博格華納 (BWA) 2012 Q1 法說會逐字稿

Good morning, my name is Nicole, and I will be your Conference Facilitator. At this time, I would like to welcome everyone to the BorgWarner 2012 first-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.

Thanks, Nicole. Good morning, and thank you all for joining us. We issued our earnings release this morning at approximately 8.00 AM Eastern time. It's posted on our website, www.BorgWarner.com on our home page.

A replay of today's call will be available through May 3. The dial-in number for the replay is 800-642-1687. You'll need the conference ID, which is 59474210. The replay will also be available on our website.

With regard to our IR calendar, we'll be attending several conferences over the next few months. May 9, we'll be at the Wells Fargo Industrials and Construction conference in New York. May 16, we'll be at the Barclays Americas Select conference in London. May 22, we'll be at the Wolfe Trahan Global Transportation conference in New York. May 30, we'll be at the Key Bank Automotive Industrial and Transportation conference in Boston. And on June 13, we'll 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 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 first quarter and current industry trends, and then Ron Hundzinski, our CFO, will discuss the details of our operating results and also our outlook for the remainder of 2012. Also on the call, we have James Verrier, President and Chief Operating Officer, and Robin Adams, Vice Chairman and Chief Administrative Officer.

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 first quarter results, as well as our first quarter accomplishments. But before I begin, I would first like to congratulate members of my senior staff on their recent promotions. Robin Adams has been promoted to Vice Chairman of the Board, and remains Chief Administrative Officer. Ron Hundzinski has been promoted to Chief Financial Officer, and James Verrier has been promoted to President and Chief Operating Officer.

Ron has been with BorgWarner for nearly 10 years, and during that time, he was Vice President of Finance at Turbo Systems, our largest business unit. His leadership was essential to its profitable growth. In his more recent role as Corporate Treasurer and Controller, he worked very closely with Robin. And I am confident that their relationship will ensure a seamless transition for the CFO position.

James joined BorgWarner 22 years ago. He has delivered important operational improvements in every BorgWarner business he has led. At Morse TEC, and earlier at Passenger Car Turbo Systems, he successfully directed these businesses through rapid growth, geographic expansion, new technology launches, and an economic downturn. I consider James a critical component of our senior management team, and I look forward to working more closely with him in the future.

Now, in his new role as Vice Chairman, Robin will continue to focus on financial matters, and of course, he will work closely with Ron, our new CFO. He will also continue to provide input on strategy and growth for our Company. And I would like to say that I am very appreciative, and I want to thank Robin for his many years that we have worked together and hiss many years as our most successful and very successful CFO. Robin and I have the utmost confidence in Ron and James, and we are excited to be working with them in their new positions.

So now, let's go on to the first quarter results. Sales were $1.9 billion, up 11% from the same period last year. US GAAP earnings were at $1.28 per share, up 28% from 2011. Our reported operating income margin was 11.8%, a great start toward the 11.5% or better that we expect for the full year. Three key factors drove our results -- increased global demand for our products, higher volumes in our base business, and well-executed operational efficiency.

In the engine group, first quarter sales were about $1.3 billion, up 5% from a year ago. The engine group continues to perform 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 emissions products. In the drive train group, sales were about $600 million, up 26% from the first quarter of last year. Drive trains' results were driven by increased sales of DCT modules in Europe, expanded sales of traditional automatic transmission components in North America and Korea, and higher sales of all-wheel-drive systems in North America and Europe.

In addition, the drive train group continues to make progress with their margins. In the quarter, the drive train margin was 10%, up from the first quarter of 2011 and from the previous quarter. Drive trains' outstanding performance in the first quarter is a solid foundation for achieving the 9% or better margin that we expect for the full year.

We're going to also continue to invest in our business. Our near-term capital spending plan includes increased capacity for dual clutch transmission modules in Europe, engine timing systems in Asia, transfer case systems in North America, and turbochargers all over the world. For the quarter, we also spent about 5% of sales on capital, and we continue to invest for the long term. We spent about 3.5% of sales on R&D in the quarter, and we continue to trend toward our targeted level of 4% for R&D spending.

I'm also proud to review some exciting announcements that we made during the quarter. BorgWarner's regulated two-stage turbochargers have launched on Hyundai's new 5.9-liter diesel engine, and this is the first commercial vehicle engine in Asia equipped with two-stage turbo charging. The R2S System provides outstanding performance, boosts fuel economy, and helps the engine comply with Euro 5 emission standards. BorgWarner also will supply the first two-speed active transfer case for the Ford F-150. BorgWarner's TOD active all-wheel-drive technology automatically redistributes torque from the rear wheels to the front wheels without driver intervention. It delivers improved traction, stability, and vehicle dynamics.

BorgWarner also produces advanced technologies for the 2012 European car of the year -- the Opel Ampera or Chevy Volt. And, in fact, we supply components for six of the seven finalists for the European car of the year. Our majority-owned DCT module joint venture in Dalian, China will supply modules for three first-automotive, or FAW, transmission programs in China. And earlier this week, BorgWarner received a 2012 Automotive News Pace Award for its turbocharger with low-pressure exhaust gas recirculation technology.

