博格華納 (BWA) 2016 Q1 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 2016 first-quarter results 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 all of you for joining us. We issued our earnings release this morning at around 8 AM Eastern. It is posted on our website, borgwarner.com, on our investor relations home page.

A replay of today's conference call will be available through May 13. The dial-in number for that replay is 800-585-8367. You'll need the conference ID which is 77109071, or you can listen to the replay on our website.

With regard to our investor relations calendar we will attending the following conferences between now and our earnings release: the Wells Fargo Industrials Conference in New York on May 10, the Barclays America Select conference in London on May 18, the KeyBanc Automotive Industrial and Transportation Conference in Boston on June 1, the Deutsche Bank Industrials Conference in Chicago on June 9, and the Citi Industrials Conference in Boston on June 14.

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 comment on the industry and provide a high-level overview of our results and expectations for the remainder of 2016. And then Ron Hundzinski, our CFO, will discuss the details of our results and guidance.

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

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

Thank you, Ken, and welcome to everybody. Thanks for joining the call today. Ron and I will spend a little bit of time here with you going through Q1 of 2016. And obviously, we will get in and share with you some of our thoughts around the outlook for the rest of the year.

You can see on slide 2, let's start there, and let me give you some of our perspective on some of the bigger picture issues, a little bit around the macro environment, and then the industry in general. I think the headline for us, as we look at the macro in the industry, as we all know, there's is a lot of uncertainty out there in the world, whether that's Federal Reserve issues, China monetary policy, oil, Middle East. The list is pretty extensive. And we do see a general tone of uncertainty in the general macro environment.

That said, our view is that auto is relatively stable, and I'll get into more color on that. We see an unstable macro but auto's in pretty good shape, actually.

If I take that down a little further and talk more specifically about our view on the market, I'll start with the light vehicle view. We continue to remain closely aligned with IHS, as we've done throughout the year, actually. So, that points us to a projection for 2016 light vehicle growth in Europe of about 2%, North America around 4%, China somewhere around 5% to 6%. We continue to share a similar set of views to those of IHS.

If I switch over to commercial vehicle, which is obviously a key market for BorgWarner, we still see that very challenged. We're not seeing a lot of uplifting news, frankly speaking, on the environment around commercial vehicle. On a macro global level growth, there is really very little, if any. One of the evolution, I would say, in the commercial vehicle space is we do see some of the new programs that were targeted for the out years coming into a little bit of question and review. So, we are paying a lot of attention to that.

As we look out into 2016 from a higher level perspective, on the last call I wanted to alert you to the areas of watch that we're paying attention to as we continue to move forward in the year. And I'd like to refresh what we're watching and paying a lot of attention to.

Commercial vehicle I already alluded to. The second area we're watching and paying a lot of attention to is China. And particularly what we mean by China is, I think we've all benefited from some good tailwinds around the incentives that were put in place at the end of 2015, and we're paying attention to how that evolves, particularly into the second half of the year. What that means is are we seeing any pull forward in the first half of the year or do we see continued strength from the incentives? And I would say there's some questions there.

Specifically, from a BorgWarner point of view, we're paying attention to, I would say, China and Europe, relative to our biggest German-based customer, and how that may play out as the year unfolds. And then, I think like all of us, we're going to pay a lot of attention to inventory builds and inventory building schedules in North America. So, those are just some of the areas.

With that said, things have gone well for us so far and we're optimistic and positive about our guidance for the year. But there are some watch points and I think it's prudent of us to at least share with you what those watch points are from our viewpoint.

Still on the same slide, let me reference some of the areas that may be of interest for you around the regulatory and technology trend area. We continue to see a strong drive for fuel economy and emissions regulations that are pulling our powertrain technology programs. I would articulate to the group here on the call, the intensity we see around product development activity, innovation activity, is at least at the same level and potentially probably a little higher than it was several months ago around technology for fuel economy and emissions. So, I just wanted to point that out. We're not seeing any slowdown. If anything, we're seeing a little bit more work around medium fuel economy and emissions standards for powertrain technology.

We've engaged in some meaningful dialogue in the last quarter directly with the EPA, and our view of the world is that we are not anticipating meaningful change for the 2025 CAFE standards. That's not to say that maybe some minor adjustments. And clearly the process has to play out with further discussions. But our view at this stage is we are not seeing meaningful change.

