博格華納 (BWA) 2015 Q3 法說會逐字稿

Good morning, my name is Melissa and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2015 third-quarter results earnings conference call.

(Operator Instructions)

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

Thank you, Melissa. Good morning and thank you all for joining us.

We issued our earnings release this morning around 8:00 AM Eastern time. It's posted on our website BorgWarner.com on our Investor Relations homepage.

A replay of today's conference call will be available through November 6. The dial-in number for the replay is 800-585-8367. You'll need the conference ID which is 32249261 or you can listen to the replay on our website.

With regard to our investor relations calendar, we will be attending the following conferences between now and our next earnings release; the Baird Industrials Conference in Chicago on November 9, the Goldman Sachs Global Automotive Conference in London on December 3, and the Deutsche Bank Auto Industry Conference in Detroit on January 13.

A reminder, our net new business announcement will not be in November, but will be combined with our full-year guidance announcement in January. Synchronizing the timing of these announcements ensures that our one-year and three-year outlooks will be based on the same program, volume, currency and launch timing assumptions, improving the length between the two. This is a permanent change going forward.

Now, back to today's earnings release. 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 today.

Now, moving on to our results, James Verrier, President and CEO, will review results of our quarterly operating results as well as some of our recent, noteworthy accomplishments. And then Ron Hundzinski, our CFO, will discuss the details of our quarterly results.

Please note that we have posted a set of supplementary financial charts to the IR page of the website. You'll find the link to this document at the events and presentation section beneath the notice for this conference call. We encourage you to follow along with these charts during Ron's discussion of our results.

With that, I will turn it over to James.

Thank you, Ken, and good day, everybody. Ron and I are very pleased to review both third quarter results today as well as some of our recent accomplishments.

Let me just take a moment before I begin to thank all of the BorgWarner employees around the world for another good quarter. Now, onto our results.

During the third quarter, reported sales were just under $1.9 billion. That is down 7% from a year ago, but up 3% when we exclude the impact of foreign currencies. The US GAAP earnings was $0.77 per share or $0.73 per share when we exclude nonrecurring charges.

Our operating income margin again, excluding nonrecurring charges, was an impressive 13.3% in the quarter. So, considering a lower than normal growth quarter, some of the restructuring inefficiencies and the new plans in plant expansions that we are managing this year, we view this as very good performance by our operations.

Let me talk about the two segments. First of all, the Engine segment.

The third quarter sales in the Engine segment were about $1.3 billion, that's down 7% from a year ago. And when we exclude the impact of foreign currencies, the segment grew at 4%. These results were primarily led by strong, light vehicle turbo sales, particularly in Europe, partially offset by weaker market conditions in China and some weaker market conditions in commercial vehicles around the world.

Now, the Drivetrain segment. Sales were $584 million, that is down 7% from a year ago or up 2 when we exclude foreign currencies. These results were primarily led by resurgent all-wheel drive sales growth in North America and this is partially offset by the weaker market conditions in China.

The major North American program ramp that had slowed Drivetrain sales growth over the previous four quarters, did return to material volumes in the third quarter. We believe that this program, combined with benefits from the European restructuring, will drive solid growth and margin expansion in Drivetrain in 2016.

Our financial strength and strong performance is based on our ability to anticipate and drive the next technology ways. As we look to the future, BorgWarner continues to invest for the long-term.

Capital spending continues to grow. We spent about 7.3% of sales on capital in the third quarter, which is above our long-term target of 5% to 6%.

Typically, our capital spending is primarily for machinery and equipment, however, our growth over the next several years does require investment in new plants and plant expansions, which is driving some elevated spending in the near-term. We do expect this to continue through the end of this year, after which we will return to normal spending levels. Our investment in R&D was 4% of sales in the quarter, which is right in line with our target for the year and the intensity around organic innovation and product development remains very strong.

I am also proud to share some of the exciting announcements we made during the last few months. First of all, BorgWarner produces the 2-speed Torque-On-Demand transfer cases for the recently launched Foton Motor's Sauvana SUV. BorgWarner's Torque-On-Demand technology automatically redistributes the torque from the rear wheels to the front wheels without driver intervention for both improved traction, increased stability and enhanced dynamics. BorgWarner also received a 2014 World Excellence Award in the Aligned Business Framework category for exemplifying the Ford Motor Company's principles of quality, value and innovation.

BorgWarner supplies silent engine timing chains for a wide variety of Yamaha vehicles. These include motorcycles, snowmobiles, all-terrain vehicles, recreational, off-highway and personal water crafts.

Also, BorgWarner supplies Eco-Launch stop/start accumulated technology and friction plates for the new 8-speed rear-wheel drive automatic transmission from General Motors. To enable the transmission stop/start functionality, BorgWarner's system enables the transmission stop/start functionality providing rapid and smooth engagements during engine restarts. This new transmission will improve fuel economy up to 5% compared with similar 6-speed automatic transmissions. And it will debut on the 2016 Cadillac CT6 and will also drive the 2016 Cadillac CTS and ATS.

