quarter 2011 up $0.35 a share versus last year or 54%. Very strong performance.

Looking at the rest of the income statement, gross profit as a percent of sales was 19.8% in the quarter, that's 130 basis points higher than the same period a year ago and relatively flat with the fourth quarter of 2010. Looking at the year-over-year; improvement in the quarter was realized obviously as a result of the strong sales growth we have and the operating leverage in this business offset by about $9 million of higher raw material prices that we experienced in the quarter. If you look at the incremental margin year-over-year, strong performance excluding the Haldex acquisition. Close to our -- a little over our 20% target; and I'll go into that in a little bit more detail.

SG&A expenses were 9.5% of sales in the quarter, $165 million versus 10.1% in the first quarter last year, so we continue to see the operating leverage in the business reflected in our SG&A as a percent of sales. If you look at the -- I think last year we were targeting a little bit below 10%; 9.5% is again a great performance.

If you look at the increase year-over-year in the quarter -- $35 million, more than half of that was related to increased R&D spending, as Tim said already. And a good portion of that was in the Drivetrain part of the business to support additional new clutch-transmission projects that we're working on. If you look at R&D in the quarter, as Tim mentioned, it's 3.5%, an increase from 3.3% a year ago and 3.3% in the fourth quarter. So it is trending towards our 4% target and again by the end of the year we expect to be close to 4%, R&D as a percent of sales.

If you look at the -- again the year-over-year improvement in growth, both gross profit and SG&A as a percent of sales and really it reflects the effectiveness of our past restructuring activities, a continuing well executed cost control program and the benefit of our operating leverage as our sales growth continues to grow momentum and significantly outperform the growth of this industry.

Operating income in the quarter was $179 million, compared with $107 million a year ago. And again, if you exclude the impact of currency, which was minimal in the quarter, and the ENSA and Haldex acquisitions, which were not included in our first quarter performance, the year-over-year incremental margin was about 21%. As we said when we started the year, we were expecting about $0.20 on the dollar incremental income year-over-year, and first quarter we nailed it on the head -- actually gave you a little bit of extra; one percentage point. Right Tim?

And this is in-line, again with the expectations and the strong performance on a relative basis for this Company. Let's look at that incremental markdown on a sequential basis from fourth quarter 2010 to first quarter. As I said, sales were actually down in the industry first quarter to fourth quarter, but our sales were up despite that decline in the market. Our sales were up 8%. On a sequential incremental margin, if you look at comparable sales growth -- that 8% comparable sales growth excluding acquisitions, our operating income was actually about 17% incrementally on a sequential basis. And as we've said before, we expect that incremental sequential trend to decline as we put more R&D investment in this business, and we've replenished the infrastructure to grow the Company.

As Tim mentioned, our operating income margin in the quarter reported was 10.4%, however this does include transaction fees and purchase accounting adjustments related to the Haldex acquisition. If you exclude the impact of Haldex in the quarter which again as you remember, was not included in any of our original 2011 guidance of sales, income, or margin. If you exclude that, our operating income margin was actually 10.8% which is more in-line with our 10.5% plus for the year and it's a great start for the year from a margin perspective. If you look at the Haldex related transaction fees and purchase accounting adjustments, these are expected throughout the year to offset most of the operating income generated by Haldex in 2011.

As we've said before, when we announced the acquisition of Haldex, their operating income margins are pretty much in-line with BorgWarner margins, but the additional purchase accounting adjustments, which we weren't sure where they would fall out again, would have an impact on reported margins for that business. And we've completed the analysis and thanks to our accounting friends, the amortization of excess purchase price on a non-cash basis is eating up quite a bit of a of the good profit being generated by that business. Accounting does report to me so it's my fault as well. So if you look at the year, we will report higher sales from Haldex, as Tim mentioned, we've upped our guidance as a result of that, but very little income because of the purchase accounting and transaction costs on this transaction.

So on a margin perspective throughout the year, Haldex will be a slight drag on our all-in margins, operating income margins, and we are going to have to exclude it on the incremental margins to get you to understand what's truly happening in our base business going forward. But whether you include Haldex in our margins for the year, or exclude them for the year, it doesn't make any difference. It's a great start for what we believe will be a record margin year for BorgWarner -- a record sales year and a record earnings year and just another great year for this Company.

