博格華納 (BWA) 2011 Q4 法說會逐字稿

Good morning. My name is Rachel and I will be your conference facilitator. At this time I would like to welcome everyone to the BorgWarner 2011 fourth quarter results earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

I would now like to turn the call over to Ken Lamb, Director Investor Relations. Mr. Lamb, you may begin your conference.

Thank you, Rachel. Good morning and thank you all for joining us. We issued our earnings release this morning at approximately 8 AM Eastern time. It's posted on our website, borgwarner.com, on our home page. A replay of today's conference call will be available through February 21. The dial-in number for the replay is 800-642-1687. You'll need the conference ID, which is 44472821. The replay will also be available on our website.

With regard to our Investor Relations calendar, we will be attending several conferences over the next few months. February 22, we will be at the Barclays Industrial Select Conference in Miami. March 14, we will be at the UBS Auto and Auto Supply Conference in Boston. March 19, we'll be at the Sidoti Conference in New York. And on April 4, we'll be at the B of A New York Auto Summit in New York.

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 comment on the fourth quarter, the full year, and current industry trends. And then Robin Adams, our CFO, will discuss the details of our operating results and also our outlook for 2012. With that, I'll turn it over to Tim.

Thank you, Ken, and good day, everyone. Today I'm very pleased to review our strong fourth quarter and full year results, as well as our fourth quarter accomplishments. First, I would like to thank all BorgWarner employees for a fantastic 2011. Your strong performance reflects our dedication to BorgWarner's customers and our shareholders. Now on to the results.

Let's start with the fourth quarter. Sales were $1.8 billion, up 16% from the same period last year. US GAAP earnings were $1 per share, but excluding a loss from disposal activities, earnings were $1.19 per share, and Robin will explain the financial mumbo jumbo behind the disposal activities later. Our reported operating acquisition margin was 10.8%, but again excluding non-recurring times, our operating income margin was 12% in the quarter. Three key factors drove our results; increased global demand for our products, higher volumes in our base business, and well executed cost controls by our operating guys. For the full year, sales were $7.1 billion, up 26% from 2010. US GAAP earnings and earnings excluding non-recurring items were $4.45 per share. And in their full year, reported operating income margin, it was 11.2%, or 11.1% excluding non-recurring items.

Let's go to the Engine Group. In the Engine Group, fourth quarter sales were about $1.25 billion dollars, up 11% from a year ago. The Engine Group continues to perform very, very well. And results were led by accelerating turbocharger growth around the world, increased sales in engine timing systems, including variable cam timing, and greater sales of fan and fan drives, which are linked to the commercial vehicle market.

On the Drivetrain Group, sales were $534 million, up 27% from the fourth quarter of 2010. Drivetrain's results were driven by increased dual clutch transmission module sales in Europe, increased traditional automatic transition component sales in Korea, and the Traction acquisition, which was formally known as the Haldex acquisition. Now the Drivetrain Group continues to make progress with its capacity and productivity issues in Europe. In the quarter, the group's margin was 8.8%, up from last year and up from the previous quarter. Drivetrain's performance in the fourth quarter is a solid foundation for achieving the 9% margin or better that we expect from them in 2012.

And looking forward to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow. For the full year, we spent about 5.5% of sales. We are committed to supporting our future growth and productivity improvements. And our R&D spending was about 3.4% of sales in the quarter and for the full year. We continue to trend towards our targeted level of 4% for R&D.

Now I'm also proud to review some exciting announcements that we made during the quarter. BorgWarner's regulated two-stage, or R2S turbochargers, have launched on the four-cylinder Mercedes S-Class Blue Efficiency engine. This is the first four-cylinder engine in the history of the S-Class. It delivers excellent performance while getting about 41 miles per gallon. We are proud to set a new benchmark for the turbochargers, for our turbocharge downsized engine, in the luxury segment with Mercedes-Benz.

Now BorgWarner's double tip platinum spark plugs are also featured with the next generation ignition coils for the Audi's 1.8 and 2-liter engines. BorgWarner also supplies advance technologies for 5 of Ward's 10 best engines and to all of the winners and finalists for the North American Car and Truck of the Year. Finally, we announced $2.5 billion of net new business for 2012 through 2014 time period. That's a 9% increase over last year's backlog.

So now let's take a look at our current outlook for 2012 for late vehicle production. We first announced our 2012 outlook at Deutsche Bank's Automotive Conference in Detroit last month. Our view is unchanged from that forecast. We expect total global production volumes to be approximately 81.2 million units, up 6% from 2011. In North America, we expect 13.9 million units of production, up 6% from last year. In Europe, 19.3 million units, down 4%. In China, 18.6 million units, up 8%. And in Japan, 9.3 million units, up 18%.

In Europe, we expect mid-sized and large passenger cars to outperform the overall market just like it did in 2011. This is due in part to exports to China and also exports to North America. We also believe that these segments will be more resistant to production cuts due to their more affluent buyers. As a matter of fact, I just went out and bought a Q7 Audi Diesel last night.

In the commercial truck market, we expect solid growth in North America and Brazil. We expect the commercial vehicle market in Europe to remain relatively flat. And in China, we expect a slight rebound. However, BorgWarner's commercial truck business in China is growing for turbochargers, thermal systems and emission systems due to our increased penetration rates.