BorgWarner produces its many direct-actuating variable force solenoid for the 2016 Chevy Volt, Chevy Malibu hybrid and Cadillac ELR. Designed to deliver increased accuracy with significantly lower leakage, the advanced solenoid reduces parasitic losses from the transmission oil pump, which saves battery power to propel the vehicle.

Now, let me move on and share a little bit of an overview on our updated guidance for 2015. We have narrowed our sales growth guidance range to the low end of the previous range. Our reported sales growth is now expected to be between minus 6% at the low end, and minus 5% at the high end. This is compared with minus 5.5% to minus 2.5% previously.

The change in our sales growth guidance is primarily related to two things; the impact of weaker than expected market conditions in China on our business and weak commercial vehicle markets around the world. When we exclude the impact of currency, our growth is expected to be approximately 4.5%.

We have also narrowed our earnings guidance range. We now expect earnings to be within the range of $2.95 to $3 per diluted share and this compares with the $2.95 to $3.10 per diluted share previously. Our operating margin is still expected to be approximately 13%. Ron will provide a lot more details about our updated guidance shortly.

I'm encouraged by our year-to-date performance and our outlook for the remainder of the year. Despite some challenging market conditions, our full-year guidance implies mid-single digit growth and outstanding operating performance in 2015. With the restructuring and expansions activities, when they are through, we have a clear transition to continue strong performance in 2016 and beyond.

As you look ahead, the industry's continued adoption of our leading edge powertrain technology combine with operational excellence are the primary reasons that we have been, we still are and we will continue to be the leading auto supplier in terms of growth and operating performance. Now with that, let me turn the call over to Ron.

Thank you, James and good day, everyone. Before I began reviewing the financials, I also would like to commend all of our employees for their hard work in the quarter.

Also, as Ken mentioned, I will be referring to supplemental financial slide deck and it is posted on our IR website. I do encourage you to follow along. Now, onto our financials. James already provided a detailed review of our sales performance in the quarter.

In summary, as shown on side 2 of the slide deck, sales were down 7% from a year ago or 3% excluding the impact of foreign currencies. Working down the income statement, gross profit as a percentage of sales was 21.1% in the quarter or up 20 basis points from last year.

During the same period, SG&A as a percentage of sales was 7.9%, a 70 basis point improvement from a year ago. R&D spending, which is included in SG&A, was 4%.

You may have noticed that SG&A is nearly down $27 million year-over-year. Over half of this is related to currency. Of the remaining amount, corporate expenses were down $5 million and our operating were down about $9 million.

Operating income in the quarter was $237 million excluding $9 million of restructuring charges and $4 million of M&A expenses related to the Remy transaction. Operating income was $250 million or 13.3% of sales. Up 80 basis points from a year ago as shown on slide 3 of the slide deck. Excluding nonrecurring charges previously discussed as well as the impact of foreign currencies, operating income was up $22 million on $66 million of higher sales giving us an incremental margin of 35%.

As you look further down the income statement, equity and affiliate earnings was about $9 million in the quarter, down from $15 million last year. This line item 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 TEL, our turbocharger joint venture in India. Lower NSK Warner sales in Japan and China was the primary reason for the decline in affiliated earnings.

Interest expense and finance charges were $15 million in the quarter, up from $9 million a year ago. The increase is primarily due to the $1 billion of fixed rate senior notes issued in the first quarter of 2015.

Provision for income taxes in the quarter on a reported basis was $67 million. However, this included favorable tax adjustments of $6 million. You can read about each one of these adjustments in our 10-Q, which will be filed later today.

Excluding the adjustments, the provision for income taxes was $73 million, which is an effective tax rate of 29.5% in the quarter. Our year-to-date effective tax rate is 29.5%, which is also our estimate for the full-year. Net earnings attributable to non-controlling interest were about $9 million in the quarter, up slightly from $6 million in the third quarter of 2014. This line item reflects our minority partner's share in the earnings performance of our Korean and Chinese consolidated joint ventures.

That brings us back to net earnings, which were $150 million in the quarter. Net earnings excluding nonrecurring items were $165 million or $0.73 per share.

Now, let's take a closer look at our operating units segments in the quarter beginning on slide 4 of the slide deck. As James said earlier, reported Engine segment net sales were about $1.3 billion in the quarter. Sales growth for the Engine segment, excluding currency, was 4% compared with the same period a year ago.

Turning to slide 5, adjusted EBIT was $212 million for the Engine segment or 16.2% of sales. Despite inefficiencies related to investments in new plant construction and expansion and of all our restructuring, both of which are for our emissions product family, adjusted EBIT as a percentage of sales was up 40 basis points from a year ago.

Excluding currency, the Engine segment's adjusted EBIT was up $10 million on $55 million of higher sales for an incremental margin of 17%. Very good performance given the level of investment activity within the segment.

Plant construction and expansion currently in progress should be largely behind us by the end of 2015. And, the restructuring plan for Wahler is on target after which, we expect it to be a double-digit margin business.

Now, turning to slide 6. Drivetrain segment net sales were $584 million in the quarter. Excluding currency, sales increased about 2% compared with the same period a year ago. On slide 7, adjusted EBIT was $70 million for the Drivetrain segment or 12% of sales.