As you look farther down the income statement, equity and affiliate earnings was $8.4 million, down slightly from $9.3 million a year ago. Now as we've said before, and I think most of you know, our equity affiliate earnings primarily reflects the performance of our Drivetrain systems 50-50 joint venture in Japan, NSK-Warner. And that is the -- part of our Drivetrain business that primarily services our Japanese customers for transmission products in the Asian market; Japan and China.

If you look at what happened in Japan -- first of all I should let you know that our financial numbers for NSK-Warner is reported on a one month lag. So actually, that $8.4 million reflects our share of their earnings for the 3 month period ending February 28, which is the fiscal quarter for NSK-Warner that we report. So if you look at the first quarter, actually there was no impact in the numbers as a result of the disaster in Japan that occurred in March. And we'll see the effects of that tragedy on affiliate income line in the second quarter and beyond for the year.

Actually if you look at production in Japan for the 3 month period ending February 28, vehicles produced were down about 7%, which is why the affiliate earnings were down in the quarter; $8.4 million versus $9.3 million. Again, we will see the impact of the tragedy in Japan and the affiliate earnings line in the second quarter which will be about break even at best for us, and we will continue to see below year or prior-year levels of affiliate income in the third and fourth quarter of the year as we struggle to get back to normal levels in our operations -- or actually more of our customer operations, our operations are fine. Our customer operations in the third and fourth quarter of this year.

Interest expense and finance charges were $18 million in the quarter compared with $14 million a year ago and that's primarily due to higher debt levels, and a discount on a note receivable we took related to an insurance settlement in the quarter, which is detailed in our 10-Q which will be filed later today. We settled with an insurance carrier and the settlement includes some payments over a period of years and we had to discount those payments to a present value and the difference we took as expensed interest in the quarter. About $1.5 million.

If you remember, in the third quarter 2010 we issued $250 million of 4.625% 10-year senior notes and that is the additional interest expense we are seeing in the quarter this year versus the first quarter last year. Provision for income taxes was $41 million in the quarter, so the effective rate of about 24% shouldn't be a surprise to anyone; it's pretty much within the range of our expected effective tax rate that we gave for the full year.

Net earnings attributable to non-controlling interest and again, formally known as minority interest, was at $5.2 million in the quarter. It basically wasn't materially different from the first quarter last year or sequentially from the fourth quarter. And to remind everyone, that line item reflects our minority partner share in the earnings performance of our Korean and Chinese consolidated joint ventures and we're the majority owner.

That brings us back to net earnings line item, which were $124.5 million in the quarter, compared with $76.2 million a year ago. And as we've done for the past year or so, at the bottom of the press release on the income statement page, you will find additional information related to how we calculate diluted earnings and diluted earnings per share. And again, this diluted calculation is impacted by the if-converted accounting for the convertible debt we issued in April 2009. And as Tim mentioned, this convertible debt matures finally one year from now and I look forward very much so to getting rid of this convertible accounting treatment and getting this behind us. It drives me crazy.

The convert is deeply in the money today as we've said before, and as Tim mentioned, we've already acquired all the shares required to satisfy the maturity. Unfortunately, we can't just deliver the shares to the bond holders today and get rid of this thing; we have to wait until April of next year to deliver the shares and retire the debt. In the meantime, we are reporting about $0.05 a share per quarter less EPS than we normally would as a result of this accounting treatment. And again, that will go away next year and Ken and I both will be thrilled when we don't have to talk about this anymore. Using the current if-converted accounting treatments, we earned again $1 per diluted share, an all-time quarterly record for BorgWarner and again up 54% from the first quarter 2010, this is another quarter of BorgWarner. A very strong earnings performance by the Company which continues to be quarter after quarter after quarter here.

Now let's look at our operating segments. The Engine segment sales were $1.25 billion in the quarter excluding currency and sales related to ENSA again, which we purchased in April of 2010, so on a comparable basis Engine segment sales were up 30% compared with the first quarter 2010, and this is a record for the Engine business. As Tim mentioned earlier, we are seeing strong global growth across the Engine segments portfolio; most notably turbochargers, variable cam timing products, engine timing systems and fans and fan drives. Adjusted EBITD for the Engine Group was $186 million in the quarter, or 14.9% of sales; again another record for the Engine Group, sharply higher than the 11.8% adjusted EBITD margin reported a year ago and an improvement from the 4.5% adjusted EBITD margin reported in the fourth quarter 2010.