Just like other suppliers in the space, and the OEMs you talked to, the transition to electrification of the powertrain continues to evolve and, I would say, accelerate. We noticed that a couple of years ago and we've seen that trend playing out and we continue to see that intensify.

Clearly for BorgWarner we're right in the middle of that electrification evolution, whether that's 12-volt, 48-volt hybrid EVs, we see a lot of activity around many different architectures. And I would say to the group here, not just for the long term, seven or eight years out, but we're seeing meaningful evolution in that space in the next two to three years. So, more to come from that in my later comments.

I also want to just to anecdotally mention, as this electrification trend continues, I know one of the hot buttons for the companies, how does that play out for you from electric vehicles. We talked on the last call that we were very proud of our EV transmission program with [Jaylee] that will run somewhere around 15,000 units in 2016.

I can tell you we've been awarded two additional electric vehicle programs for the Company. I'm not in the position to announce the details today. We need to work with our customers to get that, but those announcements will be coming out in the next few months and we view them as significant in how we will play in that space.

Finally, around the regulatory or technology area, let me make a couple of comments around diesel, I know that's on people's minds. I would say it's a similar story to what I shared with you in February. We're not really seeing any meaningful mix shift at this point.

We do know and we believe that diesel-gas mix will slowly evolve and shift a little more to gas over the next couple of years. I think that's consistent with others' view in the space. We see that as a somewhat neutral event for BorgWarner as that technology continues to get adopted to the gasoline products at a similar level to diesel.

Let me shift from the macro and the industry perspective and give you a little bit of a snapshot from a BorgWarner viewpoint. First of all, let me start with Q1. Obviously, Ron will give you a lot more color and details in his commentary.

I would tell you from my seat, I was very pleased with our Q1. I think we delivered some good growth, a little bit above expectation, which was good to see, and as you'll see in the details very strong operating performance across the segments. I went into the quarter feeling good, I come out of the quarter feeling very good. It was a good solid quarter for us.

Versus our expectations, the revenue, I would say, on a regional basis China played out about as we'd expected overall. Europe a little lower than what we'd expected and if I can give a little bit of commentary on that later. And North America and Korea a little better than we'd expected. But no meaningful big shifts. It was just a little bit of nuancing, and overall that led to a good quarter.

The quarter totaled up to $2.3 billion in sales, which when we exclude FX and Remy that's about 4.5% growth. EPS of $0.80, which includes the non-comparables, it does of course include Remy. And our operating margin of 12.2%, again for comparable thoughts, when we exclude Remy on the core business from BorgWarner, it was 13.2%; strong performance. If I break that down a little further by segment, engine came in at $1.4 billion, which grew at 1% as reported or 4.5% when you exclude currency. Our primary drivers of the growth that [good growth in engine with turbo and BCT, variable [cam] timing on the engine timing side of our business.

Our drivetrain sales, $879 million. That's up an impressive 44% but obviously we get the benefit of Remy. When we exclude Remy and currency, we grew at 5% in the drivetrain segment. That was primarily driven by very good all-wheel-drive sales in North America and also in Europe. So, again, good quarter.

As we look out for 2016, you'll see that we did tweak our guidance just a little for the full year, but generally it's pretty much unchanged. And I'll let Ron give the necessary detail around that.

I did want to comment on the Wahler restructuring because you see that in some of our walks as it comes up. I want to say this, I think the Wahler transaction we did, strategically we feel very positive about it still. We're very comfortable with the technology, we're comfortable with the customer reaction, we're pleased with the growth.

The restructuring element, obviously, has taken longer than what we'd anticipated, and that's a little frustrating from a BorgWarner viewpoint. Let me just, maybe give a high level summary of why that is so you have a sense. What it really is, it centers around our European facilities. Asia and South America and North America are doing great, actually.

The European peace, we're in the process of having to make a lot of product moves. We're closing a plant; we're opening a plant; we're building a plant up. Those multiple moves of products as part of the restructuring with our customers is taking a little longer than we'd anticipated. But we're going to come through it and get back on track with Wahler. So, our adjusted guidance does reflect a little less tailwind than expected for Wahler, but as you can see we didn't change the total Company margin or EPS guidance.

I also want to share my view a little bit as we look to the second half of the year. I think what I would say to you is we have opportunities and we have risks. I would say the risks a little outweigh the opportunities, as we see the world at this point. And let me maybe share what I see those as.