Finally, our sales and earnings guidance for 2012 also remains unchanged. Sales growth in 2012 is expected to be 10% to 12%, or 14% to 16% if you exclude currency. In Europe, we expect our sales growth to outperform vehicle production by a wide margin in 2012, and our performance in the fourth quarter of 2011 supports this outlook. In the quarter, European production was down 4%, while our sales excluding currency and the Traction acquisition was up 6%. Our 2012 earnings guidance continues to be $5.35 to $5.65 per share. And our operating margin is expected to be better than the 11.5% for the year. The 12% operating margin posted in the fourth quarter of 2011 provides great momentum towards achieving this target. And 2012 should be another great year for BorgWarner.

In conclusion, the outlook for our business remains strong. In 2012, we expect sales growth and profits in every major region of the world, including Europe. No company in the auto sector is better positioned for short-term and long-term profitable growth than BorgWarner. The industry's adoption of our leading-edge powertrain technology will continue for years, and because of this, I feel very good about BorgWarner's future. And so should our shareholders. With that, I'll now turn over to Robin.

Thanks, Tim, and good day to everyone. To me this was a typical BorgWarner quarter; just strong financially across the board. And before I go through the outperformance of the Company from a financial perspective, I want to go through the macro industry environment for the fourth quarter. If you look at fourth quarter global production, it was about 19.7 million units, up about 1% from the fourth quarter of last year. And again, if you look at our sales on a reported basis, they are up about 16%.

So very strong performance, but that did include some foreign currency impact and also the Traction Systems acquisition, which we made in the first quarter of last year. So if you eliminate those and really put the sales on a comparable year over year basis, fourth quarter sales increase was 12%, and that's 11 percentage points better than 1% fourth quarter growth in global vehicle production. And just another quarter, quarter on quarter on quarter on quarter on quarter. And I don't know how many quarters in a row this is, but frankly it's a lot where our sales growth significantly outperformed the market. Now if you look at it on a full-year basis, our sales were up 26%, and again if you eliminate the impact of currency and acquisitions, we were up 16% with global production up 3%. So we outperformed the market by 13 percentage points for the year and again consistently quarter on quarter on quarter. As Tim talked about our guidance for 2012, 2012 is just going to be another year where we beat the pants off the market from a growth perspective.

Let's look at the financials right now, particularly the fourth quarter income statement. Our gross profit as a percent of sales was 20.3%, up from 20% a year ago, and (inaudible) [6%] in the third quarter this year. We had some commodity pressure in the quarter, not as much as we've had in previous quarters. It's about $3 million was at. It puts us at about $35 million for the full year. SG&A expenses were 8.3% of sales in the quarter versus 9.7% in the fourth quarter of last year despite a year over year sizable increase in R&D spending. R&D as percent of sales was up slightly to 3.4% from 3.3% a year ago.

If you look at total SG&A spending, year over year was relatively flat. However, R&D spending was up about $9 million in the quarter, or 17% higher spending in the fourth quarter of last year. We're talking about SG&A. During last quarter's earnings call, we discussed a $10 million benefit that we got in SG&A in the third quarter related to equity incentive compensation expense. And again this was a function of our stock price declining from about $80 a share at the end of the second quarter to about $60 at the end of the third quarter.

Now we also at that time said our full-year guidance assumes we got back to the $80 share price and would penalize the fourth quarter. However, our year-end stock price was about $64 a share, which resulted in only a $2 million negative impact in fourth quarter SG&A and operating income, or about $0.01 a share in negative impact, so not a big event for the quarter. Looking at reported operating income in the quarter was $191 million, or 10.8% of sales as Tim said. However, we did have asset disposal activities in the quarter, which resulted in a pretax book loss of close to $22 million. We already announced a sale of our tire pressure monitoring business in December and the loss related to that. And the majority of the loss on this line item is related to that transaction, including a few other minor disposal activity clean-ups.

The disposal activity loss shows on the other income expense line item of the income statement. If you are looking for it, it's pretty easy to see. It sticks out and it's right above the operating income line. Excluding these special items is loss on disposal activity. Operating income was $213 million, or 12% of sales, and that is an all-time record for BorgWarner. And that's compared with the $157 million, or 10.3% of sales a year ago. And if you look at the improvement in operating income margin, which is pretty meaningful, it really reflects the outstanding performance we have in this business controlling costs while we continue to grow our top line sales.

As you look further down the income statement, equity in affiliates' earnings was $10.2 million, up slightly from $9.8 million a year ago. And if you remember, the equity in affiliates' earnings primarily reflects the performance of our Drivetrain Systems 50/50 joint venture in Japan, which is NSK-Warner. And that joint venture services our Japanese customers for transmission products in the Asian market. It also reflects our Indian turbocharger joint venture as well to a lesser degree.

Looking further down, interest expense finance charges were $17 million in the quarter, down from $22 million a year ago, primarily due to the favorable impact of foreign interest rates swaps on our debt and lower average interest rate on some of our short-term debt. Taxes in the quarter were $58 million, which if you do the math is an effective tax rate of about 31%. And that's quite a bit higher than what we've been given for expectations of the year of about 24%. Now included in there is the tax impact of the disposal activities. And that was about $2.7 million of tax expense.

So if you exclude the disposal activity tax implication, our tax rate from operations in the quarter was about 27%. Now this is still a little higher than the 24% full-year forecast, but when you look at it on a full-year run rate basis, the full-year run rate is about 24.8%, versus our 24% forecast. And unfortunately that 0.8% difference in the full-year rate, that all gets slammed into the fourth quarter, and that's why you get that 27% effective rate for the fourth quarter. So you got 24% for nine months, you got 27% in the fourth quarter, and it gets you to 24.8% for the full year, so we weren't that far off.