Despite inefficiencies related to investments in the new DCT plant in China and restructuring plan in Europe, adjusted EBIT as a percentage of sales was up 120 basis points from a year ago. Excluding currency, the Drivetrain segment adjusted EBIT was up over $8 million on $10 million in higher sales for an incremental margin of nearly 90%.

If you recall in the third quarter 2014, we had about $3 million of headwinds related to restructuring inefficiencies. We're beginning to see those headwinds dissipate as we get closer to completing the restructuring. This benefit is reflected in the higher incremental margin in this segment for the quarter.

Drivetrain's European restructuring plan is on target and expected to be completed by the end of 2015. The ramp up of the new DCT plant in China, which was expected to begin in early 2015, is under review concerning the weaker than expected market conditions in China. The segment review highlights good progress on our restructuring and expansion plans which will strengthen our competitive position and performance over the long-term.

Now, let's take a look at our balance sheet and cash flow. We generated $470 million of net cash from operating activities in the first nine months of 2015, down $76 million from $546 million a year ago. Weaker foreign currencies, higher cash outlays for restructuring and a few other miscellaneous items reduced net cash from operating activities in the first nine months of 2015 as compared with the same period a year ago.

Capital spending was $419 million in the first nine months of 2015. This is up $21 million from a year ago. The Increase was driven by capital required to support our backlog of net new business.

Free cash flow, which we define as net cash from operating activities less capital spending, was $51 million in the first nine months of 2015, down from $148 million the first nine months of 2014. We expect to generate between $200 million and $250 million of free cash flow in 2015.

Investments and restructuring and expansion that are driving elevated spending will soon be behind us. We expect spending to normalize beginning next year. Also, our alignment plan, which will provide increased treasury management flexibility, will be complete. As a result, we expect to see an increase in cash available for corporate niches beginning in 2016. We will quantify this improvement and clarify our intentions in our 2016 guidance call in January.

Looking at the balance sheet itself, balance sheet debt increased by $469 million at the end of the third quarter in 2015, compared with the end of 2014. Cash increased by $236 million during the same period. The $233 million increase in net debt was primarily due to capital expenditures, dividend payments to shareholders and share repurchases.

Our net debt to net capital ratio of 17% at the end of the third quarter is up from 12.8% at the end of 2014. Net debt to EBITDA at the end of the year on a trailing 12-month basis is 0.6 times.

Now, I would like to discuss our updated guidance for 2015. James reviewed our guidance at a high level. I will discuss some of the finer points.

We have narrowed our sales guidance to the low end of the previous range of minus 6% to minus 5% compared with the minus 5.5% to minus 2.5% previously. James described a weaker than expected market conditions that affected the change.

Our business in China was the primary contributor. According to third-party sources, light vehicle production in China was down 4% in the quarter. During that same period, volumes at our four largest customers were down 12% in aggregate.

Our sales growth in China for the quarter was flat. We expect our business in China to modestly improve to mid-single digit growth in the fourth quarter.

Our full-year dollar to euro exchange rate assumption is now $1.12, slightly higher than the previously assumed amount of $1.10. We have also narrowed our expected EPS within a range of $2.95 to $3 per share. The change in EPS guidance is primarily due to the impact of lower than expected growth sales.

Our share repurchase activity is gaining momentum. We spent $67 million on share repurchases in the third quarter and $130 million year-to-date. We still expect to spend $1 billion on share repurchases during a three-year period ending the first quarter of 2018. Our weighted average diluted share count is still expected to be approximately 226 million shares for 2015.

Our operating income margin guidance is unchanged at approximately 13%. This implies a mid-teens incremental margin for the full-year and incremental margins north of 20% in the fourth quarter.

We continue to be confident in our ability to execute in any market. This Company has demonstrated a heightened focus on efficiency and cost. This focus resulted in highly efficient growth and record margins in each of the last four years.

With our solid growth and operations performing at a very high level, 2015 should be another great year for BorgWarner. As we look beyond 2015, we intend to execute our growth plan yielding solid growth and to officially convert our sales growth to profits.

The future is bright for BorgWarner. With that, I would like to turn the call back over to Ken.

Thank, Ron. We are now going to move to the Q&A portion of the call. Melissa, please remind everyone of the Q&A procedure.

(Operator Instructions)

Rich Kwas, Wells Fargo Securities.

On Drivetrain, Ron, you talked about comping against some of the inefficiencies from last year, but this is a pretty big step up in the margin. So it seemed like going forward here, less inefficiencies, leverage on some of your key platforms, that there is an upward trajectory from here. Is that the right way to think about it versus the 12% you printed this quarter?

Rich, I'll say at this point it was a really good quarter. But the overall intent is for upward trajectory on margins in that segment. The other thing I would note, is that we did get a little bit favorability from North America, F150 obviously, because the volumes of return, that also is driving some of the upward movement in that segment.