I mentioned earlier that China second half of the year -- we do have a little bit of angst that some of that incentive benefits that we're getting has been potentially pulled into the first half. And, as you know, our back half of the year is very heavily weighted to a lot of launches, particularly in Q3. Some of those are very significant, and we see a little bit of risk there.

And commercial vehicle is a little bit hard to read. It's hard to imagine it getting much worse than what it is, but we do pay attention to that. And I think the last comment I would make relative to the risks in the second half, is our largest German-based customer, and is there additional risk there in China and Europe from a market share pressure point of view.

We've reflected that into our guidance. We believe that's the right thing to do, that's the prudent thing to do. But I do want to be very clear. I'm very comfortable, and very confident, about reiterating our ability to achieve our full-year guidance. We're off to a good start and we'll deliver on our full-year guidance. And that guidance, of course, is a good mid-single digit growth and strong operating performance.

Let me just share a couple highlights around growth that you can see on the screen. First of all, the Remy deal, I would say at a high level the integration is actually going well for us. I would say to you, financially and operationally it's performing about as expected, which is pretty good.

The reaction from our customers around the technology is very positive. We have multiple customers already engaged in discussion around, not just the core Remy business -- starters, alternators, belt alternator starter systems, but a lot of activity, a lot of discussion, a lot of quoting activity around the combination products.

I would point you to the largest part of that is our activity about the combination of the former Remy motor, the BorgWarner clutching systems for hybrid vehicles. Some of you on the call may know that as a P2 hybrid architecture. We feel very positive about where we stand on that position. And more to come on that.

Away from the Remy integration, I will tell you the quotes and our booking activity remains strong and solid, very much in line with our growth expectations. So, we feel good about our win rates, we feel good about the actual overall quoting activity, and all of that's building up nicely for our future growth. And, as I said earlier, the intensity around electrification continues, and BorgWarner's right in the middle of that.

If I wrap all that up and summarize before I turn it off to Ron, we're off to a good start to the year. Really good solid Q1. The business is running well. We continue to be heavily focused on driving our growth through adoption of technology. And we're upbeat and confident about delivering our full-year guidance.

So, with that, let me turn the call over to Ron who can provide more color and detail around the financials.

Thank you, James. And good day, everyone.

Before I review the financial details, I'd like to provide you some of the financial highlights as I see them for the quarter. As James said, we have experienced better-than-expected sale growth for the quarter. We also expanded our free margins on a comparable basis and we flow through that additional sales. But, more importantly for me, on the cash side, we saw a return to normal CapEx spending.

Now, as Ken mentioned, I will be referring to a supplemental financial slide deck, as we posted on the IR website, so I do encourage you to follow along.

Let's start on slide 3. On a reported basis, which includes the change in sales due to market growth, price, net new business, FX and Remy -- that's a mouthful, by the way -- sales were up 14.3%. However, to get a clearer picture of how the core business performed, we have to exclude the impact of FX and Remy. So, when you exclude those items, sales were up 4.5%, which was above our high end of our guidance range.

Gross profit as a percentage of sales was 20.5% in the quarter. On a comparable basis, or excluding Remy, gross margin was 20.9%, which is down 70 basis points from last year caused by plant startups and Wahler restructuring inefficiencies, as James was talking about earlier.

SG&A as a percentage of sales was 8.3% but on a comparable basis SG&A was 7.8% of sales or 70 basis points improvement from a year ago. The Company did a good job executing cost controls to offset the gross margin decline. R&D spending, which is included in SG&A, was flat from a year ago at 3.8% of sales. However, if you do exclude Remy, engineering was at 4.2% or actually a 13% increase in absolute spend.

Now, let's look at the year-over-year comparison for operating income, which can be found on slide 4. Starting on the right, first-quarter 2016 operating income, adjusted for noncomparable items but including Remy, was $276 million or 12.2% of sales. Excluding Remy's $11 million of net contribution to operating income, operating income was $266 million or 13.2% of sales, and that's up 10 basis points from a year ago. Excluding noncomparable items, Remy and FX, operating income was up $14 million on $90 million in higher sales, and that gives us an incremental margin of 15% in the quarter.