Let's take a look at our current outlook for 2012 light vehicle production. In Europe, we now expect 19.1 million units of production, down 200,000 units from our previous outlook. In China, 18.2 million units, down 200,000 units. In Japan, 9.2 million units, down 100,000 units. However, there is good news. In North America, we now expect 14.6 million units of production, [up] 700,000 units from our previous outlook, and this will offset some of the softness in the other regions. In Europe, the change in outlook is due to production cuts at the French OEM's, and weaker sales in France and Italy for smaller cars. We expect midsize and large cars to be more stable, just like they have been in the past. And this is due in part to exports to China and North America for the larger vehicles.

In North America, recent strength in monthly sales is driving production schedules higher. Consumer sentiment, credit availability, and increased fleet demand are also positive developments. In summary, there have been regional changes, but our recent outlook for total global production volume is in line with our previous outlook.

Now, in the commercial truck market, our 2012 outlook is trending positive. Commercial truck production in North America and China looks to be stronger than expected. We expect low double-digit growth in North America in 2012, and a slight rebound in China for the commercial truck market. BorgWarner's commercial truck business in China is growing faster than the market, with turbochargers, cooling systems and emission systems, and this is due to increased penetration rates by BorgWarner. Brazil now looks weaker than expected, as new EURO 5 type emission standards were introduced in January of this year. This led to a strong pre-buy toward the end of 2011. Also, we expect the CV market, or Commercial Vehicle market, in Europe to remain relatively flat year-over-year.

Finally, our sales and earnings guidance for 2012 remains unchanged. Sales growth in 2012 is expected to be 10% to 12%, or 14% to 16% if you exclude currency. Our business outlook for the rest of 2012 is generally stable, although we are keeping a watchful eye on Europe. In Europe, we expect BorgWarner sales growth to outperform vehicle production in 2012, and our performance in the first quarter supports this outlook. In the quarter, European production is down 7%, but our sales, excluding currency, were up 8%.

Our 2012 earnings guidance remains at $5.35 to $5.65 per share, and our operating margin is expected to be better than 11.5% for the year, as I said earlier. And as I said before, the 11.8% operating margin posted in the first quarter provides great momentum towards achieving that target.

So, in conclusion, the outlook for our business remains stable for the year, and in 2012 we expect to grow sales and profits in every major region of the world. 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, power-train technology for fuel efficiency will continue for years, and because of this, I feel very good about our Company's future, and so should our shareholders.

With that, I'd now like to turn the call over to my good friend, Robin Adams.

Thanks, Tim. As Tim said, a little less than a month ago, on March 27, we made an announcement regarding a well-thought-out transitional succession plan for BorgWarner, which included the naming of Ron Hundzinski as the new CFO of the Company. Ron originally joined BorgWarner in the mid-90s, so he's been around here a long time. As Tim mentioned, his career includes working in both the drive train and engine operating segments of BorgWarner, and more importantly he spent five years as a VP of Finance for our largest product area, turbochargers, from 2005 to 2010, providing financial leadership and discipline for that business through an emerging growth period, an economic downturn, and a strong re-emergence.

For the last two years, Ron has been my right-hand person at the corporate finance organization, first as a Corporate Controller, and then as a Corporate Treasurer. He's been part of the executive leadership team for the past few years, helping to drive our Company's technology focused growth strategy, and has helped develop the policies and the strategies underlying our Company's financial strength and financial discipline. You know I have a lot of pride and passion about BorgWarner, and it's with that pride and passion that I am pleased and honored to introduce Ron to lead the financial portion of this call. Ron, it's all yours.

Thank you, Robin, and good day to everyone. Before I review the financials, I would like to review the macro industry environment for the first quarter to help put our performance in perspective. First quarter global production was about 20.4 million units, up about 4% from the first quarter of last year. Our sales in the quarter were up 11% on a reported basis. When the impact of foreign currencies and acquisition divestitures activity in 2011 are excluded, the year-over-year sales was 13%. That is 9 percentage points better than the 4% year-over-year growth in global vehicle production, and another quarter where our sales growth significantly outperformed the market.

Working down the income statement, gross profit as a percent of sales was 20.7% in the quarter, up from 19.8% a year ago and 20.3% in the fourth quarter of 2011. The year-over-year improvement in the quarter was realized despite approximately $5 million to $6 million impact of higher raw material prices.

Moving further down, SG&A expenses were 8.8% of sales in the quarter versus 9.5% of sales in the fourth quarter of last year. R&D as a percent of sales was 3.5%, flat from the same period a year ago, but I should note that on an absolute spending basis, R&D expenditures increased by nearly $8 million. Again, that is our investment in R&D and technology in this business.

Reported operating income in the quarter was $226 million or 11.8% of sales, compared with $179 million or 10.4% of sales a year ago. This 140-basis point improvement in our operating margin reflects outstanding cost controls while growing our sales. From an incremental margin perspective, after excluding the impact of foreign currency and acquisition divestiture of the activities in 2011, our incremental margin was 23% in the quarter.