Just a broader question, I know you're not going to give the backlog until January and give your 2016 views spend. But how should we think about growth for the Company as in the current environment assuming that the China production outlook is relatively modest next year and the developed markets are relatively modest as well? Just trying to get an understanding of where you think growth can go over the course of the next 12 months considering the landscape and considering what has happened with some of your key customers within the backlog that you provided last year at this time?

Rich, good morning. This is James. Maybe, what I will do is take a shot if I can at just giving you a little bit of high-level commentary and then I want to ask Ken to talk maybe a little more specifically about some of the math about how to think about the details of the backlog, if that works for you.

I think, as we kind of transition through this year, first of all, we are looking to print mid-single digit type of growth, which we feel is pretty decent.

The two headwinds we've really faced from a macro point as we have gone through the year are commercial vehicle and China, China being obviously the bigger piece of that. Those are the two headwinds that we have faced this year. I think it is fair to say as you look at commercial vehicle going into next year, we're not looking for meaningful improvement in those end markets.

I think in China, what we're looking for from a light vehicle perspective as we look to next year in China, Rich, is a 3% to 5% type growth rate of the market in China. As you know, our content will grow well above that market rate in China because of the adoption of our technology.

So, we are looking for a strong growth year in China next year. And that, coupled with other elements of our backlog, we're looking for a good growth year next year. But I'm going to ask Ken to put a little bit more detailed commentary around that so he can help you from a math point.

Thanks, James. Rich, this is Ken.

Based on the preamble of your question, you're not expecting a lot I think. But, we want to be as transparent as we can be about where we think we are with growth next year. Let's talk about the math a little bit. Rough math, this year's backlog's coming in about 55% of what we expected coming into the year.

Now, if the conditions that caused that lower growth persist into next year, and you know the conditions I'm referring to is our business in China and commercial vehicles, then we can reasonably assume that the backlog will come down similar levels next year. Essentially, what we're saying is that is about cutting it in half. Then once you layer on the potential impact of other macro risk factors, it is reasonable to expect that we are looking at low to mid-single digit growth next year.

Now, regarding these other macro factors, if you look at the last five years, we have had recessions, natural disasters, debt crises, currency devaluations, business disruption to some of our largest customers, just to name a few. The magnitude of the impact of these factors has varied for us but they have all had an impact.

We intend to do a better job accounting for these risks in our guidance going forward. Does that answer your question?

Yes, so basically 55% of the $1.1 billion that you provided last year at this time, and then what's the other color around the macro factors that you're saying might be down?

Well, I don't know that we have any data, numeric data to attach to that. We just want you to know that that is something that we're definitely going to be considering as we come through with guidance next year.

Okay, all right. So that would be developed markets and the other things that are going on?

Yes, certainly.

Okay, I will pass it on. Thanks.

John Murphy, Bank of America.

If I could follow on of that top line thought process. Is there any change in your view of the revenue generation that Remy will bring in next year and if you could remind us roughly what you'd expect that to be for 2016?

John, this is James. It was about $1.2 billion, is the approximate revenue stream that we were expecting to generate from Remy. Obviously, we're going through the closed process, so we're going through some additional validations.

And we will bring a more accurate number of course into the meeting in January. But we're not expecting a meaningful shift away from that $1.2 billion number is a good way to think of it, John.

If we layered that onto your base business this year, you would say 5% to 6%? I'm sorry, low to mid-single digit growth is what you said, Ken? And so, the combination of those two would be a decent way to think about it?

I think that's right. So the low to mid-single digit growth was on the base business and then layer on Remy on top of that. That's right.

Okay, just wanted to make sure we were clear on that.

Second question, Ron, you talked about some delays or some real stalls here in this DTC launch in China, yet you're getting the F150 really ramping up pretty hard-core here and you are getting the restructuring in Eastern Europe working fairly well and should be running full throttle as far as benefits in 2016.

Is there any reason to think that Drivetrain should have a margin not above 12% next year just given all those good guys? Is China really going to derail this or is that something that won't be that bad?

So to use the negative there, I agree that it should be above 12%, John. The DCT plant is a Western OEM and at this point, of all the headwinds we have had in DTC in China, that is really basically the last one left. I will just say it that way.

But, we will get more color on that impact as I said in my script and we will actually articulate exactly that headwind that we might see next year. But the bottom line is that the margins going forward should be north of that 12%.

Okay, that's helpful. Lastly, if we think about capital and free cash flow here, it looks like there was a downtick in your free cash flow guidance, the $200 million to $250 million. I think previously it was $250 million to $300 million. What's the key driver of that?

And as you think of maybe that might in the same context of share repos, why don't you think you would be more aggressive with share repos just given what has happened with the stock more recently?

Movement and free cash flow is a combination of a little bit in earnings and a little bit of items on the balance sheet movement. But to get back to you are more important question right now, we surely intend to be more aggressive. If you look at the year-to-date number, it's not a well-represented number because we had a self-imposed blackout period during the Remy acquisition, right?

Our intent quite frankly, is to be more aggressive given where the stock price is. I can just tell you that, John.

Okay, that's very helpful. Thank you.

Chris McNally, Evercore ISI.