The year-over-year incremental margin, again excluding currency and assets was 27%, and on sequential basis or when comparing the first quarter to the fourth quarter, Engine sales were up 9%, and again in the market that was down 2%, and the segment's incremental margin on a sequential basis was up 19%. The Engine segment continues to perform very, very well, and you can see it in the numbers here.

Let's talk about the Drivetrain segment. Sales were $486 million in the quarter in the Drivetrain segment. And if you exclude the sales related to Haldex and currency, that is an increase of 17% compared to the first quarter 2010 and again, the market is up 5% so 12 percentage points stronger than the market on a comparable basis. On a reported basis, adjusted EBITD was $32 million or 6.6% of sales, which looks a little weak but I'll help you understand it wasn't as weak as it looks. This is down from the 9.5% adjusted EBITD margin reported in the first quarter 2010, and also down from the 7.6% margin reported in the fourth quarter. However, that is on a reported basis.

If you look at the first quarter 2010, it actually includes a net loss of $4 million relating to the Haldex acquisition, primarily driven by transaction costs in the quarter and a little bit of a purchase accounting adjustment. Again, if you look at a comparable basis excluding Haldex and currency, the Drivetrain's adjusted EBITD margin was approximately 8% in the quarter, which is actually higher than the fourth quarter of last year on a sequential basis but still a bit behind the first quarter last year.

As Tim mentioned, Drivetrain segment had a significant increase in R&D spending in the first quarter of this year versus last year to support new DCT programs. And if you look at it as a percent of sales, R&D as a percent of sales for Drivetrain was 3.1% in the quarter this year versus 1.4% in the first quarter last year. And that 1.7 percentage points differential in R&D spending pretty much covers the gap -- the remaining gap from the first quarter 2001(sic) margin excluding Haldex, which again I said was 8% versus the first quarter last year which was 9.5%. So excluding Haldex, and putting R&D on a comparable basis, first quarter 2001(sic) margin was actually slightly higher than first quarter 2010. First quarter 2011 was higher than 2010, sorry.

However, we did have sales growth in the quarter year-over-year. And stripping out the Haldex acquisition, this sales growth still only provided a little bit less than 10% incremental margin. And as Tim mentioned, the incremental profitability on this business -- so we would expect it to see actually on an apples-to-apples basis higher margins from Drivetrain in the first quarter, but it was held back by operational efficiencies in our European operations. If you look at the first quarter on a sequential basis, again excluding Haldex, sales were up 14% relative to a market that was down 2% so actually on a relative basis much stronger than the Engine side of the business. And the incremental margin was about 13%, again impacted by these operating issues in Europe, as Tim mentioned. We'll focus on getting those corrected.

So that's the segment data. Good strong performance on a comparable basis by both business units. And again the Drivetrain business performance was a lot better than it first appears on the face of the statement. If you look at the balance sheet and cash flow, our net cash use and operating activities was about $40 million in the first quarter and down $106 million from the first quarter a year ago. And as we've said before, the first quarter of each year is typically a challenge from a working capital and cash flow perspective because of the significant increase in business activity. If you look at the first quarter this year; investment working capital is considerably higher in the quarter as we ramp up to match significantly higher levels of business versus the end of last year.

If you look at sales just in the month of March alone, this year versus December of last year, sales were up over $200 million, close to 50% in March than they were in December. As we know, this sales increase sits on the balance sheet and is really what drove the higher level of working capital in the first quarter this year versus last year and we will see this correct itself by the end of this year and we will recover this working capital.

So we are still on target to meet our full-year guidance of $600 million of cash provided by operating activities and it's just a timing issue here, and I'll take the strength of sales and operating income in the first quarter and short-term penalty for working capital any day of the week. As you look at capital spending in the quarter, it was $70 million, up from $55 million the first quarter of last year and the year-over-year increase is indicative of the growth in capital spending. We'll see that's required to meet the increased level of program launches we have around the world, particularly in markets like Asia, Eastern Europe, and Mexico. And we're still targeting about $350 million of capital spending for the full year.

So if you look at the first quarter, it was as typically it is a challenge from a cash flow perspective but despite this we still expect to generate strong free cash flow in 2011. Again, cash provided by operating activities of about $600 million, capital spending of about $350 million that generates about $250 million of strong free cash flow available for stock repurchase, acquisitions and so on throughout the remainder of 2011.

Looking at the balance sheet itself, the balance sheet debt increased by $250 million from the year end, while cash decreased about $227 million in the quarter. And again this approximately $450 million or so increase in net debt was primarily due to the acquisition of Haldex Traction Systems, which was approximately $205 million. As Tim mentioned, we purchased over $180 million of stock in the quarter and as he said as of today, we have 100% of the shares required to settle this convertible and I can't wait until April of next year to get this thing behind us.