For the full year, as Tim said our reported US GAAP tax rate was 25.5% on -- and again that's 24.8% excluding all the [e-unique] items. Net earnings attributable to non-controlling interest, which again was formally known as minority interest, was $5.2 million in the quarter, up from $3.9 million a year ago. And again this line item reflects our minority partners sharing earnings performance of our Korean and Chinese consolidated joint ventures. And the fact that this charge is up just reflects the continued growth in this business. Very strong growth of our business in Asia. And that brings us back to the bottom line near net earnings, which were $122 million in the quarter on a US GAAP basis, or $1 a share. And again as we've already discussed fourth quarter earnings included a loss from disposal activities of approximately $0.19 a share. And we've identified that in a table in our press release as we typically do, and this is to help you reconcile our reported US GAAP earning measures with the financial performance of the continuing operations of our Company and to help you in comparing our fourth quarter results with prior periods and future periods. And we view this as an important part of our press release and we encourage you to review this information as well as our 10-K which should be filed by the end of the day today.

On a comparable basis, fourth quarter 2011 net earnings were about $146 million, $1.19 a share, up 34% from $0.89 a share a year ago. Very strong performance for the Company. Again, briefly touching on the full-year sales, we're a little over $7.1 billion, up 26% from 2010, and again adjusting that for acquisitions and currency puts us at about 16% versus a 3% market growth. US GAAP earnings were $4.45 a share, up 47% from 2010. Now there were a few non-recurring items throughout the year, but when you netted them out really had no effect on earnings totals. $4.45 a share on a GAAP basis, $4.45 on what we would say continuing basis. If you look at operating income, our margin was 11.2% reported, 11.1% excluding the non-recurring items, solidly above our original guidance for the year which was 10.5% for 2011. So keep that in mind when we talk about our guidance for 2012 of 11.5% floor. Right, Tim?

You got it.

Yes. When we started 2011, we said that we expected incremental margins of about $0.20 year over year. And excluding non-recurring items and currency, our incremental margin was about $0.19 on the dollar. If you exclude the acquisitions, in addition, our incremental margin was just over 23%. And this was a record year for BorgWarner anyway you look at; sales growth, margin performance, earnings, et cetera, et cetera, et cetera. Cash flow, just a phenomenal year for BorgWarner as Tim said. And we're really proud of the performance that our operations put forth.

And speaking of our operations, let's look at the segment data. Engine segment sales as Tim said were a little over $1.2 billion, $1.245 billion in the quarter, up 11% versus fourth quarter last year. On a comparable basis or excluding currency, Engine segment sales were up 12% compared with the third quarter 2010. If you look at the strong global growth across the Engine segment portfolio, we're -- sales were driven by turbochargers, engine timing systems, fans and fan drives. EBIT for the group, adjusted EBIT was $203 million in the quarter, or 16.3% of sales, significantly higher than the 14.5% of EBIT margin reported a year ago. And you look at the year over year incremental margin excluding currency in the quarter, the Engine guys hit the ball out of the park with a 31% incremental margin.

If you look at the Drivetrain segment sales were $534 million in the quarter, up 27% versus last year. Not a comparable basis or again if you exclude the currency impact and the Haldex Traction Systems acquisition, Drivetrain sales were up 12% compared to the fourth quarter last year. So with Engine segment sales up 12% and Drivetrain up 14%, you can see both segments outperform the 1% global automotive industry projections in the quarter, very handily. Strong traditional transmission component sales in Asia and higher dual clutch transmission module sales in Europe were the key growth drivers for Drivetrain in the quarter and have been throughout the year.

On a reported basis, adjusted EBIT was $47 million, or 8.8% of sales, which was up from 7.6% reported in the fourth quarter of 2010. And as Tim mentioned, it continued the sequential improvement we've seen in Drivetrain from the low of 6.6% of the first quarter of 2011, 7.4% in the second quarter, 8.1% in the third quarter. And as we said in the third quarter, we expected Drivetrain to get close to that 9% margin level, and in fact they did that with 8.8%. As we've said before throughout 2011, the PERS accounting expense amortization from the Haldex Traction Systems acquisition is negatively impacting Drivetrain margins. If you take out the Haldex Traction Systems acquisition and look at the Drivetrain segment margins on a comparable basis versus last year, they actually were about 9.6%, a full 2 percentage points better than the fourth quarter of last year on an apples to apples basis, and the best quarterly performance we've seen out of that business since prior to the 2008/2009 recession. So, again if you look at the Drivetrain systems business they're back, they fixed their issues, they're stronger than ever, and that's why as we've said before we expect them to generate all in, even with the Haldex business, Traction business, expect them to generate margins of about 9% plus in 2012.

On a year over year incremental basis, again excluding the currency and the Haldex transaction, incremental margins were $0.24 on the dollar. Very strong performance out of the Drivetrain group. And as I said, we continue to see improvements in the business and fourth quarter again is a solid foundation for that Drivetrain segment to achieve our targeted margin of 9% or better in 2012.

