博格華納 (BWA) 2013 Q2 法說會逐字稿

Good morning, my name is Stephanie and I will be your conference facilitator.

At this time, I would like to welcome everyone to the BorgWarner 2013 second-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, Stephanie. Good morning and thank you all for joining us.

We issued our earnings release this morning at approximately 8.00 AM Eastern time. It's posted on our website, BorgWarner.com, on our investors home page. A replay of today's conference call will be available through August 1. The dial-in number for the replay is 800-585-8367. You'll need the conference ID, which is 10514936. The replay will also be available on our website.

With regard to our IR calendar, we will be attending a number of conferences over the next few months. August 13, we'll be at the JPMorgan Auto Conference in New York; September10, we'll be at the Main First Auto IAA Investor & Analyst Conference in Frankfurt Germany; September 11, we'll be at the RBC Capital Global Industrial Conference in Las Vegas; and on September 16, we'll be at the Morgan Stanley Global Autos and Industrials Conference in Laguna Beach California.

Before we begin I need to inform you that during this call we may make forward-looking statements, which involve risks and uncertainties as detailed on our 10-K. Our actual results may differ significantly from the matters discussed today. Now, moving onto our results, James Verrier, President and CEO, will comment on second-quarter results 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 2013.

With that, I'll turn it over to James.

Thank you, Ken, and good day to everybody.

Today I'm very pleased to review our second-quarter results, as well as our second-quarter accomplishments. First of all, I like to congratulate all of the BorgWarner employees on an excellent second quarter. Your efforts drove outstanding results in a challenging environment.

Now let me talk about our results. Reported sales were $1.9 billion, which is up 3% from a year ago, excluding the impact of foreign currencies and dispositions made in the last 12 months. US GAAP earnings were $1.50 per share, which is a new quarterly record for the Company. Our reported operating income margin was 12.9%, which is also a new quarterly record and represents outstanding performance by our operations. So despite low production levels in Europe for both light and commercial vehicles, our operational efficiency and cost controls enabled us to post a strong operating margin in these conditions.

Let me talk a little bit about the Engine Group, where the second-quarter sales were $1.3 billion, which is up 4% from a year ago after excluding the impact of foreign currencies and dispositions made during the last 12 months. Results were led by high sales of turbochargers, EGR coolers and engine timing systems in China, and also turbocharger sales in Brazil. In the Drivetrain Group sales were just under $620 million, which is up 2% from the second-quarter 2012, when we exclude foreign currencies. The Drivetrain results were driven by higher sales of all-wheel drive systems in North America and all-wheel drive systems and transmission components in Korea. As we look to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow and in the quarter we spent about 5.7% of sales and we remain committed to supporting our future growth and productivity improvements. Our spending for R&D was about 3.8% of sales in the quarter, which is just under our targeted level for R&D spending of 4%.

I'm also proud to review some exciting announcements that we made during the quarter. First of all, BorgWarner will provide turbochargers for Jaguar Land Rover's new family of four cylinder gasoline and diesel engines, which we expect to launch in 2015. To support JLRs new engine manufacturing center near Wolverhampton in the UK, BorgWarner plans to expand its existing production lines and also build a new engineering center in nearby Bradford. In addition to this, BorgWarner is establishing a masters degree program in turbocharger engineering at the University of Huddersfield, also in close proximity. BorgWarner also supplies leading twin scroll turbocharging technology for our Hyundai's new 1.6-liter turbo gas direct injection engine available on Veloster Turbo both in the US and Europe. This turbocharge engine is nearly 50% more powerful than the Hyundai standard 1.6 TDI engine.

Also, BorgWarner supplies its latest EGR coolers for Renault's 1.6-liter diesel engine, which is available on the European Scenic and Megane, as well as Nissan's crossover, the Qashqai. BorgWarner's advanced EGR cooler helps improve fuel economy up to 3%, while also helping to achieve upcoming Euro VI standards. BorgWarner DCT joint venture in China has recently started delivery of its DualTronic control modules and clutch modules for SAIC Motor Corp's new six wet speed dual-clutch transmission. This is the first developed completely in-house by a domestic Chinese automaker. Last but not least on the highlights, on July 24, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.25 per share of common stock, and Ron will provide more detail on the dividend during his discussion of capital allocation strategy.

Now I like to review the current outlook for 2013 light vehicle prediction -- production, which has improved slightly from our previous view. We're now expecting global production volume growth of approximately 2% in 2013 compared with our previous outlook of 1% growth. The increase is primarily due to an improved outlook for North America, We're now expecting production volumes growth of 5% in 2013 compared with 3% previously. As we look at the rest of our key markets, we still expect Europe to be down 3%, China up 10% and Japan down 10%.