Capital spending was $70 million and cash used in operating the business primarily related to the significant increase in working capital, drove the need for increased debt in the quarter.

As you look at the capital structure, the ratio balance sheet debt-net-of-cash was about 34% at the end of the quarter compared to 24% at the end of 2010. Net-debt-to-EBITDA on trailing 12 month basis was about 1.4 times at the end of the year. And again because this convertible debt is essentially taking care of, it still sits our balance sheet for the next 12 months but it's basically it's taking care of. We view our balance sheet and capital structure on an if-converted basis and we encourage all of you to do the same. And from that perspective, our net-to-capital was about 24% at the end of the year, and net-debt-to-EBITDA was approximately 1 times. And our capital structure remains in excellent shape as it always has at the end of the quarter.

Tim talked about the guidance for 2011; I'm going to move on to guidance for 2011. Despite the unfortunate circumstances in Japan and its effect on our industry, our expectations remain essentially unchanged from guidance given during the last earnings call in February. However, we are now including the Haldex transaction business in our full-year guidance. So sales growth as Tim mentioned, has been increased approximately $200 million; it's real easy, but to 19% to 22% growth in 2011 versus 2010 versus 16% to 20% previously. As Tim mentioned, earnings per share we're going to stay within the range of $3.85 to $4.15, which is an increase of 27% to 37% versus last year.

As we've said, the Haldex acquisition will be a push from an EPS perspective due to transaction cost this year and purchase accounting expenses, which will offset most of the operating income being generated by this business.

The negative impact we expect from our NSK-Warner joint venture in Japan, which I said basically would be break-even in the second quarter, continue to have year-over-year comparison short falls in the third or fourth quarter. That short fall in earnings is expected to be offset by more growth and better performance in our consolidated business and our other geographies around the world.

We do have a change with respect to the impact of raw materials implicit in our guidance. After reviewing the most current information, we now believe that raw materials will have an unfavorable impact of $35 million to $40 million in 2011 and that is up from our previous expectation of $30 million to $35 million. And again that increase in raw material prices, we're going to suck that up and that will not have any negative impact on earnings expectations for the year.

If you look at the sales growth and earnings ranges for year-over-year it still implies incremental income excluding Haldex -- income margins of 20% in-line with our target for the year, and which is well above historical levels of that 15% to 20% incremental -- on incremental sales.

So to summarize the quarter, I think the first quarter was another string of strong quarters for BorgWarner. Another record from a sales perspective, another record from an earnings perspective, another record from an operating income margin perspective and we don't believe we are stopping with the first quarter. Despite the overhang in the industry, our expectations for the year are largely unchanged. And as Tim said before, our thoughts are with the people of Japan, our customers and our employees as they continue to rebuild in the aftermath of the disaster.

This industry has always been resilient and we are confident that its participants will do what needs to be done to support the strong demand for vehicles around the world. And while there may be disruptions in the second quarter and some through the remainder of the year, we believe they will be short-term in nature and will not affect the short-term financial performance of BorgWarner, nor will it affect the long-term process of this industry or the long-term value of BorgWarner stock.

If we look beyond 2011, we see catalyst for growth around the globe, an increasing string of regulatory environments, rising fuel costs, and the evolution of powertrain technology in the developing markets of the world, most notably China. And all of these should drive growth for BorgWarner beyond levels of growth that we are seeing today.

Our product strategy focused on improving fuel economy, reducing emissions, and enhancing vehicle performance is proven, reconfirmed every quarter, and well aligned with the direction of the industry. Our focus remains on the key drivers of this Company's success; technology leadership, global expansion, financial discipline, and attracting and maintaining a talented workforce around the globe. In these times of rapid change, the industry will rely on companies that are able to provide vision, innovation, and leadership, all of which are core attributes of the BorgWarner culture. And with that I would like to turn the call back over to Ken.

Thanks Robin. We will now turn to the Q&A portion of the call. I will ask the call coordinator to please announce the Q&A procedure.

(Operator Instructions) Your first question comes from the line of Rich Kwas, Wells Fargo Security.

Thanks for the color on Drivetrain, very helpful. I wanted to ask about DCT launch costs in China, I know that was a headwind in Q4 and it was expected to be a headwind throughout this year, how is that trending and what was the impact here in Q1?