Now let's look at the balance sheet for a second in cash flow. We generated over $700 million from operating activities in 2011. That's up almost $170 million from 2010. Very strong performance. Capital spending was just shy of $400 million, up about $120 million from 2010 levels. The year over year increase in capital spending is indicative of the growth required to meet the increased level of program launches that we have around the world, particularly in markets like Asia, South America, Eastern Europe and Mexico. Free cash flow which we define as cash from operating activities for that little over $700 million plus capital spending, a little bit less than $400 million, was $314 million in 2011, up $52 million from $262 million in 2010, or almost 20% higher.

If you look at the balance sheet itself, debt increased by approximately $150 million in 2011. Cash decreased by about $90 million. That's about $240 million net swing and that was primarily due to the again acquisition of the Haldex Traction Systems business, which was in the first quarter of last year, about a year ago, and the buyout of our emissions joint venture partner in India in the third quarter for about $30 million. And that item shows up in our cash flow statement as purchase of non-controlling interests. We generated enough cash internally to fund the growth of our capital spending, the growth of our business, and also to fund the stock repurchase program that we had in 2011. If you look at the capital structure, net debt to capital was about 28% at the end of 2011, compared to 24% at the end of 2010. That's at the EBITDA on a trailing 12-month basis was just below 1 times at the end of the year. However, as we said before, we really view our balance sheet and capital structure on a if-converted basis, and we encourage all of you to do the same.

The convertible debt which we are converting from a capital structure perspective as we look at this balance sheet matures in about two months from now and frankly I'll be happy to be able to stop talking about this if converted look at our capital structure, because it will be converted. But anyways on a if-converted basis net debt to capital is about 18% and at the end of the year net debt to EBITDA was approximately 0.5 times. A very strong capital structure and ready for the next strategic acquisition to come along and be part of the BorgWarner fold. 2011 was simply another great year for BorgWarner and really sets the stage for another strong financial year in 2012. As Tim said, our sales growth and earnings guidance remains unchanged from what we provided last month to Deutsche's Detroit Auto Show Conference. Frankly it was about 30 days ago, so not much changes in 30 days.

We continue to expect sales growth of 10% to 12% compared with 2011. But again if you adjust for currency, about 14% to 16% again which will be about 10 percentage points above the 5% to 6% market global market growth we're looking at right now for 2011. Earnings will be in a range of $5.35 to $5.65 per diluted share, which is approximately 25% higher than 2011's all-time record earnings for the Company.

From a margin perspective, we do expect to achieve better than 11.5% margins with R&D spending up another 20% over 2011 levels and that's on top of the 35% growth in R&D we had in 2011. So we're really putting the money into R&D in this Company and it helped to fund the future growth of this business. And looking at 11.5% or better operating income margins, we just did 12% in the fourth quarter, so we feel pretty good about the better than 11%. Incremental margins as we look at it year over year again should be north of 20%, although the impact of currency will have some reported impact. We are expecting the dollar-euro to be 1.30. It was approximately 1.40 in 2011, so we'll see about a 4% to 5% percent decline in sales related to currency as we pointed out in our guidance and that will have an impact on the incremental margins because the incremental margin on that currency is about 11% to 12% range. If you strip that out, incremental margins again will be north of 20%.

We expect to generate in 2012 approximately $1 billion in cash from operating activities, and capital spending will be north of $450 million in 2012. We talk about high raw material costs, approximately $35 million in 2011, we're looking at about $25 million to $30 million in 2012. And as always, that will change throughout the year. And again, as we've said before, whatever the raw material price increases are, we'll absorb that and manage that throughout the year. It will not have any negative impact on our earnings expectations.

To summarize here, we achieved record fourth quarter earnings. We outperformed the industry relative to sales by 11 percentage points. The Drivetrain segment continued to improve margins and actually on a comparable historical basis, or all-time margin high, and the Engine segment margins again also remain near record levels. It was a strong finish to a very strong year and provides great momentum for us as we move into 2012. To me, again, this was just another typical BorgWarner quarter on top of quarter after quarter of very strong performance.

We expect 2012 to be another year of solid growth, record margins and record profits. And as we observe the trends in the market today, we see even more growth and more record profits beyond 2012. Our confidence in this stems from a regulatory environment that continues to become more stringent, fuel costs that continue to trend higher, and as a result OEMs and end customers favoring advanced powertrain technology that only BorgWarner can bring to the market.

Our product portfolio is focused on improving fuel economy and lowering emissions, which is precisely what the market is focused on today. And we expect the strong demand for our products to continue for many years to come. Our technology leadership, strong global presence, financial discipline, and focus on attracting and maintaining a talented work force around the globe has been the keys to Company's success and the keys that will continue driving our success in the future. And with that, I'll turn the call back over to Ken for questions and answers. Thanks.

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

(Operator Instructions)

Ravi Shanker, Morgan Stanley.

The 12% margin fourth quarter was really impressive, but incentive on comp helped you a little bit there. Robin, can you help us understand what the trajectory of margins looks like in 2012? And also with your stock getting up to the high $70s, will incentive comp be a headwind in 1Q?

Yes. Great question. At 12% was a record margin, and remember incentive comp would have been a negative relative to performance. So, there really was no benefit for incentive comp in the fourth quarter. We expected a penalty in the fourth quarter and we didn't get the penalty. So, the run rate in the quarter was pretty much a normal run rate.

Got it.

We do, given that the stock price again is higher in the running in the first quarter here, and we will get a little negative implication in the first quarter of 2012 related to equity incentive comp, but I don't think anyone is going to be complaining about that particularly our shareholders. As we look at the 2012, you know the sequential for this business typically is from a margin perspective.