I'd like to pause for a second and point out that there is a reconciliation of reported operating income or GAAP basis, to operating income adjusted for noncomparable items plus Remy, and it can be found on slide 15. This is very important so you understand there is a GAAP to reported differences here.

Now I can move on. As we look further down the income statement, equity and affiliate earnings was about $9 million a quarter, which was up slightly from last year. Interest expense and finance charges were $21 million in the quarter, up from $10 million a year ago, and this increase is primarily due to the $1 billion and EUR500 million fixed rate senior notes, issued in the first and third quarters of 2015, respectively.

Provision for income taxes in the quarter on a reported basis was $80 million. However, this included a $1 million tax benefit associated with our noncomparable charges plus an additional $1 million favorable tax adjustment. You can read about each of these adjustments in our 10-Q, which will be filed later today.

So if exclude those items, the provision for income taxes was $82 million for an effective tax rate of 31%. And I should note this is up from our guidance of 30%. Net earnings attributable to noncontrolling interest were about $9 million, in line with the first quarter of 2015.

Let's take a look at our diluted earnings per share on slide 5. Net earnings, excluding noncomparable items, but including Remy, was $0.80 per diluted share. For comparisons with prior periods, net earnings excluding noncomparable items and Remy were $0.77 per diluted share.

Let's take a closer look at our operating segment, in the quarter, beginning on slide 6 of the deck. Reported engine segment net sales were just under $1.4 billion in the quarter. Sales growth for the engine segment, excluding currency, was 4.5% compared with the same period a year ago, primarily due to higher turbocharger and variable cam timing systems.

Turning to slide 7, adjusted EBIT was $233 million for the engine segment or 16.7 % of sales. Excluding currency, the engine segment's adjusted EBIT was up $10 million on $63 million of higher sales for an incremental margin of 15%.

Turning to slide 8, and starting from the right, drivetrain segment net sales were $879 million for the quarter. Excluding Remy and FX, sales growth for the drivetrain segment was 4.8% compared to the same period a year ago, primarily due to higher all-wheel-drive sales.

On slide 9, adjusted EBIT was $84 million for drivetrain segment or 9.5% of sales reported. But if you exclude Remy, adjusted EBIT was 11.7% of sales, which is up 10 basis point from the prior year. Excluding Remy and FX, the drivetrain segment's adjusted EBIT was up $5 million on $30 million of higher sales for an incremental margin of 15%.

Now let's take a look at our balance sheet and cash flow. We generated $35 million of net cash from operating activities in the first quarter, which is typically our lowest quarter for cash flow. Our investment in working capital ramps up for the first quarter to match higher levels of business activity compared with the end of the year.

Capital spending was $104 million in the first quarter, down from $140 million a year ago. Capital spending was above the trend in 2015 but we're returning to normal spending levels of 5% to 6% of sales this year.

Free cash flow, which we define as net cash from operating activities less capital spending, was an outflow of $69 million in the first quarter. That's a $38 million improvement from a year ago. Again, this is a typical seasonal occurrence. We still expect to generate between $400 million and $475 million of free cash flow in 2016. At the midpoint that's up 50% from 2015. $200 million to $300 million of this free cash flow will be used to repurchase shares in 2016.

Looking at the balance sheet itself, balance sheet debt increased by $48 million, and cash decreased by $185 million in the first quarter compared with the end of 2015. The $233 million increase in net debt and was primarily due to investments in working capital and share repurchases. We spent $80 million repurchasing 2.1 million shares in the first quarter, ahead of schedule, for executing an expected $200 million to $300 million of share repurchases this year.

Our net debt to net capital ratio was 37% at the end of the first quarter. That's up from 35.2% at the end of 2015. The net debt to EBITDA at the end of the year on a trailing 12-month basis was 1.5 times.

Now, I'd like to discuss our 2016 guidance which is slightly modified from our initial announcement. Returning to the slide deck, let's start with our sales growth guidance for the full year on slide 10. Note the baseline of 2015 net sales excluding Remy, which was just under $7.9 million.

All in, we expect growth between 12.7% and 17.5%, which is down slightly from 13.2% to 18.3%. This change is primarily due to lower growth expectations from Remy's commercial vehicle business. We're seeing the same effect in Remy on commercial vehicle we're seeing in our core business.

Currency is unchanged. And net new business, pricing, and market related growth is also unchanged at 2.5% to 5.5%.