In the commercial vehicle markets, our overall expectations are unchanged. We still expect stability in 2013, but not much growth. So in Europe and North America, we expect production to be relatively flat compared with 2012, which is consistent with our previous outlook. However, our view on CV production in China has improved. In April we said that we were expecting a double-digit decline in 2013 CV volumes. However, a strong first half has changed our view, so we're now expecting CV production in China to be flat with 2012 levels. In Brazil we still expect double-digit growth and a strong half we've seen support that view.

Finally, our sales and earnings guidance for 2013 has changed. Sales growth in 2013 is now expected to be 3% to 5% or 4% to 6% when you exclude 2012 dispositions and our 2013 earnings guidance is now $5.40 to $5.55 per share. Our operating margin guidance is now approximately 12% for the year. Ron will provide a little more color on our guidance shortly.

So, with a strong first half of 2013 behind us, I'm increasingly confident that 2013 will be another very strong year for BorgWarner. The macro environment is improving but still has its challenges, especially in Europe. However, BorgWarner's record financial performance in the second quarter underscored our operational proficiency and our ability to manage cost during challenging times.

As I look beyond 2013, I'm excited about what I see ahead for this Company. Our operations are performing at a high level and I'm confident that this will continue. As our sales growth improves, the combination of our efficient operations and higher sales outlook should result in tremendous earnings power for our Company. I believe no company in the auto sector is better positioned for 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, very good about our Company's future.

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

Thank you, James, and good day, everyone.

Before I begin reviewing the financials, I'd like to put BorgWarner's performance into perspective relative to the industry. Global light vehicle production was up 3% in the second quarter compared with the same quarter last year. BorgWarner's reported sales were up 2% from a year ago. As James explained earlier, if we exclude the impact of foreign currencies and M&A activity in 2012, our sales in the quarter were up 3%.

To get a clear picture of our performance relative to our markets, we need to review the light vehicle and commercial vehicle markets separately. First, let's take a closer look at the light vehicle market from a regional perspective. In Asia, which we define as China, Korea and Japan, light vehicle production was up 2%. Our light vehicle sales in Asia, excluding currency, were up 10%. In Europe, light vehicle production was up 1%. Our vehicle sales, excluding currency sales and 2012 dispositions, were up 1%. In North America, light vehicle production was up 5%; our light vehicle sales growth in North America was up 3%, slightly below the market.

Now let's review the commercial vehicle market. Commercial vehicle production was mixed in the quarter. Production was up in Brazil and China, but lower in North America and Europe. As a result, our commercial vehicle and aftermarket sales were up about 1% in the quarter. So our typical outperformance of light vehicle market by 8 to 10 percentage points was intact in Asia in the second quarter. In Europe, our customer mix was weighted toward those customers who underperformed overall markets. Also, you may recall that our DCT business in Europe was exceptionally strong a year ago, making it a tough year-over-year comparison. Our performance relative to North American markets continues to be a challenge, as the adoption of advanced powertrain technology continues to lag other markets. We expect this to improve over time.

Now, working down the income statement, gross profit as a percentage of sales was 20.9% for the quarter. That's up slightly from 20.6% a year ago, the impact of raw material prices in the quarter was minimal. SG&A expenses were 8.2% of sales in the quarter, in line with the second quarter of 2012. R&D spending, which is included in SG&A line, was 3.8% of sales in the second quarter, up 20-basis points from a year ago. This implies a 20- basis point decline in other SG&A spending, which was attributed to good execution of cost control. Reported operating income in the quarter was $243 million, or 12.9% of sales, compared with $231 million, or 12.5% of sales on a comparable basis a year ago. The 12.9% operating margin is a new quarterly record for the Company. After excluding the impact of foreign currency and non-comparable items in the second-quarter 2012, our incremental margin was around 30%, which is above our targeted 20%, which is outstanding performance by our operations. As a result of our strong first half, we are raising our full-year operating margin target to approximately 12% from 11.5% or better.

As you further -- as we look further down the income statement, equity and affiliate earnings was $11 million in the quarter, down slightly from $13 million last year. This represents the performance of NSK Warner, our 50-50 joint venture in Japan, which sells transmission components to our Japanese customers in Japan and China, as well as TEO, our turbocharged joint venture in India. Light vehicle production was down in Japan and flat in India for the quarter. Interest expense and finance charges were $9 million in the quarter, down from $13 million a year ago. This was primarily due to some income from the Company's cross currency swaps.