First quarter is a solid quarter from a margin perspective. Second improves a little bit. Third quarter is weak due to the seasonality, and fourth quarter is typically our strongest quarter from a margin perspective. And I would expect the same type of cadence in 2012 that we've seen in 2011.

Great. And I'm sorry if I am missing your remarks, but did you say what material headwind is going to be next year, in 2012.

Yes. We're looking at about somewhere around $25 million to $30 million for 2012. But frankly whether it's $20 million to $25 million, $25 million to $30 million, $30 million to $35 million, we'll manage through it. I wouldn't have any expectation of any negative impact in our earnings guidance related to material.

Got it. And Robin when you speak on the balance sheet, you threw in there that the balance sheet looks in good shape for new strategic acquisitions. Anything in particular you have in mind in terms of products, end markets?

Well, as always, we're looking for advanced powertrain technology. We've got a lot of things in mind. Unfortunately, we can't get the sellers to sell them. Just like a lot of the transactions. So, we're just going to have to continue to be patient.

Our VP of M&A is going to have to continue to go out to nice dinners and drink fine wine and eat food trying to woo these potential sellers. But, that's our focus. I told them spend a little bit more money on the wine this time around, maybe we'll get one of these guys to convince to sell their company to us. There are some attractive things out there. We just got to bring them in.

Sure. I'm sure Tim is going to drive out there in his new Q7. Congratulations, Tim. That's a sweet car. I hope you got the 21s on it.

Yes. (laughter) That will be my second Q7 Diesel.

Although all our customers make a very, very good car that --

Yes.

That a --

Yes. You probably have like $5000 of content in that thing.

Well, I got -- I also drive a Ford and a Dodge and a whole lot of other cars. So, we thought we would spread it around a little bit in our family.

I own a GM product and -- (laughter)

Rich Kwas, Wells Fargo Securities.

This is actually David Lim, in for Rich Kwas. Just had a couple questions related to the Drivetrain segment. Now if we stripped out the purchase accounting, how -- what kind of contributions are we looking from Haldex on the Drivetrain segment? And from a cadence standpoint, do you guys feel like you can get to that 9% early on in 1H, or is that more like a second half kind of phenomena?

Okay. Let me take the acquisition related. If you look at the Haldex Traction Systems business, we purchased it in the first quarter. So, when you look at the fourth quarter versus the prior year, there is nothing to compare it to. So, really their incremental margin is their all end margin. And if you exclude the purchase accounting, they're running right about the average of the Drivetrain business at about 9%.

Got you.

Yes. So there's no incremental there now. We'll see their incremental in the first quarter and I expect it to be comparable to typical BorgWarner incremental margins of $0.20 on the dollar.

Got it.

As we look at the Drivetrain business, again, fourth quarter was very strong for them. And we don't expect them to fall down in the first quarter. We'll see some continued strong performances. As I said earlier, fourth quarter is typically our strongest quarter of the year. So, first quarter might not be as strong as the fourth quarter, but it's going to be close enough.

And again you'll see strength throughout the year, but we don't expect to start the year off at 7.5% Drivetrain margin in the first quarter. It will be pretty comparable to the fourth quarter levels, maybe a little bit weaker, but not much. And then it will build in the second quarter. We'll have that third quarter dip because of the shut downs in the third quarter, and then we'll see a strong fourth quarter out of them.

Got you. And then the question that I have is, what we saw is your -- on the Engine side, your revenues pulled back a little bit in Q4, as in normally we see a material increase sequentially from Q3. And I was just wondering if you could sort of explain that it's [head that]. Was that something more to do with FX? Or can you put a little more color on that?

This is Tim. On the fourth quarter, towards the tail end of the fourth quarter, we saw a little bit of softness on some schedules. And the Southern European guys, the guys, PSA, Renault, Fiat, that impacted us a little bit on a couple of our business units, including turbochargers. And that softness is starting to come back now in the beg -- in January. We're starting to see a rebound in the schedules in January. And so that contributed a little bit to the softness that you saw towards the end of the fourth quarter.

We also had a negative impact in currency. You're right. If you looked at quarter-over-quarter, first of all third quarter was pretty strong quarter for the Engine group, a little bit stronger than normal because our customers ran a little bit more in the third quarter than they normally do. But we were impacted negatively by currency fourth quarter to third quarter of about $45 million in the Engine business. So on a comparable basis, fourth quarter to third quarter Engine was up about 3 percentage points.

And again our reference point is versus the prior year and the Engine group was more than 11 percentage points sales growth relative to the industry. So from that perspective, we had a hell of a fourth quarter in the Engine group. And again currency did impact the comparison fourth quarter to third quarter. If you took out currency, we are actually up almost 3% in the fourth quarter versus the third quarter. And again, the third quarter was a strong quarter for them.

Yes. When I talk a little bit about softness, I'm talking about relative to our plan and the actual schedule that we had gotten from the OEMs themselves coupled with our plans.

Yes. Thanks for the clarity on that. That helps a lot. And then finally on the 32% contribution margin in the Engine segment, I mean, how sustainable is that? And how did the team -- how did the team generate that kind of return? I mean, it's pretty impressive.

It's very impressive. First of all I would tell you they worked their butts off. (laughter) But, we had very strong performance out of all of our business units.