Rich, the costs are still there but on a sequential basis they are relatively consistent and so there wasn't much to talk about. I mean they're up a little bit from the first quarter last year but that's being absorbed by the growth of the business. Our biggest challenge was the increased R&D related to the growth of other programs, not just getting this facility ready in China. And again, some of those operational challenges we have in Europe.

Okay and then Tim, could you just comment on business wins in the quarter, You said last quarter -- you said Q4 was the best ever for the Company. How does Q1 shape up and then if you could comment on quoting activity?

Quoting activities continues to be really strong. Our business wins in the first quarter were on the high side of normal. They were a little bit less than the fourth quarter but tremendously higher than what we've seen and within what we've seen typically in the first quarter. So for our first-quarter run rate, the business wins look really good. We tend to get -- we've been tracking over time now that there tends to be some seasonality in the run rates and the fourth quarter is always a good strong quarter; the first quarter is a little weaker but this is probably one of the strongest first quarters we've had a long time.

Okay great, and then just last question. In terms of guidance here, I mean you're losing a fair amount with the equity line item -- equity JV line item that is being offset by some strength in the consolidated ops. I mean as we look at it all else equal, you would have raised guidance without kind of a Japanese situation. Are there any costs associated -- incremental costs in terms of expedite freight and that type of stuff that's going to impact you for the rest of the year?

Yes Rich, you're right. When you look at the impact of that NSK-Warner affiliate without that, we certainly would have been raising guidance for the year. But we will have a little bit of a challenge from time to time. As we said we will see some maybe some short-term disruptions here in there, but again, we think the strength we have in the business from a sales perspective and the operating performance throughout the business, both on the Engine side and also Drivetrain components wasn't that bad. We had a little bit of issue in Europe but they'll get that straightened out. I think that's going to be more than enough to offset the negative impacts that we will see this year from that tragedy in Japan.

Okay great. Thank you.

Your next question comes from John Murphy, Bank of America.

Just a follow-up to that guidance question, it looks like if you didn't have the impact at NSK-Warner and the disasters in Japan, which are incredibly unfortunate, that you would be raising guidance maybe in the $0.15 to $0.20 range. Is that a rough ballpark decent range to be thinking about?

I'm not going to comment about the range but I will tell you this, until Japan happened, Robin was in my office saying -- hey, we've got to really look at guidance because it looked like the preliminary results in the first-quarter were going to be much stronger than we expected and consequently, yes, we probably would have increased guidance if it hadn't happened -- if Japan hadn't happened. The only thing that was stopping us at the time was it wasn't at the end of the quarter and, number two, I said -- hey I wanted to at least get through the first quarter before I do anything for the rest of the year.

Okay and Tim, just a follow-up on Japan also is -- you mentioned that your facilities might be running as high as 75% but the Japanese manufacturers are running somewhere in the 50% to 65% range over there. Are you seeing them making up some production in overseas plants that they would've otherwise produced in Japan or is that non-Japanese parts that you are supplying to other non-Japanese manufacturers outside of Japan?

The reason our Japanese plant, and I'm talking about the one that's fully owned by BorgWarner and the chain side of the business now, not NSK-Warner. The reason we are doing better, our uptime is better, is because they are supplying parts to BorgWarner in Korea and BorgWarner China and some parts to BorgWarner, a little bit of BorgWarner in Europe and North America. Because they are a supplier to other parts of the world that are growth markets, they are seeing stronger sales than the typical Japanese market would demand. Do you understand what I'm saying there?

Yes, they're growing fast. I mean those guys are growing fast.

They are supplying other parts of BorgWarner that are growing significantly at higher rates. So they're not just supplying -- that plant in Japan wasn't just supplying Japanese OEMs. They are supplying other parts of BorgWarner that were supplying Hyundai, Kia, the Chinese OEMs, whether they're GV's or domestic and so forth. And we also used them, since they had some capacity, we used that plant to supplement and add volumes to some areas where we're tight on capacity in North America. So they're supplying chain -- they are backfilling our production in chains and so forth out of Japan in areas where we were tight in North America.

Got you. And then just one last question specifically on Drivetrain. The margins -- the incremental margins there were a little bit lower and you talked about a lot of the factors including the DCT launch. If we were to take a look at the base business without the new business backlog rolling on, would you be looking at incremental margins that are much higher? I mean I think you were talking about 13% in Drivetrain and 27% in Engine incremental year-over-year. I mean that includes a lot of new business that's rolling on, including sort of this pressure from new business investment. I mean in your base business, as lines are growing, are we looking at incremental margins that are far north of 20%? Have you had a high class problem of pressure growth?