As you look farther down the income statement, equity and affiliate earnings was $9.2 million, up from the $8.4 million a year ago. This is our affiliate earnings -- primarily reflects the performance of our drive train systems' 50/50 joint venture in Japan, NSK-Warner, that services our Japanese customers for transmission products in Japan and China, and our turbocharger joint venture in India, which we call TEL.

Interest expense and finance charges were $15 million in the quarter, down about -- from the $18 million a year ago. This was primarily due to several items, including lower interest rates, lower foreign debt, capitalized interest from our capital expenditures, and some interest rate swap differentials, as well. It's a hodgepodge of items. Provisions for income taxes was $58 million in the quarter. This equates to an effective tax rate of 26%, which is now our estimate for the full year.

Net earnings attributable to non-controlling interest, formerly known as minority interest, were $5.5 million in the quarter, up from $4.9 million a year ago. This line item reflects our minority partners' share in the earnings performance in our Korean and Chinese consolidated joint ventures. That's the year-over-year increase reflects the growth in those businesses. That brings us back to net earnings, which were $164 million or $1.28 per share. Earnings up from $1, which is a 28% earnings growth on 11% sales growth. Strong performance for the Company.

I'm going to switch gears now to the performance of the operating segments. The engine segment group sales were $1.3 million in the quarter. On a comparable basis, or excluding foreign currency and divestitures made in 2011, engine segment sales were up 8% compared with the first quarter of 2011. We are seeing good growth across parts of the engine segment portfolio, most notably engine timing systems including BCT, emission systems, and Turbochargers. However, the engine segment's growth was impacted by the slowdown in vehicle production in southern Europe, as Tim mentioned earlier, and in commercial vehicle markets in Europe, China, and Brazil.

The adjusted EBIT for the engine group was $210 million in the quarter, or 16% of sales, and significantly higher than the 14.9% adjusted EBIT margin reported a year ago. The year-over-year incremental margin, excluding the currency and divestitures in '11, was 27%.

On a sequential basis, or when you're comparing the first quarter of 2012 to the fourth quarter of 2011, engine sales, excluding FX, was up 10%. The segment incremental margin on a sequential basis was about 12%, and I'll get back with that in a second after drive train.

In the drive train segment, sales were $611 million for the quarter. On a comparable basis, or excluding currency and Haldex Traction Systems acquisition, drive train segment sales were up 24% year-over-year 2011. Strong all-wheel-drive sales in North America and Europe, growth in traditional transmission component sales in North America and Korea, and substantially higher dual clutch transmission modules sales in Europe were key growth drivers.

On a reported basis, adjusted EBIT was $61 million or 10% of sales, double digit, sharply higher than the 6.6% reported in the first quarter of 2011. If you look at the progression of the drive trains' adjusted EBIT margin performance over the last year, the business has shown remarkable improvement, 6.6% in Q1 of 2011; 7.4% in Q2; 8.1% in Q3; and finishing up 10% in Q1 of 2012.

Last year, Tim and Robin commented to a heightened focus on improving drive trains' operating performance. That focus has paid off. As Tim said earlier, the first quarter performance is solid foundation for the drive train segment to achieve EBIT margins of 9% or better, as we said last year, and we have already met that in the first quarter. The year-over-year incremental margin for drive train segment, excluding currency and the acquisition of Traction System's Division of Haldex was 25%, excellent performance around the drive train segment.

On a sequential basis in drive train, when you're comparing the first quarter of 2012 to the fourth quarter of 2011, drive train sales, excluding FX, was up 18% -- tremendous growth. The segment's incremental margin on the sequential sales was about 17%.

I'd like to talk about that a little bit more about sequential performance before I talk about the balance sheet and the cash flow. If you look at the total segment performance on the sequential basis, the sales are up 12%, if you exclude currency. Global production from Q4 to Q1 was up 4%; again, we outperformed the market. If you take a look at the adjusted EBIT margins, the combined margin was 14.1% in Q4 2011, and we're slightly up -- 14.2% in Q1 of 2012; basically, we had margin expansion. Engine margins were slightly down, but they came off the records of 16.3% in Q4, down to 16% in Q1, while drive train, though, achieved record highs, or as far as I can go back in recent history, in Q1 of 10% versus 8.8% in Q4. I think that's solid performance.

So, I'm going to move on to the balance sheet and cash flow. If you look at the balance sheet and the cash flow statement, we generated about $31 million of net cash from operating activities in the first quarter, up $72 million from the first quarter of 2011. Capital spending was up about -- was $95 million in the quarter, up $25 million from the same period a year ago. The year-over-year increase is indicative of the growth in capital spending 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 net cash from operating activities, less capital spending, including tooling, was an outflow of $64 million, which is typical seasonal occurrence for Q1. Our investment in working capital is substantial in the first quarter, as business activity picks up from the end of the fourth quarter of last year.

Looking at the balance sheet, the balance sheet debt increased by $81 million compared with the end of 2011, while cash increased by $37 million during the same period. This is a net difference of $44 million increase in debt, which was primarily to fund the working capital investments I just discussed. As you look at the capital structure, our net debt to capital ratio was 27% at the end of the first quarter, compared to 28% at the end of 2011. Net debt to EBITDA at the end of the first-quarter 2012 on a trailing 12-month basis was 0.9 times.