In fact, as we've said before we got a couple of business units in the Engine side. The BERU business, we had a disposal in the quarter. And they're working real hard frankly on some of their overhead costs in the SG&A area. So, that helped a bit in the fourth quarter.

We do not expect that $0.31 on the dollar incremental margin improvement in 2012. As I said earlier, we're looking about our traditional $0.20 on the dollar out of both Engine and Drivetrain, which is the more typical. And you know they did have a very good fourth quarter. We got some -- there was a little improvement on some of our European guys in the fourth quarter.

Great. Thank you very much. Appreciate it.

Rod Lache, Deutsche Bank.

You say a couple of things. Just first relative to your guidance, if you just from a very high level apply 15% organic growth and 20% incremental margins and then, as you suggested, take off that 5% FX and maybe an 11% margin, you still -- you come up with EBIT of $174 million, $175 million. It's in the low 12%s. You're guiding to 11.5% plus. Just seems like a decent delta there. Is there something that I'm missing in that bridge?

No. You're doing a macro rough look. I wish the business were that easy, Rod. (laughter)

I guess just relative to your SG&A. Your SG&A to sales is falling pretty steadily over the course of this year. You had pretty steady -- as a percentage of sales, you had pretty steady revenue. How should we be thinking about that number going forward? The SG&A?

You know, you'll see as I said earlier, we're looking for a sizable increase in R&D spending again, 2012 versus 2011, which will get us higher spending on the SG&A line item. We're looking at about 20% increase. But, if you look overall to the business, you know, we were still expecting SG&A closer to 9% than its historical 10% level.

The other thing you're seeing is, we're starting to leverage our existing platforms in Europe and North America. Let's take Europe for an example. A lot of the growth we are going to see in China will come, be based on not just domestic OEMs in China, but also European OEMs in China that are taking technology and launching vehicles in China that they are using existing designs and existing products that we've already designed and manufactured and spent all the extra SG&A on in Europe. So, the guys in Europe, or the guys in China or Asia in general, are leveraging off of the SG&A that has already been spent in Europe with carryover products.

And this two maybe things you can hit for us. Your Engine margins, as you pointed out, are up very strongly, you know, low 16s here. Is there anything that you see on the horizon that would cap that out? And then lastly, if -- you may have mentioned this already, but HIS did adjust their production forecast subsequent to your guidance. Did you look at that and basically conclude that the platforms that they adjusted are not that relevant to you? Or, were you not using HIS when you provided the guidance initially?

Well, we use a number of information, including HIS. But at the end, we make our own determination. And based on what we're seeing and based on our analysis, basically we're not changing our estimates for production in any parts of the world at this point in time. We think we have been pretty accurate in years past and we think we're pretty accurate this year.

So, we're not changing, we haven't changed anything. But we continue to monitor and as the year goes on, we'll typically make one or two adjustments in the middle of the year or maybe the third quarter of the year as we see the year develop. But there is no need for us to change what we see right now.

And the Engine margins?

Do they cap out? Relative to 2011, we still see little bit of upside on operating income margins in the Engine group. As we said before, our margins will cap out when our sales growth slows.

Our margins are a lot -- somewhat dependent on our technology. The better that we can develop technology and separate ourselves from our competition, the better we can maintain or improve our margins. So, you know, and as far as I'm concerned margins are tied to two things; how well we develop new technology that our customers really want and how disciplined we are in running our Business. And I think we are pretty good in both.

Definitely. Okay. Thank you.

Himanshu Patel, JPMorgan.

Tim, I wonder if you could update us a little bit on the competitive dynamics in the turbocharger space? I think maybe a little bit less than a year ago, you guys had talked about Bosch and Conti having secured only about a 5% share of the sort of contracts that you saw being out there by mid-decade. Two questions.

One, is that still the kind of ballpark of market share that you're seeing for those guys? And then number two, I'm just wondering, they may have secured a certain amount of share, but they clearly would be bidding on a much larger scope of the market. I'm just trying to understand how much of the turbocharger bidding activity is such where you're seeing four players instead of the two or three traditional guys.

Well, even before Bosch and Conti got into the picture, we saw four players, because we had two Japanese competitors along with ourselves and Honeywell. Conti has got a little bit of business at Ford. I think they're getting ready to launch it right now. I don't know if they've won anything more since then. They -- Bosch and Mahle joint ventures got a little bit of business at Volkswagen. I don't know where they are in their launch cycle.

We see them -- actually we see everybody bidding on all the product, all the projects. We bid based on our technology and what price levels we're willing to live with. And we're winning a significant amount of turbocharger business. And we're doing it without sacrificing pricing or margins.

And I think like I said many times, we are focused on the higher tech part of the turbocharger business, the technology that delivers the best fuel economy at the same time given the best durability. So, competing against Honeywell over all these years is tough enough, and really not that much different just adding a couple more competitors. They're typically focused on the lower end technology portion.

We have won significant amount of new business in the last 12 months. And will, which will eventually be focused or roll into our backlog when we announce that in November. I don't go by batting averages or anything else. I just track how much new business we win by dollars. And we've won a significant amount of dollars as compared in 2011 as compared to 2010 or 2009.

Are you sensing that sort of 5% number is changing though?

Not really. I think it's that they've won some big ones and now in the launch stage and they are bidding on other new business. But, are they getting much more than they've won in the past? Not that I can tell.

Okay. And then a somewhat related question. Just given the proliferation of turbochargers in so many powertrains, this seems like it's so integral to the engine. Any risk here that the OEMs consider insourcing this product area at one stage?