Provision for income taxes was $67 million in the quarter, which is a 27% effective tax rate, in line with our 2013 guidance. Net earnings attributable to noncontrolling interest was $6 million in the quarter, up slightly from $5.6 million. This line represents our minority partner's share in the earnings performance of our Korean and Chinese consolidated joint ventures. Earnings per share, that brings us back here to the earnings -- I'm sorry, earnings per share, which were $174 million in the quarter, or $1.50 per share, up 10% from $1.36 per share year ago on a comparable basis. Again, outstanding performance for the Company.

Now let's take a closer look at our operating groups. Engine Group sales were $1.29 billion in the quarter. Excluding currency and 2012 dispositions, Engine Group sales were up 4% compared with the second quarter in 2012. Adjusted EBIT for the Engine Group was $220 million in the quarter, or 17.1% of sales. That's a 50-basis points higher than the 16.6% reported a year ago, and a new quarterly record for the Engine Group, as well. Excluding currency and 2012 dispositions our year-over-year incremental margin was 33%. Excellent performance for the Engine Group.

In the Drivetrain Group sales were $614 million in the quarter. Excluding currency, Drivetrain Group sales were up 2% compared with the second quarter in 2012. Reported adjusted EBIT was $60 million, or 9.7% of sales, up from 9.2% of sales a year ago. The year-over-year incremental margin for the Drivetrain Group, excluding currency, was 47%, which is great performance. However, the group has been inconsistent and it is our view is that there is room for improvement in Drivetrain in profit levels and in performing consistency. We are focusing our attention on improving the group's performance.

Let's move to the balance sheet. Cash flow -- balance sheet and cash flow, we generated $300 million of net cash from operating activities in the first half of 2013, down $10 million from the first half of 2012. Capital spending was $195 million in the quarter, up $7 million from the same period a year ago. Our capital spending is required to support our program launches around the world, particularly in Asia, South America, Eastern Europe and Mexico. Free cash flow during the period, which we define as net cash from operating activities less capital spending, was $105 million.

Looking at the balance sheet itself, balance sheet debt increased by $163 million compared with the end of 2012. Cash increased by $101 million during the same period. This $62 million increase in net debt was primarily due to $150 million of share repurchases in the first half of 2013 less our $105 million of free cash flow. We purchased about 1.9 million shares in the first half of 2013, leaving approximately 6.3 million shares on the current authorization. At the end of the quarter, our net debt to capital ratio was 11.3%, which is below our targeted range of 15% to 30% but up from 10% at the end of 2012. Net debt to EBITDA at the end of the second quarter on a trailing 12-month basis was 0.4 times.

Our capital structure remains in excellent shape. Also, as James mentioned, we have reinstated the dividend. The Board has declared a quarterly cash dividend of $0.25 a share of common stock payable on August 15, 2013, to shareholders of record of August 5, 2013. At current share price levels, the yield would be between 1% and 1.5%, which is in line with historical levels. The dividend is an important and stable component of our cash deployment strategy, which also includes capital expenditures to fund our organic growth, acquiring strategic assets and repurchasing shares. After CapEx and paying the dividend, our priority is in strategic acquisitions. However, in absence of a deal, repurchasing shares remains an option for us and we have repurchased over 6 million shares in the last five quarters.

Now, I'd like to discuss our guidance for 2013, which has changed from what was provided in April. James reviewed our guidance at a high level, but I'd like to discuss some of the finer points. Our sales growth expectation of 3% to 5%, or 4% to 6%, excluding 2012 dispositions, still assumes no currency impact. The net impact of foreign currencies in the first half was small, as the weakening Japanese yen and the Brazilian real nearly offset the strength in euro. We will continue to monitor foreign currencies and provide updates as needed. We still respect raw material inflation of $15 million to $20 million in 2013, but now toward the lower end of that range.

As we mentioned earlier, our operating income margin is now expected to be approximately 12% in 2013, which is up from 11.5% or better. In other words, we now expect to improve our margins this year compared with 2012. Productivity gains and spending controls seen in the first half are expected to drive strong results for the remainder of the year. Our expected diluted share count for 2013 has changed. Our previous EPS guidance was based on 117 million diluted shares, which was our share count at the end of 2012. However, due to the first-half share repurchase activity, our new full-year average diluted share count is expected to be 116 million shares. For those of you modeling our financials, that's approximately 116.3 million in the first half and approximately 115.5 million shares in the second half. This diluted share count guidance is based on share repurchases made to date. Any additional share repurchases that we may execute during the remainder of the year are not factored into our guidance.

Finally, our EPS guidance range is now $5.40 to $5.55 per diluted share, up from $5.15 to $5.45 per diluted share previously. Both the current and previous guidance range exclude non-comparable items, of course. About $0.05 of the guidance raise is due to a lower share count based on share repurchases made to date. The remainder is due to better-than-expected performance from our operations.