I appreciate the color on the 2016 backlog. I think everyone was trying to triangulate those numbers. But as we look at the 55% number, you've given detail in the past about roughly 40% of your backlog coming from Asia and then obviously the commercial vehicles are weak on top of that.

To get to the 55%, could you just talk about how much of the backlog is pushed out from 2015 to 2016 to later years because of lower volumes related to the Chinese market? Because the math would suggest you are losing almost 100% of the Asian backlog. So, if you could just give some color about potentially what's loss versus what is pushed out by year or two even, from 2015 to 2016 into 2016, 2017? Thank you.

Sure, Chris. The way I want to frame this is we provided that directional guidance to help you think about where things may land. As far as the split of the backlog, how much is going to be Asia, how much is Europe, North America, how much of it's push out and how much of it is just program cuts, you have got to give us a little bit of time to work through that.

I think as we sit here today, Asia as a percentage of the backlog is coming down. That is the market where we're having the most impact from what is going on in the world today. In commercial vehicles, a percentage of the backlog is also very likely coming down. Let us work through that.

What we wanted is for people to have a good sense for where we think we're headed next year. We will give you more details in January.

Okay, that's good. Maybe just qualitatively, if we take out China and TV, would be backlog numbers for all other global production, would they have come down as well? So, we are essentially the $1.1 billion number that we're referencing probably would have been lower regardless other than a week China and a week commercial vehicle?

Well, if you want to recap the year on the things that affected the backlog, we've talked about primarily China, our mix of business in China. We've talked about the commercial vehicle issues around the world. We had some issues with Asia launches that were coming down last year. We had some mix issues in North America as well.

As I go over those four or five topics, the two persistent ones is the impact of China and commercial vehicle. The mix issue in North America, we think that that is going to normalize with the F150 coming back on stream for us. And the Asia launches, that is all kind of linked to China. China drives that whole market anyway.

Let's continue to do some work on that. I think you're thinking about it correctly. We just have to work through the numbers for you.

Okay. Thanks, Ken. Thanks, guys.

David Leiker, Baird.

I'm going to take one more stab at this comment about the backlog. How much of this shortfall that you're seeing from the backlog that is realized this year is coming from currency? I think when you did the backlog last year, you had a pretty high euro value in there.

I think we had (multiple speakers).

That's true but the European portion of the backlog was pretty small. Remember, coming into the year, we thought it was going to be about 15% of the backlog. So, the euro, while it came down significantly, didn't move the backlog that much.

Okay. I appreciate the increased transparency with everything, the slides and the commentary so far. I want to see if I can go one step further. (Laughter). Can you give us some quantitative ideally, but qualitative perspective in terms of the revenue performance by region in the quarter?

I gave you some, David. I told you basically in China, we were flat. That was in the script. In a down market. Actually, the comparable was to our customers and that market was down 12% and we were flat even though the market is up I think 4%, we said.

How about Europe and North America?

We're just looking at the data.

Remember, we had modest growth in both of those regions in the light vehicle area. Both North America and Europe, we did grow modestly. Obviously, in commercial vehicle, not much growth at all.

Okay, great. Thank you much.

Brett Hoselton, KeyBanc.

Two questions. First on 2015 margins, lower sales guidance, but you maintained your margin guidance. What are the offsets there? Normally, you would expect a little downward leverage there.

On just really good operational performance. We had a good third quarter as you can see. We are anticipating that to continue that performance level.

So that we didn't feel that we needed to take down the margin when the sales came down, that we could still hold the margin. It's really just good operations performance is what is going on there, Brett.

Okay. Then, as you think about 2016 margins, I know you are not going to provide guidance here, but can you talk about some of the major puts and takes there, pluses and minuses that you see?

We have been very clear about our objective is to get mid-teens incremental. So if you take sales and assign mid-teens incrementals, that is the starting point. Now, some of the items that are going to be a tailwind from us were these inefficiencies we were seeing for three quarters of this year.

We said that those inefficiencies will be tailwinds for us. You would take the mid-teens incrementals and then add in the inefficiencies that will now be headwinds and they will be on top of it. So the end result would be higher than mid-teens incremental margins going into next year.

And the inefficiencies, can you just remind me what they were? Or not necessarily what they were, but how much they were?

Sure. Remember in the second quarter, we were seeing -- well, first and second quarter and actually last year, we were seeing anywhere from about a $3 million, I think the high was $7 million, $8 million in the third quarter headwinds. It was bouncing around.

Sometimes it would be $4 million, $5 million. I think the worst actually was that second quarter around $7 million of headwinds.

So, it's somewhere between this $3 million to $7 million. The first time we saw it was a year ago in the third and it was the $3 million I referred in my script. It has been between that number, $3 million to $7 million.

Now, I am not saying all that dissipates, all $7 million or $5 million, whatever number you use, but the majority of that will. Some of it is normal activity. We have always things going on, but the majority of that is going to dissipate as we go into next year.

Minor correction, they were at $9 million.

Oh, was it $9 million in the second quarter?

Yes.

Okay.

$3 million in the first and $9 miilion-ish in the second. Something along those lines?