Well, Himanshu, I've learned a long time ago both in this industry and outside of this industry, never say never. And it -- I don't see any activity in Mexico right now. We see a little bit in Europe where they -- people would like to be in the turbocharger business.

You know Mercedes or Daimler has got a piece of the action with one of the Japanese turbocharger companies. They've got a small joint venture. It could happen, but I don't see any activity going on right now that's over and above what's normal.

Okay. Next question. Just I think for the fourth quarter you guys mentioned you are kind of clean organic European revenue growth was 6% versus industry of negative 4%. That sort of 10 percentage points of out performance, can you just directionally talk to what you expect that to be for full year 2012, just given what you are seeing on platform mix and your own backlog. Should we think about sort of a similar magnitude of European outperformance for Borg?

Yes. Actually we'll probably be a little bit stronger. I think as we've said before, we're looking at a market in Europe that is going to down about 4% to 5%. We're looking at our sales in Europe on a reported basis up about 10%. And there is a little bit of negative currency impact in there as well. We are going to be pretty strong relative to the market in Europe in 2012.

Okay.

As a matter of fact, in 2011, we increased our European presence, percentage-wise, up a little bit already in 2011 for the full year. And that didn't include the Haldex acquisition.

Okay. Great.

John Murphy, Bank of America Merrill Lynch.

Just a question on the Drivetrain business. You have highlighted DCTs and in Europe as a point of strength, and your standard transmission parts in Asia as a point of strength. I was just curious where you stand right now with your old school Drivetrain. I'm not going to be, not disparagingly, but your standard Drivetrain torque transfer business with trucks in North America, particularly with Ford, and really what levels of capacity utilization you're at there. As that market improves, could that be a real source of upside for Drivetrain?

Well, we've got all Ford's standard duty transfer cases. We've got all of the RAM trucks, standard duty and heavy duty trucks. And as you see, Ford and Dodge doing better month-on-month and doing very well in the truck markets, that's a direct correlation to us in a positive way. Would I like to have some GM business? Yes. But I'm perfectly happy having almost -- well let's say the majority of Ford's business. We have everything except the extreme heavy duty portion.

And so as they -- so as the truck market is doing well, we're doing well. At capacity, we are tight on capacity on the Dodge transfer cases. We are at capacity or just slightly below capacity on the Ford. We can do more at Ford. We're putting in, we're actually putting in capacity right now for Dodge. I would hope that they challenge us with more volume in the future, because we can put capacity in fairly quickly on that product line.

Okay. And then just a second question on the BERU double platinum spark plugs on the Audi engines. As we look at that, is that purely incremental content, or are you replacing some former BERU spark plugs there? Just trying to understand, is that all incremental growth?

That's all incremental.

That's incremental. New technology.

Okay. And that expands -- that's on two programs right now, but you are talking about two more, and are those global platforms or engine platforms?

Well we just said in my comments, we said we're going to launch it on the Audi 1.8 and 2.0-liter. Those are global engines for Audi. So, I'm pretty sure that when they go global, we go global.

Okay. And then lastly just on the potential for a dividend, obviously there's a lot of capital going to growth. You guys were previously a great dividend payer. Just curious what your thoughts are on the potential for a dividend reinstatement?

That's a great question. We continually discuss that issue. I think there's a couple of things here. First of all as you point out, our focus is growth and we really like to reinvest our cash in the business. And you know, the way we make acquisitions you never know when they are going to come. So, we do have to have a very strong capital structure and be able to have the cash on hand to be able to make a transaction when something becomes available. So, we're holding a little bit more cash because of that.

Second, we found out in the last recession, 2008 and 2009, that having a revolving credit facility available to use as cash for an acquisition may be is not the way to go in these days, because we saw a lot of banks just walk away from lending during that time period. So, we're less comfortable relying on a revolving credit facility, a little bit more comfortable relying on some cash. You'll see us carry a little bit more cash on our balance sheet than we would have prior to 2008 and 2009 when we were paying a dividend.

The second thing is the tax laws in the United States are really a disadvantage for an international company like BorgWarner. And there is a lot of talk about changing the tax laws and I think both from a corporate perspective and also from a personal income perspective, the last thing we want to do is pay out dividends and see them taxed at a normal ordinary income rate to our shareholders. We think there's more tax effective way to return capital to our shareholders. So, at this point in time, the dividend is just going to sit a while until we get some clarity on US taxes.

It's going to sit a while while we continue to look for strategic acquisitions. You know, again our first focus is acquisitions. We have had a history of purchasing shares on the market. We continue to do so.

If you look, we purchased some stock in the fourth quarter of 2011. We'll continue to be in the market repurchasing stock. So, right now dividends are kind of lower on our list of priorities for returning cash to shareholders, but we're watching hopefully some tax law changes here in the next year or so that will provide some clarity on what is the best way to return capital to shareholders.

Great. That's helpful.

Joseph Spak, RBC Capital Markets.

Just going back to the Drivetrain segment. If we strip out the Haldex acquisition, it looks like that has sort of been growing mid-teen-ish, is that sort of you think a fair run rate for that segment going forward and which -- I know you called that DCT, but what other products are really help driving that growth?