So we continue to be confident in our ability to execute in any market. This Company has demonstrated a heightened focus on efficiency and cost controls since the 2009 recession. This focus resulted in a highly-efficient growth and record margins in each of the last three years. Weak market conditions, particularly in Europe, will likely result in sales growth below our long-term trend in 2013. Despite this, 2013 should be another year of record sales and record profits for BorgWarner. Over the long term, we intend to execute our growth strategy and over the short term remain focused on efficiency, regardless of the direction of the market.

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

Thanks, Ron.

Now let's move to the Q&A portion of the call. Stephanie, could you announced the Q&A procedure again?

Yes, sir, thank you.

(Operator Instructions)

Rich Kwas with Wells Fargo Securities.

James, on the margin performance -- very strong this quarter -- anything unique that helped the quarter? It sounded like a lot of it was productivity; but anything that you would call out is being abnormally good? Then, with the guide for the back half of the year, it implies a step down in the margin -- the overall margin. You usually get some seasonal decline in Q3, but are you expecting anything changing on the mix front, or in terms of the operating environment, the macro environment, that is included in the guidance?

Rich, let me address the first one to start with. There was nothing really unique or that unique; it was just solid performance and I think, significantly, across all of our products and all of our segments of the business. I think the teams around the world just did an outstanding job, executed on good plans that we'd put together earlier in the year to acknowledge a low growth environment. It was just very, very solid execution, no unique things, which is terrific.

I would say, Rich, by and large that performance -- that strong performance is what we're continuing forward with in the rest of the year. You're right, when you do comparables first half to second half there's a little bit of seasonality impact in Q3 -- and to some extent, Q4, as well, Rich, when you consider the holiday season at the end of the year. So, that does factor in a little bit. Then there's a little bit -- in the second half of the year there's a little bit of incremental spend, primarily around R&D, that factors in as well, which we feel good. But those are the main highlights, I think.

I think your other question, Rich, about our view from the market side is, nothing's really changed there. Our view -- in our biggest market, which is Europe, we were talking around that 3% reduction level, 2012 through 2013, that's what we've seen consistently through the year and that's what we're seeing as the rest of the year plays out. I think as you look at the other regions of the world, no meaningful shift there. From a mix perspective, Rich, in terms of whether that's diesel versus gas or platforms -- nothing really meaningfully different from where we were when we talked in April.

So, hopefully, did I get all your questions there, Rich?

Yes, and then -- thanks, James, and then just a quick follow up.

Ron, on the Drivetrain margins, so pretty good performance this quarter. You called out still a focus there and room for improvement, but does this quarter's performance provide any more optimism for you about the state of the business and where it could go and if it would make you feel better about where you can go there? Any comments or color there would be helpful.

Rich, we've been very vocal in this part of the first half of the year about we wanting consistency and the absolute level of profitability in the Drivetrain Group. We like what we saw in the quarter, but the consistency's still a concern for us. It still -- we bounce it around too much for us. So I wouldn't add any more flavor around that, other than the fact that we continue to do deep dives on this business unit; and what I think we are very comfortable where we're going to go with this in the future.

Okay, great. Thanks, I'll pass it on.

Brett Hoselton with KeyBanc Capital.

Just to follow on with Rich's question on the Drivetrain business -- do you have any specific longer-term targets? I think you had mentioned one last quarter and seems like you already exceeded that with this quarter's results. Do you have any specific longer-term targets. And then more specifically -- we're talking about the Drivetrain business, of course -- and more specifically, what's your strategy? What do you hope to change there, specifically, to allow you to maybe improve the consistency or improve the margins?

Brett, I think I would say this. First of all, we are encouraged and pleased with the direction of the business. If you go back a year or so to where we are now, it's certainly moved forward and that's encouraging, so that's a good thing for us. We've not laid out a very specific target. We have said and we continue to say that we believe the Drivetrain business and be a double-digit margin business. We feel comfortable that we can get to there.

In terms of what are we looking at kind of thing question, there's a couple of areas that I think are key to us. We talked in prior calls around the China growth for DCT, and you see the good news in this quarter that we're starting to see that come on, but getting an acceleration there is a good key part of the growth. Just like all of our products and all of our businesses we always look to optimize our footprint around the world, and that's an area that we're paying good attention to. Because this is a growth business, the Drivetrain business we see is very strategic and it's a growth business. And as we drive that growth and accelerate that growth, we want to make sure we optimize our footprint to support that growth. That's kind of a key area for us, as well, Brett.

So in a nutshell, we're pleased with where we're at and the direction. We're not where we want to be, but we're going to get there, primarily around those couple of key levers I just talked about.