Looking at our operating income guidance on slide 11, from an operating performance perspective, we are expecting 16% to 18% incremental margins on our core business sales growth, which is slightly down from our previous guide of 18% to 20%. The change is due to slower progress of the Wahler restructuring, as Jay mentioned earlier in his remarks. Our previous guide included an $8 million tailwind from Wahler restructuring this year, which has been reduced to $3 million.

On a comparable basis we still expect our operating income margin to be 13% or greater. And including Remy, our operating income margin is still expected to be around the 12% range.

Now, on slide 12, we have our EPS guidance. We still expect earnings of $3.11 to $3.32 per share on a consolidated basis, which includes about $0.12 per share from Remy. Excluding Remy we now expect earnings to be $2.99 to $3.19 per share.

Now let's review our second-quarter guidance issued this morning, starting with the sales growth on slide 13. All in, we expect to grow between 0.6% (sic - see press release "10.6%") and 16% in the quarter, including about 12 percentage points due to Remy. Excluding Remy, our growth in the quarter is expected to between minus 1.5% to positive 3.8%, but this includes a negative impact of currency.

Currency is expected to lower sales by 290 basis points at the low end and 100 basis points on the high end. So if we exclude Remy and currency, the impact of net new business, pricing and market-related growth will drive growth between 1.5% to 4% (sic - see press release "4.8%") in Q2.

Now turning to slide 14, we expect earnings of $0.78 to $0.83 per share on a consolidated basis in the second quarter, which includes about $0.03 per share from Remy. Excluding Remy, we expect earnings to be $0.75 to $0.80 per share.

Now I'd like to make a few concluding remarks. We had a good first quarter. Sales growth exceeded our expectations and we flowed this through to our operating income.

But, more importantly, the first half of 2015 was a challenging year for us. We were having a difficult time setting our sales guidance because of the market indexing that we have in BorgWarner. And, as a result, this impacted earnings expectations last year.

However, over the last few quarters, we have settled this down and we've achieved our sales and earnings expectations. So, as we look at the rest of the year, we expect to continue on this path -- solid sales growth, strong operating margins, and improved cash flow for our year. I remain confident we will deliver our 2016 guidance, similar to what James expressed earlier.

And with that, I would like to turn the call over to Ken.

Thanks, Ron. We're now going to move to the Q&A portion of the call. Melissa, can you please remind everyone of the Q&A procedure?

(Operator instructions)

Rich Kwas, Wells Fargo.

Hello, good morning, everyone. James, following up on your comments regarding risks and opportunities, and more risks here maybe versus 60, 90 days ago. If we look at first quarter, it came in better on organic growth versus your initial expectation. You didn't change the full-year organic growth rate. Is it fair to say that you've taken some of these incremental risks into account for the second half of the year as it relates to the items you cited earlier?

Yes, that's a good way to think about it, Rich. That is the good way. And that's why I thought it would be useful to at least let you know what some of them could be. We're not necessarily saying that will all happen but we just thought it was prudent.

And it does get back a little bit to the China story a little. We've seen some acceleration in the first half on these incentives that may weigh a little bit on the back end. Clearly, we have the Volkswagen business with China, particularly in Europe, from a market share risk point of view.

And just on that one, Rich, as an example, we saw some of that weigh on us in the first quarter with China and Volkswagen in China. You can see the numbers. They were down in production pretty significantly in the first quarter. That's still 20%-plus of our business.

And then the last one, Rich, we've got some pretty big launches, which we've talked about on the prior calls, with us to start with the Super Duty, the Duramax. I would say, Rich, these are all small nuancing things. It's not big but when we add all of those up, we just seem slightly skewed to the risk side than the opportunity side, and we just think it's prudent to reflect that and play it from there.

And then on North America, inventories appear to be elevated here, and we need some real decent flow-through on the sales side over the next few months to justify that IHS number that you referenced. What are you seeing on schedules at this point here in North America? It doesn't seem like you factored in much on the North American front on the back half; but just curious on how you see things potentially playing out here.

You're right, Rich, that one we didn't reflect into our numbers in the back half of the year. We pretty much left that alone. I think what we're seeing is largely what you do. Builds -- that's the first quarter came in where it did. I think everybody's looking at the second quarter as a key one, in terms of where we're stacking up between production builds and inventory levels. For me, I think it's a pretty key quarter across all of the OEMs.