I'll talk about the run rate. Tim can talk about the product. As we look at our backlog, our three-year backlog, if you look at the total growth of the Company, we see the Drivetrain business growing just about the same rate as the Engine business. As we look at growth as a company, a 10 percentage points in excess of the market, that's both Engine and Drivetrain growth. So, we expect continued good strong growth in the Drivetrain business along with the Engine business. Tim, you want to talk about the technologies.

Let' go. On traditional automatic, transmissions, they're going from four-speed to six-speed's, and six-speed to eight-speed automatic transmissions. Every time you put another speed in a traditional automatic transmission, it's another clutch opportunity for BorgWarner.

Also, because of the race between dual clutch or the competitive nature of people that are making dual clutch automatics versus the people that are making traditional automatics, the traditional automatic transmissions are trying to up their game in terms of fuel economy, which is driving better shift quality. And we make the trans -- we make the solenoids for traditional automatics that people are upgrading to to get better, crisper and quicker shift quality with less paresthetic losses.

Consequently, we're growing very well on transmission solenoids with traditional automatic transmissions. We're growing very well with clutches on traditional automatic transmissions. Then you shift gears and go over to dual clutches. There are two parts of the market on dual clutches. There's the dual wet clutch and the dual dry clutch. When you do the dual wet clutch, which is a growing market globally, we supply the clutch module and the control module for both, for the dual wet clutch. So, that's pretty much two big pieces of content on the wet clutch.

On the dry clutch, even though we don't make the dry clutch module, we make the control modules for a number of the dry clutch transmission manufacturers. So, we're picking up half of the competing business on the module itself. Then you go four-wheel drive business. Four-wheel drive business has continued to be a growth business now with the trucks recovering in North America.

And actually we were in China last week with our Board and SUVs are becoming more fashionable in China. So I see some opportunity for transfer case growth in China due to the SUV market becoming more fashionable again.

So, that coupled with the fact we took a lot of cost out of the transportation business that we have by basically closing down our Muncie operation and moving it to, and consolidating all our transfer case business in North America in Seneca, South Carolina. Between a lot of products that are growing in the Drivetrain side coupled with improving cost control, not just on the transfer case side, but also on the transmission side, should help us. We consequently should see growth in our sales and hopefully growth in our profits on the Drivetrain side.

And then I appreciate the color on contribution margins, and I think you said 20% on both segments. But for the Drivetrain, is that ex Haldex or including the Haldex amortization costs?

That will be including Haldex.

So, implying would be higher without it?

Yes. The amortization cost is --

But without the amortization I mean.

Yes. The amortization cost is basically fixed. So, what you're really looking at when you look at the incremental margins year-over-year, you're looking at the core operations both for the traditional Drivetrain business plus the acquired business, Traction Systems business. So on an incremental basis year-over-year, we expect to see operating performance and the purchase accounting numbers are flat year-over-year, should have no incremental impact.

Fair enough.

Patrick Archambault, Goldman Sachs.

I have one remaining one, because a lot of mine have been answered. On the diesel penetration, you know, following a few years of uptick in that in Europe, you know now that, obviously, we're heading into a much softer macro environment, how do you see that playing out? I know that the export market is likely to remain okay, which may help it. Is that something that could impact you from a profitability standpoint if people downshift a little bit, just given a more frugal environment.

Patrick, we're seeing, and globally between 2011 and 2016, a 25% growth in diesel applications in the light vehicle market. We're seeing some slight growth in Europe, but percentage-wise it's about flat at 54% in Europe. So, the percentage is flat in Europe, but there's still growth in Europe. We're, well we're seeing growth in the rest of the world for diesel engines. And we're actually starting to see little bit of uptick in interest in the United States for diesels also.

But whatever happens on the diesel side, if they don't buy a turbocharged diesel, there is a chance, a high probability they will buy a turbocharged gas engine with GDI. So, we're going to get, we're going to sell turbochargers either way. It's just a matter whether they're gas turbochargers or diesel turbochargers. But, the diesel market is still a growth market, but it's just not as fast as the growth market for gas turbochargers.

And just on that, is the content more or less the same between a diesel program and a gas program, you know, assuming kind of a similar vehicle, similar powertrain output?

Yes. Well, let's say it depends on application. There's -- it varies from application to application. But on the whole and on the average, gas tends to be a little bit higher priced for a gas engine application turbocharger than a diesel application. For pass car, when you get in the commercial side there is no gas engine, it's just high priced diesel turbochargers, and we like it that way.

And lastly, so is a lot of the growth in diesel that you see outside of North America and Europe? Is that mostly commercial applications or there is actually some hope of a take up in diesel in places like Latin America and Asia, as well?

For pass car, you mean?

Yes.

Yes. We're seeing increased penetration rates in on diesels in other parts of the world, you know India. We're seeing some in Asia. We're seeing -- but it doesn't, and Korea. But it doesn't -- it's not growing as fast in those parts of the world as turbocharged gas engines are. Right now turbocharged gas engines, well, give you an idea. I said diesel engines for light vehicles, globally diesels are growing roughly 25% over the next five years. Turbocharged gas engines are growing 150% roughly over the next five years.

Okay. Very helpful color.

I'd like to thank you all again for joining us. We expect to file our 10-K before the end of the day, which will provide plenty of results, plenty of details on our 2011 results. If you have any follow-up questions about our earnings release, the matters discussed during the call, or our 10-K once it's filed, please direct them to me. Rachel, please close out the call.

That does conclude the BorgWarner 2011 fourth quarter results earnings conference call. Thank you for joining. You may now disconnect.