And then just switching gears -- new business backlog. It seems like, as we look into the fall -- and I know you haven't calculated the numbers yet, Ken -- but it seems like as we look into the fall, production net-net is kind of a tailwind. So it seems like that should be neutral to maybe a positive surprise. I'm wondering, as you look at your bookings throughout the first part of this year, back half of last year -- what kind of implications does that suggest for the backlog? It seems like the backlog should be fairly solid as we move into the back half of this year.

You're right, Brett. Ken's getting his calculator ready to do the real detailed analysis here over the next few months, but from a bookings perspective and business win perspective we feel good. What we've seen has been good and strong for us as a Company, certainly over the last six months, so that gives us good comfort as we start to build the backlog. What we've seen roll off this year, Brett, has been pretty much what we'd expected, so that's a good, encouraging sign. As we look to the second half of this year, we're seeing the backlog assumptions and projections that we'd factored in seem to pretty much be playing out as we thought. So more to come, as you know, Brett, but we're feeling pretty good about where we're headed on the backlog.

Thank you very much, gentlemen. Nice quarter.

Thanks, Brett.

Ravi Shenker with Morgan Stanley.

If I can just ask on the top line, you highlighted two areas of weakness in EU and North America. Can you just talk about what the near-term outlook is like, especially in Europe? Do you think that your relative customer -- you're exposed customer performance normalizes versus the industry in the third quarter? Also in North America, given that you have a pretty high level of visibility into the out years, when do you think that inflection in demand for your high-tech [cars] comes in.

Ravi, from a European point of view, the key point I'd point out is, things are playing out pretty much as we'd anticipated, and I think this is all pretty much what we'd projected and what we thought would happen. I think one of the things that we've talked about frequently is, you will get quarterly variations in our growth versus the market. And this is probably a good example where there can be some specific platform or vehicle mix that can work for you or against you and this is a good example of that. The fundamentals of our growth and our performance in Europe are still very much intact and we're not concerned at all there. We're going to continue to see good adoptions of our technology for fuel economy and emissions and we feel good there.

Switching to North America, we've talked in the past about the adoption rates and you saw pretty good evidence of that in the backlog that came out last year. We moved up the North American and the content in some aspects for the backlog. So when you look at turbocharger penetration, as an example, into North America, there's tremendous momentum around that as just one example. So you're going to see that and I don't think it's a single-point inflection, Ravi, I think it's going to be a gradual evolution over a two, three, four, five-year period. But we're seeing the trend going that way for sure.

So if I can just follow up on that, do you expect a return to outperformance versus the industry in the next couple of quarters? Or do you think it's a little more gradual?

I think it's going to play out pretty much as we'd expected, which we've talked about a reasonable level of outperformance in Europe for the year, and it'll vary quarter to quarter. But nothing really changing from where we were a quarter ago, Ravi.

Understood. Finally, if I can follow up on the margin commentary earlier in the Q&A. [We see an almost] 13% margin in this quarter with Europe still very weak. Where do you think your margins can eventually get to? I don't want to use the term peak margins, but as you really start delivering on this secular opportunity, where do you think that finally heads out?

Ravi, I'll tell you that we know that we can probably achieve higher margins and I'd rather not give any numbers at this point, but we're comfortable that margins can still expand.

Very good, thanks very much.

David Leiker with Robert W. Baird & Co.

This is Joe on the line for David.

Just regarding the control of expenses this quarter -- in the past, I think you flexed SG&A up or down in the quarter depending on whether trends were better or worse. Just wondering if you did this, this quarter? And then what you plan for investment might be entering the second half?

SG&A was pretty much in line with last year, right, basically at this point. What I would say -- forward looking, James mentioned, is that we do anticipate R&D spending -- probably, if you take a look at our data so far, our guidance really was 3.7% of sales. We're trending a tad higher, maybe 20 basis points higher than that, year to date. We fully expect that, that trend will continue to trend higher. So that's why earlier in the call we're talking about the second-half margin -- that's impacting the second-half margins. But other than R&D spending, I think the SG&A controls remains where it's at. I think the only variation was going to come through the R&D spending.

Okay, great.

Wanted to touch on the DCT launch in China. First of all, congrats, because I think that's four years or so in the making. Just wondering -- what is the size of the opportunity today, relative to when you first announced these programs? Do you have a sense of what maybe the launch schedule is with the other programs you have in the backlog on China DCT?

We're real pleased, as Ron said, to get the product launched and it's a great breakthrough for us and our customers in the Chinese market, so it's great news. We've always said we would launch with SAIC in the middle of this year, which we've now confirmed, and then we will start to follow on from that with FAW with subsequent transmission programs next year and then into 2015. Thus far the projections around the size of the business and the scope of the business is pretty consistent with what we've outlined in the prior calls, Joe, and it's meaningful and very positive for us.