No. As we have said before, quarter-to-quarter is slow but difficult but on an annual basis we are expecting our incremental business to generate incremental margins of anywhere of $0.15 to $0.20 on the dollar. $0.15 in developed parts of the world, $0.20 in underdeveloped parts of the world. That incremental margin when you do the math gets impacted by any performance issues you might have in the base business in the quarter. We don't strip out the base business. We just look at sales were up x, income was up y; we look at the two change and said there's the incremental.

So you can't assume that the Drivetrain new business is only generating incremental margin of 13% on those sales on a program-by-program basis. If we would have not had the operational inefficiencies in our European operations we would have done the math, those incremental margins in the quarter would've been closer to $0.20 for the Drivetrain business. Engines a little bit stronger in the quarter, but again that's going to fluctuate. These new programs that are rolling on we expect to generate between $0.15 to $0.20 on the dollar. And as we've said, for 2011, because we are still leveraging off some infrastructure here with dramatic sales growth, we are expecting all end- margins and $0.20 on the dollar on both sides of the business this year.

Great. That's very helpful. Thank you.

Your next question comes from David Leiker, Robert W. Baird.

What I wanted to walk through here,Tim and Robin, is your organic growth, how much faster you are growing than the market has been great. It has been stronger than what your 11% to 12% backlog number would indicate. I have just two questions on that. One, what is driving that faster organic growth relative to what your backlog would indicate? And then secondly, what does it look like over time in terms of the persistence or sustainability of that gap between your backlog implied growth versus what you are actually reporting?

Over time -- I would take the second part first. Over time because of the demands for fuel economy improvements and emissions improvements, we will see strong demand for our product. There is no doubt about it in our mind. Just based on the number of programs we're working on and the types of products we are working on and the markets of the world that we are working in have such strong growth.

As far as where we're winning them in turbochargers, we're winning them in transmissions, we're winning in 4-wheel drive. We're pretty much winning in almost all of our businesses including engine timing and variable cam timing type product lines. We're winning them in -- the organic -- we're getting good organic growth in Europe because of the diesel penetration rates coming back up about 2%. We are on the right-side of the vehicle mix with the large cars, the premium cars and the European product. We're winning because we're getting tremendous penetration rate at Ford and General Motors on turbochargers.

We have tremendous penetration rates in China on all of our products and everybody -- China is trying to -- they're saying they're going to have an 8% to 10% vehicle growth -- they're going to try to ratchet it down to 8% to 10% vehicle growth in China. I don't think they're going to be able to do that. I think you're going to see vehicle growth in China continue to be reasonably strong; that will be still be the strongest growing market in the world.

China is like an open opportunity for us. So that is where we are getting our business and we are just continuing. Will we probably do well in our net new business backlog each year going forward, I can't say definitively until the end of the year what's going to happen, but we expect that we're going to continue to that trend of improved, increased growth in our net new business backlog, but that's an estimate at this point in time because we don't look at it until October.

Got it. No, I understand. So I guess it's where you look at where you're outperforming what your backlog would indicate, it looks like mix is some of it, penetration might be some of it, is that the way to look at it?

David, it's interesting if you look at each one of our major product areas, they are all significantly outperforming the market, as Tim mentioned. Whether it's turbochargers, whether it's thermal systems, whether it's Variable Cam Timing and timing systems, emission systems -- if you look at the Torque Transfer product area, if you look at the Transmissions Systems business area, DCT, they are all significantly outperforming the market. So it's not just one product, it's not just one driver, it's the value of all the technology we have within our specific product areas that continues to be in demand here as a result of our customers looking for ways to improve fuel economy and reduce emissions.

I don't know how the best way to classify it Dave, but it is mix. We are in the sweet spots of the market. We have product that's focused on fuel economy and emission reductions and those are the areas that are growing right now. And if you call that mix or if you call that penetration of new business opportunities and the right product applications, we are in the right product applications and those volumes are going up much better than the total volume mix -- the total volume percentage itself.

I guess the way I'm looking at it is that your revenue contribution from your backlog is greater than what your backlog numbers indicate.

Dave you are right, that's the right conclusion. Our backlog is turning out to be stronger for 2011 than we anticipated going into the year.

Okay great. Thank you.