Personally, I think $9 million is the worst we're going to see, quite frankly, and that was in the second quarter. It was bouncing between -- actually, probably $5 million to $7 million was really the average. $9 million was the high end. Again, you can't just take simple $6 million to $7 million, take that off the table, but some good portion of that will come off the table.

Was there an impact in the third quarter specifically?

No impact. The year-over-year difference was favorable. That was what drove the high 120 basis points of improvement in the drivetrain segment because we didn't have that headwind. So there is a good example of what we're trying to talk about here and why the incremental was there at 90%.

Thank you, gentlemen.

Brian Johnson, Barclays.

This is Dan Levy on for Brian. Thanks for taking the questions.

First question, are you seeing any signs of program delays from any of your larger customers who may have been impacted by certain issues in the past quarter?

Let me take a shot at that and answer this. I think I know maybe which OM you may be referring to, and the answer is we have not. We have seen no impact on any of our product development activities and we have really not seen anything relative to engineer activity or launch activity with the customer that I think you're referring to.

Okay. More broadly on the diesel front, any signs that the diesel activity globally and specifically within Europe still remains intact?

Yes. Thanks for the question. If I can, I think this is an important issue relative to specifically, I think there's two things that I would like to address to the group here.

The first one is, the Volkswagen specific emissions this year. I think it would be good for us to put some context on that and how that impacts or potentially impacts BorgWarner. And secondly, I will talk a little bit more generically around diesel, specifically and any concerns that may be an overhang on diesel.

Let me start with Volkswagen. I think is really important that I try and provide again some additional clarity and transparency around this. If I start with the Volkswagen business for BorgWarner, it represents about 16% of our total revenue of the Company. Significantly 4% of our total sales, or a quarter of the Volkswagen business is tied to light vehicle diesel engine products.

So, I hope that provides a little bit of clarity. What is really kind of in debate, so to speak, is about 4% of the total business for BorgWarner on diesel light vehicle products for Volkswagen.

When we look from a BorgWarner perspective of the affected engines that have been disclosed by Volkswagen, that breaks down to less than 0.5% of total revenue for BorgWarner. I think this is a really critical point that I'm trying to make because I know you guys have been trying to wrestle with that. What's the exposure? What is the impact to BorgWarner? And again, the affected engines that Volkswagen have publicly talked about, that breaks down to about 0.5% or less of our total revenue stream. If anybody would like a little bit more clarity and color on how we get to the 0.5%, please feel free to follow-up because Ken's happy to provide that additional level of detail.

So, when I say that, it frames it from a VW perspective, it is really not a particularly meaningful impact. On top of that, I want to be clear that from a schedule and releases perspective to Volkswagen, we have seen no impact. We have seen no adjustments, no impact on our schedules.

Furthermore, I think the other final point that I would make relative to specifically on the Volkswagen issue, our opinion is as they go through the recall transition efforts next year, we see that having no impact on BorgWarner because our products are not involved in any of the recall solutions. Hopefully, that just gives you a little bit of clarity and a little bit of color. The message fundamentally to that issue is we're not seeing an impact.

Let me quickly transition and take a moment just to talk about the broader perspective of diesel. I think is it's fair to say we have been talking over the last couple of years, the slowdown in diesel adoptions has been expected. We have seen that and proactively been managed around that. We still see that transition around a slower adoption of diesel being a relatively slower trend over several years. And part of that is because we still see diesel being a key element to the customer's plans to get to the fuel economy and emissions standards.

I want to also give you a bit of clarity and color, light vehicle diesel sales is about 15% to 20% of total BorgWarner, just to give you a frame. So, what we're talking about here is what is in play of diesel is about 15% to 20% of total BorgWarner revenue. I think that's important.

As the transition moves from diesel to gas, we have talked quite openly about this, that in the short run as this transition occurs, the way to think of it on a diesel engine for BorgWarner -- BorgWarner related, in our comparable advanced gasoline engine, BorgWarner gets about 70% of the content on a gas engine versus a diesel engine currently. That actually over time is evolving because we're adding more and more content to gasoline engines such as EGR valves and EGR coolers. So over the long run, and I'm talking two, three, five years, gas diesel will become a relatively neutral event from a BorgWarner perspective.

I know I have shared quite a lot of information there, but I do recognize from the various conversations how important those two issues are relative to BorgWarner and I wanted to take some time to clarify that. Hopefully, that did. And of course, if there's any follow-up questions, we could take that now or later through Ken.

Thank you very much. That is a very helpful.

[Eton McCulley], Citi.

Thank you, good morning. I just want to go back to the backlog discussion.

Ken, would the 55% arithmetic for 2016, also roughly apply to 2017? The reason I'm asking is that I think if you apply that, it does make the 2020 revenue, even if you adjust a little for M&A and FX, it kind of imply an acceleration in the last three years. And if so, maybe talk about booking activity and the visibility around the trajectory over the next five or so.

Great question. Let me answer it this way.