Okay, and then my last one -- great to see the dividend come back. Just looking at the payout ratio here, would you think this is consistent going forward so that as your earnings grow we can expect the dividend payment to grow?

Yes, we expect to stay in that yield range that you're seeing right now, Joe, yes.

Okay, great, I'll leave it there. Thanks, guys.

Itay Michaeli with Citi.

Wanted to go back to the margin topic. You're doing a great job this year of controlling expenses. I'm just wondering how much of these controls are sustainable into next year as your revenue starts to return to the historical growth rate next year with backlog. Are some of these cost controls potentially going to become a headwind next year? Or can we think about incremental margins in 2014 to be pretty similar to how you've identified the walk previously?

That's a good question. We target 20% incremental margins on our additional sales. And you're very close to the reason why we target that, is to offset all the negatives of economic headwinds that we get. But we expect that putting back infrastructure in SG&A and some of the things that we're controlling this year probably will result in us not achieving the incremental margins we've seen historically. Now, regionally it could be some issues. Maybe if the sales growth comes out of one region better than another, we'll see better incremental margins. But I would suspect, and we're planning on the incremental margins not being as robust as we start to put more infrastructure in.

Absolutely. And the Drivetrain initiatives -- will those start to hit your numbers next year? Or is that more of a two- or three-year program?

I would say it's more of a two-year -- we think it's a two-year program on the Drivetrain side.

Great. Lastly, it does look like CapEx is running a little bit below your prior full-year guidance. Anything going on there? You still feel comfortable with the prior range for CapEx?

At this point we're comfortable with the guidance. We know we have some projects in the back half of the year -- major projects coming on board -- so at this point we're comfortable where the guidance is.

Perfect, great. Thanks, guys, and congrats.

Thank you.

John Murphy with Banc of America.

John Lovallo on for John Murphy.

First question would be on the all-wheel drive systems. I would imagine that some of the strength in North America was driven by truck mix. But what was the main driver in Korea?

John, this is Ken Lamb.

We experienced growth in both automatic transmission components -- the traditional ones -- and also all-wheel drives. So it was the whole Drivetrain Group was strong in Korea, which is a trend. We've actually seen that for the last couple of quarters.

Okay, okay, that's helpful.

Then if we could touch on the dividend for a second. Reinstating the dividend is clearly positive in our opinion. But I guess I'm curious on what drove the decision internally to do so? And there's no implications, I would imagine, that you see a less robust acquisition landscape, or any pullback in growth initiatives, or anything in that regard?

I would say the way I view it is, some of the execution of what we've maybe talked about over the last several months, we want to go forward with a balanced approach to the deployment of cash. So in addition to our capital expenditure, the dividend we view is a key piece to that. It is not in any way an indication of a slowdown around M&A enthusiasm, or desire from a BorgWarner point of view. We remain where M&A is our top priority for utilization of cash and we continue to work very diligently around M&A opportunity.

We just see it as a complementary piece to the whole strategy of cash deployment in addition to the share buyback. We think this is very good in terms of balancing our approach; and that's really what it is. It's execution of that strategy that we've talked about in prior quarters. We feel good about it and we'll continue to march forward on M&A, as well.

Okay, great. Thanks very much, guys.

Joe Spak with RBC Capital Markets.

Just wanted to get back to the lack of historical function in Europe for one more second. If I recall correctly, some of your mix negatively started to impact you in the back half of last year. So should we begin to see some better results just on some of easier comps? And then the second part of that would be -- I believe you've in the past stated that more of your backlog is second-half weighted. So should that help with some of the potential outperformance in the back half, as well?

Joe, this is Ron.

Let's talk about the second quarter comp year over year. If you go back to last year -- I was going to point this out earlier -- in the Drivetrain segment itself we had sales increase of 20%, which was substantially above the market. If you go back to that call and you analyze how we got there -- we got there by DCT, primarily, in Europe. So the year-over-year comp in Europe is difficult, which I pointed out on my call this year, when you're comparing the 20% sales growth last year. So that was one element.

And then also, as last year unfolded, like you pointed out, we had a more Northern European OEM mix that was in our favor and that started going more to a normal mix, I would say, but was more unfavorable to us as it rolled up throughout the year. As we entered the year, we felt we were in a more stable mix between Northern and Southern European OEMs.

Now as we go forward, the question is, what's the year-over-year comp? We're trying to still analyze a lot of that, but mathematically you would say that should improve, because you're now to a more normal mix that wasn't unfavorable in the third quarter. That's a logical conclusion that you're drawing to right there.