Generally we're seeing build rates pretty good, in general, Rich. We're seeing not a whole lot of volatility. They're coming out pretty much as we had anticipated. So, we're not seeing -- and that's why we didn't do anything with the back half guide, Rich, we left it alone.

But it's just an area, like you and all of us, we're just paying attention to it. And I think we'll get a little better read when we can look at the second-quarter data and see what went on with the inventory and what went on with the production build. But we need the production builds to stay pretty strong and so far I would say they're holding pretty good. And if they hold like that, we should be okay, which is why we didn't adjust the back half.

And then just last one -- thanks James, by the way. Ron, I think it was referenced that Europe was maybe a little bit below expectation. I don't recall if you said exactly why. Maybe it was the Volkswagen's share. Volumes are coming better, at least so far here, for 2016. Just curious on what drove that versus expectation.

Rich, it's James again. Actually, we see Europe running pretty well in general. If you recall, Rich, in the fourth quarter, we had some transmission programs that were running out, so you get a little bit of that noise flows through as those programs run off.

And we did see a little bit of transmission build adjustment on VW, which they publicly talked about. We saw a little bit of share challenge from a VW perspective. It was a little lower than what we wanted. It wasn't a big number but there was a little bit of noise there. Those are the two big ones, Rich -- VW and the transmission rolloffs. Those are the two for us.

Okay, thank you.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. I wanted to take a step back and just ask a longer-term conceptual preference. You have obviously provided the backlog guidance at 4% to 6% through 2018. My question is this -- as you look at that backlog number, that growth number, how should we think about upside versus downside -- upside opportunity versus downside risk? And then, secondly, as you look out beyond that three-year time horizon, is that a pace that you anticipate maintaining or is it likely to decelerate or accelerate?

That's a great thought, Brett. Let me take a shot at it, okay? The first thing I would say, we're in the first year of that new business. And, as we're communicating, we're comfortable, confident, and feeling pretty good about this year. So, that's what we think.

As we look out, I'm going to say a couple of things. Are we comfortable internally as a Company with the projection we made? Yes. Do we like it? Not really. I'd rather be much higher than 4% to 6%, and we're working like crazy to get it higher than 4% to 6%. And as we get through this year we will have a better read what that looks like. Obviously, we need a little bit more time.

Our focus right now is we're comfortable with what's out there. We're going to execute and perform against it, which I think we're starting to do, which is really good. And I would say incrementally, as I look out, we'll go up from mid single-digit growth at some point. It's not yet. That's the way to think of it, Brett. We will. And I don't anticipate that, it's certainly not 2016, and I don't yet think it would be 2017 either.

But I want you to know, BorgWarner isn't happy being a mid single-digit growth company. We're not. We're going to focus like crazy to go higher than that. But it's too early, Brett. We've got to deliver and we've got to execute on the mid single-digit growth.

I think the investor day that's later this year, will help provide some clarity and color on why we believe there's opportunity to transition up. But it is too early at this point, Brett. We need a little more time to execute, deliver, and do our work.

Fair enough. And then switching gears -- thank you James -- as we think about M&A activity -- obviously you're digesting Remy, a fairly large acquisition for you. As you think about M&A activity should we think about it as subsiding for next quarter, two, three, four quarters, until you digest what you've bitten off so far? Or can we expect maybe some additional bolt-ons through the remainder of this year, into next year?

You're right, Brett. Priority one really is flawless execution on the Remy deal, which I'm pleased with how that's going. From a financial perspective, we feel comfortable that if another deal came along we could do it and we would do it. I don't feel too inhibited from a smaller size bolt-on acquisition. I'm pretty comfortable there. And I think from a resource perspective, we feel comfortable.

What I'm saying to you is, we're not slowing down our efforts to look at smaller bolt-on related deals. Whether it would be this year or next year, Brett, you always know that's hard to predict the accurate timing. But I wouldn't want you to think, or anybody to think, that we've done Remy, that's all we're doing, and we've stopped looking and working and talking about deals; because that's not the case. We are. They would be clearly, I think, smaller than obviously the Remy transaction, and they would be likely bolt-on complementary type technologies to what we have. So, if that helps you, Brett, that's where we're thinking.

Perfect. Thank you very much, James.