The part where we were talking about making sure that we account for macro risk factors in our backlog, I think that it's fair to say that we intend to apply that thinking to the entire backlog. Now, the actual cutting the backlog in half directionally and how that applies to the out years of the backlog, is still under development. I can say directionally, that is probably a pretty fair way to think about it.

We have to continue to work through that. But we expect the backlog in those outer years to also come down at a similar level. But again, we have to work through that.

I'm going to let James speak to the 2020 target of $15 billion, but that's in the next few years the way we are thinking about it.

I think Ken explained that very well. Let me say a couple things that I think may help a little bit.

What you are hearing is, your hearing that there's some macro headwinds that are a challenge for us. It is primarily again, China and its commercial vehicle. What I would say is important for people to think about is, what you're not hearing about is the adoption rates of our technology slowing because we're not seeing that.

We're still seeing continued, strong desire and adoption rates for all of our products at a similar rate actually, tied to what we've probably talked about over the last couple of years. And the reason that's important, that still gives us tremendous confidence as we look out to the future for the growth of the product. We do recognize this year, we've faced some headwinds and as Ken says, that will spell into 2016 and somewhat into 2017. But again, the adoption rates of our products remain very, very strong from a technology viewpoint, which leads us to very good confidence in mid-single digit growth outlook.

Again, part of the $15 billion by 2020 is additional acquisitions that we remain focused on. The fundamental story here is not changing. BorgWarner's technology adoption is strong.

We're going to be a strong growth company, but we are in a little bit of a transitionary period this year and somewhat into next year as well. But it is still delivering mid-single digit growth, which we feel is very strong in this industry and clearly, obviously, we're converting that into strong EPS performance.

That's very helpful. Thanks so much.

Joseph Spak, RBC Capital Markets.

Thanks for all the additional color and commentary. Just going back to Volkswagen, maybe from the other side of that equation, they have been out publicly talking about going after some big savings from the supply base to try to deal with some of the costs they are going to have to incur. And I was wondering if any of that has creeped into your discussions and if so, or if not, how you feel you are positioned to handle with what seems like it would be a more difficult conversation going forward?

We saw some of the information and we pay a lot of attention to that, of course. Frankly, at this stage, we have not seen meaningful increased pressure specifically around pricing reductions and those types of things.

I think our mindset right now, Joe, is it may likely intensify as we go forward, but our belief right now is that we can pushback and contain that and stay somewhat in the range of ours that we have done over many years, which is in the 1.5% to 2%. The quick answer is yes, we expect the intensity to come. We feel comfortable about our ability to deal that and not deviate from our historical, annual AIF type numbers that we provided.

Okay. Just one more on the backlog. You pointed out, Ken and Ron, that Europe was much lower for next year, which I believe was a result of you guys talking about decreased diesel penetration there.

Is the read that any shift in diesel or any impact from Volkswagen, that is not one of the factors related to the backlog for next year? Or is that contained in the more conservative macro view your taking?

Yes, that is a good clarification. That is a good way to think about it. Our view on diesel has been pretty well established in the backlog. We brought that up last year, I'm sure you remember, when we came out with the new backlog back in 2014.

So, yes, the changes are mostly happening in the areas that we talked about, which would be China and commercial vehicle. Diesel is kind of already built into that.

To James's point earlier, the impact of the Volkswagen issue is de minimus. That is not expected to impact our backlog as we sit here today. I think, as you think about it, the Europe piece probably, as a percentage of the total backlog is going to go higher because that feels like probably the most stable region for us out of the three, between the Americas, Asia and Europe.

Okay, I'll pass it on.

Patrick Archambault, Goldman Sachs.

Great. Just a couple of follow-ups.

The margin improvement in Drivetrain was obviously, very, very strong year-on-year. It seems like you posted a little bit of margin improvement as well on the Engine side, like 40 basis points, 50 basis points. I was just wondering, I think you have laid out the trajectory for further Drivetrain improvements pretty nicely, but how do we think about the growth potential and margins? And Engine, are we close to levels that they are likely to be or is there some upside potential there as well?

I would say that our objective has always been mid-teens. The question is, how you define mid-teens. But, I would say that Engine still has room for improvement.

And if you were to benchmark the main drivers, is it just efficiencies with better growth, or anything more specific than that?

We have a couple of things. One is the growth and being able to convert in the mid-teens is above the average now. That is one area.

The second one, which is probably more important, is the Wahler acquisition is going to gain momentum as time goes on. And quite frankly, there's somewhat of a drag on the margins now as we go forward and it becomes a double-digit business. That will start to move margins up.

Then someday, I don't know when, a commercial vehicle might actually start being a net tailwind for us and that would obviously start driving margins up too. But I'm not going to project that for 2016. That's somewhere down the road.

I hear you on that last one. Just on the revenue side, I guess I will keep this question including FX because that is the simplest way to take it. But your new guidance, midpoint of down 5.5% implies that your fourth quarter is down about 2% and you have been down about 7% year-to-date.

I understand that currency is probably a big part of that improvement if you think it's just a delta as we progress year-on-year going from down7% to down 2%. I guess the F150 would be another piece. What are the -- how do we think about the improvement there?