Let me add to that of your question about the backlog being stronger in the second half and if that can help us. We certainly expect the backlog to be stronger in the second half. However, we do have an offset from just less production available, so our base business will be less because of Christmas and the summer shutdowns and that will partially offset the backlog, which will be stronger in the second half.

Okay, and one more quick one on -- I agree with the earlier comment that it's great to see DCT China finally get off the ground. Is it possible to quantify, maybe even just from a margin-direct perspective, what the lack of top-line revenue has been, given that you've obviously laid out all the costs and had nothing to absorb that?

The only thing I'd say, Joe, is -- which we've described in prior discussions -- the slower ramp of DCT in general has just been the customer is getting ready with that technology. Not really a BorgWarner issue, although we work very closely with our customers. I think you know it's a challenging technology and it's really been around getting the product ready for market. We're not seeing any slowdown in market desire or market want for the product, so we feel comfortable with the long-term view. It's more of a product quality, product technology readiness issue with the OEMs. And I think this is a good indication that we're starting to move forward now, which is great.

Okay. The lack of absorption's clearly been part of the issue in the Drivetrain Group. Is that not accurate?

That is accurate. I think we've said that before, that the DCT in China has been a drag on the Drivetrain margins.

Okay, so it sounds like over the next two years you think you'll start to get some absorption and that'll help with the DCT improvement of the Drivetrain Group?

Yes, you're right, Joe.

Okay, thanks a lot.

Rod Lache with Deutsche Bank.

It's actually Pat Nolan on for Rob. Most of my questions have been answered, so I just had one just a follow-up detail question and then one bigger picture question.

Just the detail question -- the corporate expense, the difference between your segment results and the total operating income? It looks like the corporate expense actually declined a bit sequentially. How should we think about how that corporate expense ranges for the rest of the year? Is the Q1 more indicative of what we should see in the back half, or should I average out the first two quarters?

First of all I want to confirm that's correct. Sequentially we're down about $7 million on the corporate expense.

Now when you look at the segment, you've got to take into consideration their affiliate income is also included in there. And the fact that, that was improved sequentially reduces the expense. Just want to call that out; that's a little minor thing you have to take in consideration.

The answer to your question is -- what I would say on the corporate expenses is that the quarter itself probably was slightly below an average -- maybe $3 million, $4 million below the average that you would expect going forward, okay?

That's helpful.

On the buyback pace, can you talk about what the drivers are? I know you're not factoring in any prospective buybacks from where we are today into the guidance, but what are the drivers that would move that pace of buybacks from where it was in the first half as we look to the back half? Are there acquisitions that are pretty close to the finish line that maybe the cash would go towards that in the back half? Or, conversely, if operations came in better, would you be willing to pick up that pace?

There's many factors we look at, at the pace of buybacks. Everything from acquisitions, like you're referring to; market conditions; multiples, where we are at in certain historical things; valuations internally. I wouldn't say there's one factor, but you're generally correct. Cash flow regionally also could impact that. I don't really look at one item when we make decisions on buybacks, so you can't really point to one item.

Got it. Okay, thanks very much, guys.

Colin Langan with UBS.

This is [Raoul Jardin] on behalf of Colin.

Just looking at your second-quarter revenues and the updated guidance for the full year. Second quarter was slightly below where consensus was estimating it to be and it doesn't seem like you're changing your production assumptions for any region for the full year. What gives you the confidence to tighten the guidance range? Is it the commercial vehicle's better than expected, or better visibility?

I think at a fairly simplistic level, our view from a market outlook and the production volume level is consistent with where we were a quarter ago. So nothing from our view in the market has changed significantly enough to impact. What's driving the guidance on the revenue side -- the tightening of it -- is just, we've got six months behind us. So the first half of the year is done and in the bag, so that just gives us incremental confidence that we can narrow the range.

On the EPs side, it's really two key things. It's the strong performance that we delivered thus far in the year, and as Ron explained, around the share count issue. If you put all of that together that's why we feel comfortable where we're at.

That's helpful. Then what's your outlook for the diesel mix in Europe for this year? And how do you expect this to trend maybe over the next few years?

Our projection is around 53% in Europe of diesel rates, which is pretty much in line with where we were in prior quarters. So we're not seeing any real shift in diesel mix in Europe. So that's the quick answer for you.

Okay, thank you. Congrats on the quarter.

Thank you.

Brian Sponheimer with Gabelli.

Good execution this quarter.

Most of my questions have been answered here, but a longer-term question around emissions regulations in Europe. As we head into next year, give an idea about what incremental content you may be able to put on a commercial vehicle in 2014 in Europe relative to this year?