Chris McNally, Evercore ISI.

Thanks so much, guys. It's Chris McNally. James, it seems like the first half of this year, you're on a pretty good track to execute your new plan. On the second-half comments, I'm just very curious, you didn't mention mix, and that's one of the areas that everyone's trying to figure out, particularly in North America. Sedan production schedule is moving down, replaced by rising truck. Could you just walk through how that may affect numbers, particularly on some of the programs you're associated with?

Yes, sure. This is James again, Chris. As I mentioned earlier, Chris, we've not really done anything relative from a guidance perspective to reflect any meaningful shift in North America. As I alluded to earlier, it is a watch point for us -- more fundamentally inventory and production ratios as opposed to car/truck mix, if that helps you.

I would say, let's say second half of the year truck stays a little stronger, it's probably a little bit favorable for BorgWarner, but it's not a big shift for us. We generally get a little better if it's truck weighted versus car weighted, but it's not a big move for us, if that helps you.

That's great. And any specific program within truck that we should pay attention to, whether for launches or just the largest amount of content or incremental margin?

We have a lot of affection for the F-150. (laughter)

And the Super Duty launch. (laughter)

Exactly. Thanks, guys.

Adam Jonas, Morgan Stanley.

Good morning, everyone. This is [Varijay Stat] standing in for Adam Jonas. Just a couple of questions -- and apologies if this has been addressed earlier. In the past you have highlighted how Remy has a narrow band of customers and you're planning to leverage your relationships with existing BorgWarner customers, especially in Europe. How have those conversations evolved in the past few months?

I would articulate it this way. Think of it in two ways. The core ex-Remy business -- starters, alternators, et cetera -- we're engaged in those conversations with customers, that as of today, have not in the past used former Remy products. And those conversations are going on. It's still early, we're only a few months in, but I would say the opportunity for us is good.

We serve a lot of customers that Remy didn't. It's a little early to know how that's going to translate into revenue. We need a little more time. But I would articulate the conversations have been open and productive and good thus far.

As I mentioned in my open commentary, the energy, intensity, excitement around the combination of products and future technology packages, combining former Remy and BorgWarner, has probably exceeded our expectations from when we did the deal. As we've always said, that's a longer-term revenue play. Those are three-, five-year type offerings. But I would say to you those have been extremely positive.

Understood. And just a broader question on content going into cars, there's obviously a lot of fuel efficiency content with ICE and electrification. And there is also a lot of active safety content expected to get into cars. Both clearly very important. And even with some content coming out, you'd expect to see big net increases in costs, at least in the medium term. Any thoughts on how the consumer prioritizes different content and is actually able to afford all this increase in cost?

I can comment on that for sure. I think I mentioned earlier that we are not seeing any slowdown in the dialogue and the discussion around the need for technology to drive better fuel economy, emissions, and vehicle performance. I know there's a little bit of a perception out there that's going to slow down, and so dollars can be shifted over to these other technologies. We are not seeing that. Our activity is as good as it's ever been in terms of working with our OEMs.

And the business equation has not changed. It's purely a value equation of how can the OEM meet their fuel economy and emissions standards, at the minimal cost, frankly, so that it minimizes any impact on the end consumer. And when I look across the suite of BorgWarner products that do that, we're in a very good position. That's why we're delivering the strong mid single-digit growth we are. The adoption rates for our products remain very strong. And they will do, because they're very good, cost-effective solutions that get the automakers where they need to, in a way that they can support their end consumer.

Thanks for the color.

Richard Hilgert, Morningstar.

Thanks, good morning. A couple of questions, please. In your comments, James, you talked a little bit about the commercial truck outlook and how that's impacting BorgWarner. Is commercial truck still going to be viewed by BorgWarner as being a core market? Or is commercial truck something that BorgWarner might start to move away from?

No, commercial truck, Richard, is a key part of our business. Clearly, it's challenged right now in terms of the market conditions. We've seen globally no real growth in that sector, if you wish, for awhile. But we're in there.

BorgWarner has continued to grow in that sector. Obviously, we grow at a much faster pace on the light vehicle side of the business. So, no, the commercial vehicle business still remains very core to us. We have a number of our products across the portfolio that play in commercial vehicle. Clearly, the Remy transaction we did has a strong presence in commercial vehicle, and that was attractive to us.