However, earlier this month we settled all conversions of our convertible notes by delivering approximately 11.4 million shares to noteholders, reducing debt by approximately $374 million, and increasing stockholders' equity by the same amount. Because this occurred in April, you will not see the impact of this activity until our release of the second quarter financial statements. The 11.4 million shares were in treasury, and weren't a dilutive impact on the calculation, so there's no impact. Therefore, we have settled everything on the convert. However, there is some activity that I should note in a few seconds here.

Our balance sheet and capital structure at the end of the first quarter should be viewed on an if-converted basis. From that perspective, the net debt to capital was about 17% at the end of the first quarter, and net debt to EBITDA was approximately 0.6 times. Our capital structure is excellent, and in shape.

We also have this, concurrent to the notes, we had an overlay, a bond hedge overlay that I want to discuss. We settled the call option portion of this bond hedge overlay. Through this settlement activity, we received approximately 6.5 million shares of common stock. These shares will be held in treasury, and used to settle the warrants portion of the bond hedge overlay that matures over a 60-day trading period beginning in mid-July. The settlement of the call options has reduced the diluted share count by 6.5 million shares as of mid-April, which you will see in our second quarter financial statements. We will settle the warrants-related obligation with treasury shares, which will begin, like I said, in mid-July, and expected to have negligible amount on the diluted share count. Maybe I should explain what's happening there just a little bit.

There is two portions of this bond hedge overlay. There is a call option, which we settled when we received 6.5 million shares, and there's a warrant that is going to be unwound over a 60-day period. The call option portion of the bond hedge overlay was considered anti-dilutive by accounting standards, which basically meant we were not able to reduce the dilutive share count pool until we took possession of the shares. We did that on April 16. So, today we have additional 6.5 million shares in treasury, which is a permanent reduction in our prior diluted share count pool calculation. The warrant portion was always included in the dilutive portion of the dilutive calculation. So, in effect, we simply just kind of matched the transactions.

So, going forward as the warrant unwinds, the shares will come out of treasury and move from dilutive to basic, and therefore, no impact on us, or relatively no impact. I hope that clears that up, and maybe we won't get any more questions, I don't know. Back to guidance. (laughter)

I'm going to move to the guidance for 2012. As Tim mentioned earlier, our sales growth and earnings guidance remains unchanged. We expect sales growth 8% to 12% compared with 2011, 14% to 16% excluding currency. Although we are watching Europe closely, earnings are expected to be in the range of $5.35 a share to $5.65 per diluted share.

From a margin perspective, we expect to achieve operating margins of better than 11.5% for the full year. Our first quarter operating margin was 11.8%, a great start to the year. Year-over-year incremental margins should be around 20%. Again, our incremental margin in the first quarter, excluding the impact of foreign currency, acquisition, and divestitures was 23%.

We believe the impact of higher raw material costs will be in the range of $25 million to $30 million this year. We said at our last earnings call, we absorbed and managed inflationary costs, including raw materials, and do not expect them to have any negative impact on earnings expectations for the year. The one change to our guidance is the full-year estimated effective tax rate, which is now 26% versus our original estimate of 25%.

So, to summarize, we achieved a record first quarter earnings due to strong conversion of our industry-leading sales growth and income. The drive train segment had a very strong quarter; the engine segment margins remained near record levels, and it was a strong start to the year to provide a good momentum going forward. Our guidance for 2012 implies another year of solid growth, record margins, record profits, and as we observe these trends in the market, we see more growth and more record profits beyond 2012.

Our confidence stems from the regulatory environment that continues to be very stringent, fuel cost that continues to trend higher, and as a result, OEMs and the end consumers' favoring advanced power train technology. Our product portfolio is focused on improving fuel economy, lowering emissions, which is precisely what the market is focused on today. And we expect this strong demand for our products to continue for years to come. Our technology leadership, strong global presence, financial discipline, and focus on attracting and maintaining a talented work force has been the key to this Company's success, and will continue to drive our success in the future.

With that, I'd like to turn the call back over to Ken.

Thanks, Ron. We'll now turn to the Q and A portion of the call. Nicole, please announce the Q and A procedure.

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

Hi, good morning, everyone.

Hi Rich. How are you doing?

On drive train. So, the 10% number for margin was pretty good. Tim, do you -- is that sustainable or is that going to be lumpy as we go through the year? I know the formal guidance is 9 plus percent, but just some more color on how we should think about that going forward?

I think it's probably closer to sustainable than the 9%. Now that we have hit 10%, I think we're probably going to stay close to that. We may flex a little bit plus or minus, from 9.5% to 10%, and maybe we even creep a little bit higher than 10%. It's going to be at the high end of that 9% to 10% range.

And then just longer term on that segment, in terms of margin performance, out -- looking out. What is the potential on that segment? I know structurally speaking, it's going to be always lower than engine, but is there a lot more potential for that to go above 10% if you look out giving DCT volumes and some of the business that you have in the backlog?