Your next question comes from the line of Rod Lache, Deutsche Bank.

First of all, I wasn't really sure I understood the factors driving that decline in equity income, you mentioned that Japan and Korea -- or the Japan impact wasn't there and Korea and China are growing. And also related to that, is there any way to think about the sensitivity of equity income to production levels in Japan if we have a view on what that is likely to be?

Yes, the equity and affiliates line item is predominately NSK-Warner. There is no China entities in there, there is no Korea entities in there, it's NSK-Warner and a turbocharger entity in India, which smaller entity and less of an ownership position by BorgWarner. But NSK-Warner drives that line item. And so the decline in the quarter year-over-year was primarily related to a decline in production activity in the Japanese market. And as I said, I think the production was down about 7% year-over-year for that period that ends February 28, not March 31.

And as I said as well, that NSK-Warner affiliate income, they're going to struggle to break-even in the second quarter and as a result of their customer production levels in the second quarter. I mean we've all heard what the production levels of the Japanese vehicle manufacturers are going to be in Japan and that is where they supply their product. So we know they're going to be down and the expectation is, at best, they will be break-even in the quarter. So you will see a dramatic decline in affiliate income in the second-quarter of our reported second quarter 2011 versus our reported first-quarter 2011, and that will be truly the impact of the disaster in Japan. And we will also see in the third and fourth quarters a continual negative comparison of affiliate income to the prior year quarters.

Now we might see improvement sequentially in the third and fourth quarter as some of that production starts to come back a little bit, but year-over-year affiliate income is going to be down for the remainder of the year. And again, it is predominantly the Japanese market -- it's predominately NSK-Warner and we have 50% of their income that's reported on that line item. And to translate, a good indicator is overall production activity in the Japanese market but it's not a dollar for dollar translation, but certainly a good indicator and directionally can tell you where that number should be going.

Okay. Thank you. And can you size up what that drag is that you are referring to in the Drivetrain business in Europe? It presumably is a temporary factor, but just wanted to kind of get -- since you're calling it out, how big is that?

When we strip everything away it's a difference between I think about a 13% incremental margin and a 20% incremental margin.

And what is that specifically, this issue in Europe?

Well the issue is a couple things. We've got a -- in one of our plants we have got a first time through capability throughput problem that is causing us a lower yield and higher scrap and expedited freight both on the inbound but mainly on the outbound I should say. And it's between lost production because we're not getting the right yield, scrapage, expediting and so forth it's causing us some costs.

Part of the reason is it's a kind of a -- it's a sensitive design. And one of our sub-suppliers stopped making one of our -- a certain material and we had to switch material and the new material is not giving us the kind of production throughput we are used to. So we basically are making some adjustments on the equipment and making adjustments on our manufacturing line to account for the new material and there are some engineering changes involved and so forth.

So it is something that we have got a plan, it's something that we are stepping our way through. There are some lead times on some of these changes on the equipment to -- to get through and so it is something we are just working our way through. We are starting to see improvements from the first-quarter into this month already but, to be honest with you, it is something I hope to have done quicker rather than later, but it may take us a couple -- one or two quarters to get all the way through it.

And two quick last things. Are you still expecting R&D to accelerate to 4% of sales ultimately or is your top-line growth going to ultimately keep that lower? And then lastly, you did mention the amortization of the excess purchase price for the acquisitions. Is that something that would continue into next year or can you give us any kind of thought on the trajectory of the EBIT performance or however you would want to characterize that as it goes beyond this year?

Yes, I'll help you there Rod. We do see R&D continue to trend upward. And we're still -- excluding Haldex, and to be honest with you off the top of my head I can't tell you where R&D's percent of sales is at Haldex. It could be about the same level as the Company, but excluding Haldex, I know our core business is trending towards 4% for the year. So we will see increased spending at R&D as we go throughout the year as a percent of sales. As far as the purchase accounting for Haldex, as we said, we have transaction costs related to the acquisition in the first quarter, which is $3 million to $4 million. So that's not reccurring. Set that aside.

But if you look at purchase accounting, as we have said before, the operating income margin for this Haldex business is pretty much in-line with BorgWarner [av], which is 10%. So that would be about $20 million of operating income for the year. We would expect $200 million of sales and a vast majority of that is getting eaten up by purchase price amortization -- excess purchase price amortization. Not all of it but a good portion of it. And as we look into 2011, that will continue. Now we expect sales growth and incremental income growth to start generating incremental bottom-line income for that business unit, 2011 and beyond. But for the current year, based on again the accountants, we've got a little bit of incremental income from Haldex excluding the upfront transaction costs in our run-rate for 2011.