I'm going to start this and Ron can follow-up. A couple things for Q4.

First of all, you are right, the F150 is kind of a major mover of our growth in Q4 versus last year. And also, you have to remember Q4 of 2014 is where we took a major currency hit. That is when this all started and that's dissipating relative to the previous quarters. So the impact of currency year-over-year is a little bit less so that is helping us a little bit on the growth site.

Okay, so it sounds like it is those two main things, right?

I think that's fair.

Okay. Finally, just one housekeeping for me. The timing of Remy, I think you'd previously said closing in the fourth quarter. Are we still on track for that?

We are, Patrick. The only thing really left is the regulatory approval from China, which is in process. So, we are anticipating an early to mid-November closing is what we are on track for as it stands today. We're looking forward to that for sure.

Okay, got it. Thanks a lot, guys.

Colin Langan, UBS.

Great, thanks for taking my question. Can I follow-up on the European light vehicle diesel? When you talk about 15% to 20% of your sales, is that totaled diesel or was there a chunk in there that is commercial vehicle, which would be almost very unlikely to be impacted?

Can you also talk about your relative share in Europe on gas and diesel products? Are you pretty balanced on both products or you have had a strong position in Europe, are you more levered today market share-wise on diesel products?

Colin, let me take a shot or at least to clarify your first question and then maybe Ken can offer a little bit of commentary on the European split between gas and diesel. What I wanted to do is clarify.

Light vehicle diesel sales are about 15% to 20% of the total Company revenue, if that makes sense to you. We deliberately wanted to exclude the commercial vehicle piece in terms of how we look at that. It is 15% to 20% light vehicle diesel sales of our total overall BorgWarner revenue. See if that frames it for you.

Does that clarify it for you?

That is it exactly.

I will take part two of that. The commentary that we had made around the $0.70 and $1 content for advanced gasoline engines versus diesel, that is a direct comment on our mix of business in Europe, diesel versus gas. Two other factors, that gap is closing over time. There's going to be more and more content on gas engines as we continue to evolve in that market. We have seen that happen over the last few years and that is going to continue going forward.

Secondly, our market share for gasoline turbo-chargers is higher than it is for diesel today and it is only continuing to get stronger going forward. That's going to give us a bit of a lift as we see the shift from diesel towards gas. So, a few points higher for gas than it is for diesel.

Okay, that is very helpful. You talked earlier about take rates being stable, but I think some of the recent awards data shows that turbo take rates are flat year-over-year, which is consistent, but they've been growing for the last few years. Has that been a factor in your outlook for this year that you would have probably anticipated if gas wasn't so cheap that take rates would have actually continued to grow? And when do you think that starts to re-accelerate because I can't imagine getting to the 2025 standards without more turbo adoption?

Let me take a shot at that pack. We're not seeing a slowdown in turbo-charge of penetration rates, at all, actually. As we look -- primarily, as you know, Colin, the two primarily areas of the world that are increasing rapidly on penetration is China and North America and we're not seeing slowdown in the adoption rates fundamentally of the technology, if I can start there.

What you do see a little bit is of course, there is some volume reductions that we have seen this year in China, obviously. And we have seen some launch impacts in Asia which could be turbo related but that has got nothing fundamentally to do with slowdown of adoption rates of turbo, if that helps you.

Okay, that's very helpful. Last question.

Can you give any color on the margin direction? I'm trying to plug in the numbers. It seems like margin sales should be up a little bit. I'm sorry, margin direction quarter-over-quarter, it seems like sales should be up a bit but margins look fairly flat-ish. How should we think about margins through the end of the year?

Are you talking sequentially or are you talking into the fourth quarter?

Into Q4.

In Q4? I think if you do the math, it will be down slightly sequentially more in line what you saw in the earlier half of the year.

And usually those seasonality better in Q4 with higher production?

Yes, but we have some other offsets going on that we anticipate in the fourth quarter on the cost side that probably might bring that down right now. That's built in the guidance. If you do the math on the guidance, you will have slightly lower margins in the fourth from the third, but it will be more in line with what you saw in the first half of the year.

I'm going to go even one step further. You can see that our SG&A expense is quite a bit lower in Q3.

We don't think that is going to be the run rate going into Q4. The Q4 run rate for SG&A is probably going to be more like the average over the three quarters for the first part of the year. If that helps.

It's going to be in the SG&A line.

Okay, thank you very much.

Dan Galves, Credit Suisse.

Following up on Patrick's question, on organic growth into Q4, it seems like you guys need to do somewhere 7%, 8%, 9% in Q4. Can you talk about what your organic growth expectation is specifically for Q4? And if there's a big acceleration from the first three quarters of the year, why wouldn't that flow into at least the first half of next year?

I think the math indicates that the fourth quarter organic -- well, growth without the foreign currency, is around 5%, which is slightly above the year-to-date average I guess at this point. I think that's how the math works out. Not -- I think you had a higher number.

Yes, my mistake. Okay, thanks, guys.

I would 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. Melissa, please close out the call.

That does conclude the BorgWarner 2015 third- quarter results earnings conference call. You may now disconnect.