Well, all of our business is basically taking 15% or better return on invested capital. So, it's not so much margins that drive our business' return on invested capital, but that being said, we're trying to take business at good margins. Now, the issue is, historically the drive train group has more of historical costs, so we've got legacy costs, and pensions, and so forth and so on. The drive train group carries more of the historical cost that the engine group doesn't have, because the engine group has actually -- has grown to be the size that it is in the last 10-15 years.

Right. Okay. And then, just if you look at the announcement yesterday with the China JV, was that part -- I assume that was part of the $100 million or so business that was pushed out beyond the '14 time frame. And then, what's the potential? Are those basically the first three programs for the joint venture? I can't remember; I know you did launch something last year. If you could just give us an update for the China JV for the DCT?

Yes, they were part of the programs that were pushed out. The part that was kind of -- they were initially in it as part of the original ramp up stage of that -- of those programs, so you're going to start to see more of that now being picked up. I think in the next year, well, the new business backlog that we announced this November in 2012 -- we'll pick up some of that business now. The full tranche of that business won't be seen until like '15, maybe '16. Because those three transition programs are stepped up. What was the other part of your question again?

Just on the quoting activity as a follow-up to that. Now that you've got that booked, and where do you stand?

According to activity, in terms of the amount of new business we scored in the first quarter of this year, we tracked new business wins by our purchase orders that we have been awarded quarter by quarter. And this was the best quarter we've had -- the best first quarter we've ever had in our history, and it was probably the second best quarter we've ever had, period. The fourth quarter tends to be the strongest quarter, because the purchase orders tend to ramp up as you out through the year, and the fourth quarter tends to be the highest. And the first quarter actually tends to be one of the lower quarters, but versus first quarter this year was a really strong quarter.

Was that turbo driven, or was there other stuff within there that -- ?

It's an even distribution of all the product, yes. Yes, we're winning turbo business, we're winning dual clutch business, we're winning Morse TEC, vertical cam timing business. It's a total cross section of the Company -- emissions, BERU is starting to kick in now, also.

Okay, great. Thanks so much.

Your next question comes from the line of John Murphy with BofA.

Good morning, guys.

Hi, John.

A question on the swing factors that we would see in 2012 relative to your guidance. It sounds like in the first quarter you are seeing a little bit more weakness in Europe than you thought, but also a lot more strength in North America that really you're offsetting, allowing you to keep your guidance about where it is. If we think about the other big swing factors, other than just volume risk in Europe on the downside, and buying risk to North America on the upside. What are the big swing factors you're thinking about? Is it capacity, bottlenecks, or mix, or raw material costs, where there's resin issue? Just trying to understand what other factors you're thinking about as you're working through this guidance, other than just the volumes?

In actuality there aren't that many big swing factors that haven't already been accounted for. Material costs are roughly under control. They are going to be in the $25 million range, as the historic --- kind of towards the historical low portion of the range. So it will be $25 million plus or minus.

We have capacity -- we're putting in capacity at accelerated rates to handle the growth for the future, but that's normal for us. We -- that's accounted for in our 6% -- roughly 6% CapEx investment every year, and our 3.5% to 4% R&D expense every year. You're right though, in the beginning of that part. We have seen some softness in the -- let's just say the French, Italians, and some of the North American, German OEMs. The German OEMs that are owned by the North Americans have seen some softness, okay?

Yes, we're seeing increased pick-ups on North America both in the truck market. We're strong with Ford on four wheel drive, and timing drive systems, and ECO Boost across the board, with four-cylinder in the ECO Boost, six-cylinder truck at Ford. We're strong at Chrysler on four wheel drive and Pentastar engines. And that is part of the reason why you're seeing the increase in our tax rate, because we're getting more business and more profits out of North America, and it's kind of putting a pump to our -- kind of jacking up our tax rate a little bit. Third question, John. (laughing)

Capacity you don't see as a short-term issue at all?

No. We constantly are putting in new capacity, and I -- James is sitting right here, he knows. I have been for the last three -- two to three years, I've been hitting these guys hard on doing two-year forecasts on capacity plans and getting the capacity in before our customers actually need it. We don't want to put it in too early, but we darn well don't want to put it in late.

Thanks, Tim. On some of the stuff that, Rich was getting at on the margin side. I'm just curious that as you are filling up this capacity and you are hitting these nice, better than expected margins, north of the 11.5% operating margins. Is there real potential for these margins to increase through the course of the year, or do you think this very robust level we saw in the first quarter is where we might travel at through the rest of the year, and there's maybe not upside to north of 12%. There is a lot of speculation that there is some more room for your margin, and a lot of speculation that there's not. Just trying to understand if you think you might be able to exceed this first quarter number for the rest of the year.

Let's just say this, there is a lot of pressure on pricing, a lot of pressure on margins. We try to do -- we obviously do a pretty good job. These margins are coming -- these improved margins are coming from mainly from operational efficiencies and improvements. Our guys are -- you can see by our SG&A and you can see by our margins, we're a well-oiled machine right now, and we're running really strong in terms of operating efficiencies. So a lot of this margin stuff is coming from internal actions. At the same time on the pricing side, we go out and quote business and we win business. I think we're winning business for two reasons. One, we have leading technology and two we're competitive on price. Competitive doesn't necessarily mean low or lowest, it just means we're providing fair value.