Brian, this is Ken.

As these emissions regulations continue to tighten, it's incrementally positive for us across our portfolio. There's not one specific thing that we can say is going to be additional compared to the content on a previous emissions reg level. But just across the board, generally speaking, our technology helps. As they continue to progress in the emissions regs, there'll just be more BorgWarner content in general.

Okay. As far as your European operations are concerned, particularly within the Engine division, where are you running on a capacity utilization basis, say, relative to a 1.5, 2 years ago?

I'd focus a little more where I am now as opposed to, honestly, where I was a couple of years ago. Right now we're pretty healthy. I don't want to put an exact number on it, but I would say we're in the 80%-ish type range of utilization. The reason I put a little bit of a vagueness in there is, it does vary a little bit plan to plan and product to product because they're serving different customers that may be on an accelerated growth or they may be launching products. But in the average we're probably 80%-ish, 85% range and it's pretty healthy.

Just directionally on Drivetrain, slightly lower?

I'd say Drivetrain's pretty similar to Engine in terms of utilization in Europe. There's not a big distinction. Again, with the Drivetrain Group the same comment really. It really does vary a little bit, plan to plan. But at a macro level for both the segments and the Company we're in that 80%, 85% range.

Thanks, guys. Outstanding execution.

Thank you.

Brian Johnson with Barclays.

I've got two questions -- housekeeping and strategic. Housekeeping -- great margins. Are there any engineering recovery timings that we ought to be aware of as we think sequentially about the margins?

Nothing significant, Brian, okay?

Okay. Second question is more strategic. We've seen some new entrants into the commercial truck transmission space pushing dual-clutch transmission. I visited the VF's booth down in Louisville earlier this year. You're already fairly active in the turbocharger business in CV. Is this an adjacency that you might be looking at?

Brian, this is James.

The quick answer is yes. You mentioned -- and turbo's a good example; obviously we're already in that space, as we are with our thermal product offering. As opportunities present themselves for us to apply drivetrain technology or engine timing technology, we are looking actively to do that. We continue to have those discussions with the commercial vehicle guys, leveraging our current relationships that we already have on the turbo and the thermal and the EGR side of our business.

Fair to say there's not much of that in the backlog yet?

That's probably a good assumption, Brian.

Okay. Is that something you do organically, or could a bolt-on acquisition help?

It'll depend a little bit on the exact product, but I would say our primary driver is to utilize the existing technology portfolio, with maybe some modifications or enhancements or adjustments. That's our primary path. I would say if there's an acquisition out there that's complementary to help us accelerate the technology into the CV space that remains attractive to us as a possibility.

Okay. Thanks.

We have time for one final question and that question comes from Richard Hilgert with Morningstar.

Ron, earlier in your comments you had talked about the light vehicle segments -- Asia, Europe, North America. And Asia, you were up 10% versus 3% production there and so on. Then you said that the North American number, the 3% increase versus the 5% increase in production, was acceptance of advanced powertrain lagging the other markets. I'm curious -- you're starting to quote business now three years out. Are you starting to see some of that starting to show up now in the North American business in what you're quoting?

Richard, in our backlog presentation there is a section in there that we actually talk about North America now starting to adopt more of advanced powertrains. So the answer to your question -- our backlog is starting to reflect that. When we issue the new backlog we'll have to update it for you, but we have started seeing that increase in our backlog.

Okay. Do you have a mix on your turbocharger business between diesel and gasoline engine?

We do and it's largely reflective of the market overall. Every diesel engine, just about, has a turbocharger in it, so more of our business is weighted that way today. However, as you look at our growth going forward, a lot of that is on the gasoline side -- more of it's on the gasoline side.

But we can expect -- you said it more or less reflects the market itself, percentage breakdown between turbo -- or between diesel and gasoline, yes?

It's not direct -- that wasn't a direct numerical comment. It was in general, there are more diesel turbo charges of the world today than gasoline, so our business also reflects that, too.

Okay, one final housekeeping item. In the guidance that you'd previously given operating cash flow was $900 million to $1 billion. Has that gone up now with the change in your margin?

No. It has not. That's a wide range, as you know, and there's many factors that influence that, including CapEx spending and working capital adjustments. I'm still within that range, Richard.

Okay, very good. Thanks, guys. Good job.

Thanks, Richard.

I like to thank you all again for joining us. We expect to file our 10-Q before the end of the day, which will provide details of our results. If you have any follow-up questions about our earnings release, the matters discussed during this call, or our 10-Q, please direct them to me. Stephanie, please close out the call.

That does conclude the BorgWarner 2013 second-quarter results earnings conference call. You may now disconnect.