Rod, one thing I would just add is on that R&D expenses, that is a real big positive for us that R&D expense. We have tremendous opportunities coming at us with all of our product lines and since I approve all salary hires and almost all of them have been in the technical area and engineering. We are adding engineers in all of our business units but the area that we've seen the biggest interest or increase is in R&D and engineers being hired is in the transmission area and the reason is they have some tremendous growth opportunities coming at them for transmission products in Asia. And we have to put the efforts in now for design and development to support the sales that are going to come downstream for all of this growth.

Understood. Okay, thank you.

We have time for one final question and that question comes from Himanshu Patel, JPMorgan.

A few questions. Can you just update us on a couple of items, when you look at the kind of three verticals in the turbo business; light vehicle diesel, light vehicle gas, and commercial vehicles. Just based on the wins that have been happening, can you give us a sense on what is happening to your market share in each one of those segments over the next few years?

Yes. We have done a lot of analysis because there's seems to have been a lot of verbiage lately in the marketplace about run-rates and market share and all that stuff. Basically we have done the analysis of our future wins and our future projected sales and we will basically be maintaining market share. At the minimum we'll be maintaining market share as we look forward. We've had some tremendous run-rates globally, not just in Europe, but globally. So we see no problems with maintaining our market share in the turbocharger business and all three of those segments in spite of all the recent verbage.

Tim, also just given the increased interest from US OEMs on turbos, can you kind of give us your best guess on turbo penetration rates in North America? Where are they now and where are you kind of expecting them to go maybe by mid decade?

There's going to -- I don't remember the exact numbers to be honest with you but turbocharger penetration rates will see significant increase in North America. I just don't remember -- I just don't have the exact percentages. Himanshu, we'll be happy to follow up but I can tell you right now we're going to have tremendous market share at Ford as I look forward. Our market share at GM will be quite strong on turbochargers. They're going to be the biggest -- on the gas side, they're going to be the biggest market share generators for turbochargers in North America. I think you're going to see Chrysler in the gas turbocharger business as Fiat starts to bring in more and more of their platforms.

And diesels, I haven't talked much about diesels on this call, but the diesel penetration rate in North America is going to slowly but surely continue to increase, and we are starting to see more and more applications coming into North America on diesels, which will -- to indirectly answer your question, will also increase turbocharger penetration rates.

Okay. I guess a big nut to crack here is just the Japanese OEMs who seem to have been pretty reluctant to use turbos. I'm wondering if you've got any inkling of a sign that they may go down that path to a greater degree or does it still pretty much feel like a European and a Detroit customer base?

What was the first part of that?

Japanese OEMs --

I think the Japanese already are adopting turbochargers. We are working on a number of projects. I think that they're going to be in the same adoption rates as the Americans. You're not going to -- if you're not in the turbocharger -- if your product lines or your engines don't have turbochargers on them, you're not going to be competitive in the market. I don't care if you're not going to be competitive in Europe, and you're not going to be competitive in North America if you're not working with downsized turbocharged engines, gas or diesel. To be honest with you, the Japanese know as much about the turbocharger business as anybody else does. And they're working on projects that I haven't. And while I -- the reason I missed the first part of your question is our guys were quickly pacing through some of their charts to see what that penetration rate was in North America and it's going to be about 15% to 20% -- it will grow to about 15% to 20% in North America and I expect it would be probably more like 20% on the high side.

By when?

Probably 2015ish, around 2015.

Okay and I wanted to just clarify a comment Robin made. Robin I think you mentioned 4% of your consolidated sales, were you trying to say 4% of your consolidated sales touched Japanese OEMs globally? Did I hear that right?

Yes. Our sales from our Japanese operation -- consolidated operation is about 2.5% of our total sales in the quarter. But if you look at our sales of all the Japanese customers around the world, so what we sell to Toyota and Honda and Nissan in North America in Europe in Japan in China and everywhere, it's about 4% of our sales.

Yes. Okay, understood. Thank you.

I'd like to thank you all again for joining us. As Robin mentioned earlier we expect to file the Q before the end of the day which should provide details of our results. But of course, if you have any follow-up questions, please direct them to me. Janet, please close out the call.

This does conclude the BorgWarner 2011 first-quarter results earnings conference call. Thank you for joining.