John, this is Ron. I just want to add a little more color to that. I think one way to look at it is to take a look at sequential revenue growth going forward and then apply a 15% to 20% incremental margin. I think that's the way you should look at this from the first quarter. Okay?

That's incredibly helpful. And just lastly, Tim, one last product question. It sounds like the drive train and the transportations are doing really well here in North America. Just curious, as you are getting inquiries, a lot of inquiries on turbochargers, are you getting a lot of inquiries on your Torque-on-Demand and your efficient all wheel drive systems. Is that something that automakers are very focused on, and if you could remind us what general fuel savings you can deliver on your efficient transportation as well as all wheel drive systems?

Okay. Yes, we are getting a lot action with the traction system acquisition; we're going to be taking that technology to China. That is our expectation. We're getting on the -- let's just say in the active portion of the business, it doesn't necessarily increase on the four wheel drive side. It doesn't improve fuel economy. But the best you can do, and what we do technically, is focus on not detracting from fuel economy. So, if you can deliver a four wheel drive or an all wheel drive system, that doesn't -- that is parasitic loss neutral or fuel economy neutral, that is a good thing.

On the transmission side, we are working on new technologies for traditional automatic transmissions to improve fuel economy through clutching materials and friction materials. Huge increase in demand on dual clutch transmissions in Europe. You're starting to see dual clutch; we just talked about China. But you are going to see dual crutch being spread more and more across the globe. What you're seeing is that dual clutch has two competitors, the traditional automatic and then it has a dual dry clutch as a competitor. Yes, we supply the control modules on the dual dry clutch, but the dual dry clutch is having some technology problems out there or some shifting problems. So, there's a lot more interest and a lot more people contacting us on where they initially were thinking about dual dry clutch, they're now thinking more about dual wet clutch.

Great. Thank you very much.

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

Thanks, good morning.

Hi, Ravi.

Hi. I may have missed this when you spoke about Europe, but did you give your forecast for your own sales in Europe for 2012?

No, we didn't.

I think you'd said before that was going to be 12% Ex-FX or something?

What we said earlier in the previous meetings and conferences is -- I think we said it was going to be up and Europe was in a down market. Where we said Europe was going to be down 4% before, now we're saying it's down about 6%.

We are going to be up about 6% to 8%, I think, in Europe without adjusted for FX or foreign currency and higher than that 8% to 10% or something like that, adjusted for foreign currency. We're seeing a little, in all honesty, we're seeing a little bit more softness than we anticipated with some of the French and Italian and some of the other German OEMs, in terms of their volumes. But yet, the traditional German OEMs, the BMWs, the Mercedes, the Audis and Volkswagens, their volumes are strong, and so, we have strong volumes with them, but then we're starting to see some weaker volumes of some of the other small car players in Europe.

Ravi, I just want to -- the first quarter performance the market was down. Our differential in Europe was about 15 percentage points between the European market being down and what we achieved in sales, in the first quarter. I wasn't sure if your question was forward-looking or just what the performance was in the first quarter.

Not for full-year, but I think Tim addressed that. So, thanks for that. And also Ron, couple of questions for you. Your corporate expenses were probably the highest you have ever had. Was there anything going on there in terms of incentive comp or something?

Yes, there was. The year-over-year change was about $6 million, $7 million related to our stock-based compensation year-over-year; and actually, on a sequential basis, it's up about $9 million. So, both views there; that is exactly what it was. The stock price at the end of the year was $63, roughly. We finished the first quarter about $84, I think it was, and then if you go year-over-year, it was I think another $4 difference. I got to go back and get that number real quick, but that's what you're seeing. Last year, the first quarter was $80 finished, and we finished at $84, so there's $4 to $5 differential. And from the end of the year, you're up almost $20.

And we think that's all a good thing too. (laughter)

We agree. So, going forward that's going to be still in the mid to high 20s or is that going to be more of an elevated number? The overall corporate cost?

Are you talking about corporate costs, or you talking about impacts of --

I'm talking about overall corporate costs.

I think corporate costs will be about where it is right now what you're seeing going forward. Probably some slight reductions as we go throughout the year.

The incentives will start to come down.

Yes, the incentives will come down. So, I think we probably peaked in the first quarter.

But the compensation portion will come down.

Got it, and final question is, Ron, thanks for all that color on when the share count comes out. But can you make our life much easier and just give us a guidance for what share count is going to be in 2Q, 3Q and 4Q?

My life would be easier, too. (laughter)

He's asking for guidance for that. For the full year, for the rest of the year.

For the impact of that? Or?

What the share count is going to be?

I would basically take the 6.5 off the end of the quarter number, roughly, roughly.

Ravi, we had --- this is Ken. We had talked about this a little bit a couple of months ago. We still think the average share count is going to be 123, 124, somewhere in that area.

And we are at 127.

Got it. Thanks very much.

Maybe 5 is a better number.

Thanks for that. And Ron, James and Robin, congratulations on your new positions.

Thank you.

Thank you.

Your next question comes from Itay Michaeli with Citi.

Thanks everyone, good morning.

Hi, Itay.

I was hoping you can share what the backlog contribution to revenue was in Q1 and refresh us on what you are looking for there for 2012 on the revenue guidance?

I'm not so sure I can identify what the backlog contribution was. We just track orders and shipments as they come in. I think what you're asking -- how much of it is attributed to new business and how much of it was attributed to carry-over type business?

Exactly, yes.

I think one way to look at it. I think one way -- there is one way maybe on your models you could take a look at it. I would take base sales plus maybe a market, where the market was, and take that differential from the market to where our end sales were. I think that might be a good indication of how much backlog came in.

Great, that is helpful.

Market was about four, excluding FX we're thirteen so, it's nine. I would say maybe that nine would be indicative of our backlog coming in.

Right. And maybe some --

Just a little bit of price in there, noise, but --

That will get you there.

We don't track it that way. (laughter)

That's fair enough. And then, you're maybe a little more cautious on Europe. Tim, I was hoping you can just share what you are seeing thus far Q2 in terms of production schedules and roughly where you think the region will be in terms of production year-over-year in terms of Q2?

I'll let James grab that one.

Yes, sure, good morning. I think as Tim said we have seen just a little bit of softening in particular with the French automakers and especially the southern European business. We are seeing Q2 at a high level, about where we were from a couple of months ago. So, we are seeing some little shifts, customer to customer. As Tim said, from a -- the German OEs are doing very, very well, both within Europe and for export. So, those volumes continue to hold up. So, I would say what we're seeing right now in the quarter is similar to how Tim portrayed it for the rest of the year in the quarterly outlook. So, no big swings at this stage.

I think we may see the first and the second quarter track a little bit better than the first quarter. I think it will be better than flat, it will track upward. The second quarter is traditionally one of the strongest quarters of the year. It was our -- and that was the strongest quarter we had in 2011. So the comps will be a little bit tougher in the second quarter when you compare 2012 to 2011. I think you're going to see some slight increase in sales from the first quarter to the second quarter of this year. And then I'd say what we're seeing is, and what we're predicting, is a stronger second half to the year.

That's great. And one last quick housekeeping. CapEx --- are we still looking for about $450 million to $500 million for the year, or has that changed at all?

No, that is correct.

Perfect. Thanks so much, guys.

Yes, it is.

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

Thanks, good morning.

Morning.

Couple of items. Big picture, what are you seeing in terms of trends in the light vehicle diesel market globally? Is this still a growth driver for you? I know that Europe has kind of flattened out. Maybe you can talk about that a little bit?

It's holding strong at 54% of the market penetration. Some people had thought, had predicted, it was going to go down a little bit, but we're not seeing it. It's holding strong in terms of percentage at about 54% of the market. And now the market's, because of the southern European, the market's trending down a little bit in terms of volume, but the percent penetration is holding firm. Gas turbochargers are continuing to penetrate the market, so we're seeing growth in gas. In the face of a declining market, we're still seeing growth in gas.

What about in markets outside of Europe? Are you seeing any growth in diesel -- light vehicle?

Well, we're going to start to see some growth in diesel, I think, in North America. The Europeans are coming over with more availability. GM is going to start -- in 2013, GM is going to start launching the Cruze with a diesel, and I think that they're planning a low penetration rate, but I think that penetration rate is going to be much higher than they expect, and I hope it is. You're seeing increased use in diesels in Korea. I think we're seeing increases in Korea, a little bit in India. We're seeing good increases in India, but in India, we sell through a joint venture, and unfortunately, we are a minority owner in the joint venture instead of being a majority venture, which was set up like 25 years ago, long before we actually owned the Company. So, I don't know if that helps you, Chris.

So, for the time being maybe a little bit of help from diesel in the light vehicle market?

Yes, diesels are growing. I don't have the charts in front of me, but diesels are growing for 2012 globally, and gas is -- gas turbocharge engines are growing much stronger, globally.

Right. That much is clear. Okay. Then just a quick one. You mentioned a few times some of the softness that you are seeing in southern Europe. Can you just help us frame the size of that for you? So, roughly what percent of your business in your Europe is with Peugeot, Renault, Fiat and Opel?

I've got that. Hold on. I don't break it down, but I can give you some indication. The general softness amongst our schedules is, like, probably in the 2% to 3% range. But let's just say this, that when you get in to -- Renault and PSA -- Renault's the highest, they're the fifth largest customer, but that's a Renault/Nissan combination. And they're -- what's happening is they're -- we are growing, and we are growing our penetration rates with Renault, PSA, and actually some with Fiat, but -- so, we're increasing our penetration rates, but their volumes are declining, and what is happening is it's coming out netting a little bit lower than we originally forecasted when we put together our forecast in January for this year.

Right, but big picture, if your business is roughly is 50% Europe, is ten points of that with these customers that are under pressure, or is it more or less than that?

I wouldn't say it's that much. Less, because you're just thinking turbochargers, and we supply all sorts of product to a whole lot of European OEMs. So, we can get back -- I can get back to you on a more specific answer.

Okay, thanks.

Your next question comes from Brett Hoselton with KeyBanc.

Good morning, gentlemen.

Hi, Brett. How you doing?

Good, how are you guys doing?

We're good.

Couple of quick questions here. First of all, I would consider it to be housekeeping. The nylon issue. You guys have a lot of engine products. Thought that you guys might have some insights there. Most of what we're hearing is that it's not going to be that material. Do you have any insights that suggest this could turn into a material issue in the short-term for the auto makers, particularly in Europe or even North America or Asia?

Well, let me start with BorgWarner. It's not an issue for BorgWarner at all. There's maybe one or two part numbers, and one of the part numbers we don't use that supplier. Our Tier 2 or Tier 3 supplier to us doesn't use that supplier. And the other part number, there's a year's -- we have a supply in the pipeline; between us and our sub suppliers, we've got enough material to cover us for the rest of this year. This will be long-solved by then. As far as the industry is concerned, I think you're going to see, it'll first be hitting Europe, possibly, and I think that is where you see the initial impact, if there is an impact.

This industry is very flexible and knows how to react very quickly. You saw it with the Japanese earthquake and you've seen it on some of these other things, like where ever there's been plant fires and so forth. I think that there will be substitutions, and I think there will be workarounds. And I don't think this is going to be an issue for the industry at all. That is my opinion. But I'm pretty optimistic about this industry working with the resin people -- that they'll be able to come up with substitutions and workarounds. There may be some short-term delays here or there with one client or another, but I think that is not going to be that much of an issue.

And then as I look out into 2013, I know that you're not providing guidance here, but, in the past, you know, Robin, I have heard you talk about being able to sustain margins when revenue growth is, call it 10%, 15% or something like that. Improving revenues when it's in excess, revenue growth is in excess of 20%, let's say, and so on and so forth. My question is, we look on to 2013 --- let's say 5% production growth, 10% new business revenue growth, so forth, you're kind of in that 15% range. Is there any reason to believe, is there any unusual items or anything along those lines that you would look at 2013 and say look, this is going to be a particular impediment or benefit margin wise into 2013 that would cause us to do something different than what we would normally experience in a 10% to 15% revenue growth environment?

This is Ron. I don't see anything that would go against us. Incrementals of 15% to 20% is pretty much the way you should model that.

And then finally, can you provide us with a quick update on acquisitions? My question here is if you look out over the next 12 months or so, would you be particularly disappointed if you weren't making an acquisition or two, or do you think that it's unlikely that you're going to make an acquisition or two? Do you think it might be material, that sort of thing?

Yes, I'll take that one. You know, as we have said, we have a list of ideas. We have a list of companies that we track, monitor, and it's difficult to predict someone finally saying uncle and giving up and going to sell their business to us. But I think given our focus, I think if we couldn't find one of these guys to relent and be willing to let us buy one of these prized assets in the last 18 months, I think we would be a little disappointed. There's some technology out there we'd like to own. We have made it known we would like to own it. Not publicly, but to the owners, and we've had some discussions. We continue to have discussions, so I think that yes, you're right. If 18 months from now we haven't done anything in the acquisition area, we'll be a little disappointed. Just remember you know, we have -- in the prior 24 months we have made two decent acquisitions so, it's not like we have been sitting on our hands for a few years. But we are anxious, as always, to bring new technology in the Company, and again, I think that we're focused pretty hard on it, and we hope to be able to bring something home in the next 18 months.

All right, thank you very much. Well done on the drive train margins.

Thank you.

Thanks, Brett.

We have time for one final question, and that question comes from the line of Joseph Spak with RBC Capital Markets.

Thanks for squeezing me in, guys. Most of my questions have been answered. Maybe if I could just ask one on the margin. I appreciate that, the 11.8% to start the year, it gives you a good base to meet your full-year target of greater than 11.5%, but over the past two years, we have sort of seen sequential improvement every single quarter. Now that drive-on is back up to double digit margins, should we expect a little bit more seasonality in the margins for the rest of the year?

Well, I think it's the top line that you have to look at, so you have to look at what the sales growth is going to be sequentially on the top line, and then you can model a 15% to 20% incremental margin on that sales growth. It's the top line that is going to be the most important thing. Now, with that said, we always have seasonality in this business. Third quarter, typically with summer breaks in Europe and changeovers in the US is typically a lower sales quarter for us, and it picks up in the fourth. Historically, that is what we have seen. We have seen changes historically, but I think that's a historical perspective there.

I think you're going to see -- the rate of change will start to slow down. We have made some pretty dramatic progress over the last year and a half in terms of step-by-step, quarter by quarter, and I think we have the ability to improve, but you're just not going to see the same large steps from one quarter to another.

Okay and then just one last quick housekeeping. Appreciate the color on the share account and the color coming up. On the interest on the convert that you add back as well, it sounds like just assume one month of that in the second quarter?

You can actually assume a half a month, I believe. Because the April 18 is when it was converted, on the 16 -- half-month. And you're right, going forward you won't see that any longer.

Okay, thanks a lot, guys.

I would like to thank you all again for joining us. We expect to file our Q before the end of the day, if you're looking for details of our results. If you have any follow-up questions about our earnings release or matters discussed here on the call or the Q, please direct them to me. Nicole, please close out the call.

That does conclude the BorgWarner 2012 first quarter results earnings conference call. Thank you for joining. You may now disconnect.