So, no, we remain committed to commercial vehicle. I think what we will always see, with 80%-plus of our business pass car related, and a lot of growth in pass car as an end market, you're going to see that growth generally outweighs in light vehicle over commercial vehicle. But that doesn't step us away from our focus and commitment around commercial vehicle.

With the emissions legislation, the clean air legislation around the world getting more stringent, not only on passenger cars but also on commercial, as well as stationary applications, or marine applications, whatever the case may be, are there any types of fuel efficiency or things that are attractive to BorgWarner on the commercial side that can be adapted from passenger? Or some new technologies that might fit in with BorgWarner's strategy on commercial?

Yes, absolutely, Richard, that's what we do today, actually. If you think about it, a lot of what you could say are commercial oriented turbocharger technology, we can and we do apply to the light vehicle side of the business. And vice versa, by the way. We run our turbo business, as an example, as a very integrated business that's creates a lot of synergies from a technology perspective between the commercial vehicle and the light vehicle.

Another great example is, we applied our dual clutch transmission technology that emanated from light vehicle, as you know, with Volkswagen, and we're applying that to the Eaton trucks. So, that's another very good example. Our thermal cooling technology -- fans, fan drives, pump technology, cooling pumps -- we apply those across both light and commercial and vehicles.

So, yes, there's definitely. And as you think of the global situation, Richard, where a lot of trucks -- commercial trucks that is, are getting smaller; think of light little delivery van type technologies; and you think in some markets so-called light vehicles are getting bigger -- large pickup truck type vehicles and SUVs -- there's a blend of technologies that comes together that can offer a competitive position. And I think we do that actually very well.

Okay, very good. Turbo and diesel are like hand-in-hand. You don't usually get one without the other, so that makes sense.

That's right, Richard.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. Just one question here, in the press release you guys were talking about the Geely EC7 EV sedan, and you allude to that it's designed for emerging high-volume electrical vehicle market. It sounds like a little bit of a change in your perception of the EV market. Is that really focused on growth and the push for NEVs in China or is that a broader statement about the global industry?

John, I'll take that one. I think a couple things. Obviously, we do see the EV market evolving. Our macro perspective is we've generally pointed to a 2025 time line of about a couple percent of the world fleet would be EVs. We've said that we could be a percent or two higher or a little lower, but in that range, 2%, 3%. Were not moving at this point away from that view, John. I would say incrementally we've seen more energy, enthusiasm, and intensity (inaudible) around electric vehicles.

I would say the bigger message we're trying to get across, John, is this overhang with EVs, BorgWarner doesn't have anything, is simply not true. That's what we're trying to articulate -- that we will serve that market. And this is a great example of hard parts and assets that are going into electric vehicles, leveraging BorgWarner's technology. And it's in China. And it's a reasonable volume, whether it's 15,000 this year.

So, macro, not really changed on EV, John, 2%, 3% likely in the future. China probably again incrementally a little more aggressive that way. But the key message is BorgWarner is going to be in that space and play.

Got you. Very helpful. And then just a follow up question -- I know you guys commented that a shift from cars to crossovers might not have too big an impact on content directly in the short run. But I was just wondering if you could comment, if we see a shift toward more buy on frame trucks, specifically the F150, if that could be a real positive mix shift for you. And also, maybe longer term, as these crossovers are pushed towards all-wheel-drive systems for active safety and just for the content, could there be a step up in content from that vantage point, as well?

I would say this, John. As I mentioned earlier, we've not done anything with our guidance to move away from any meaningful truck-car mix in North America. And I said if it does, if we see a stronger second half where trucks do a little better than what's expected today, in general that helps us a little bit. We've been quite open that F-150 is a very strongly contented vehicle for BorgWarner, so that clearly helps.

And the drivers for us -- and I think you know this, John -- as that truck mix goes, and they start putting in meaningful four-wheel-drive, all-wheel drive, transfer case capability and turbocharged engines, that starts to step up the content pretty meaningfully for BorgWarner. We have to watch, and we do, the GM truck share ratio because, while our content is very strong on the Ford side, it's much less so on the GM side -- to be transparent with you.

Okay, great. Thank you very much.

Joseph Spak, RBC Capital Markets.

Hi, thanks for taking my question. The first question is with respect to Wahler and the commentary there. Is there any updated timing? And can you still get to the ultimate goals you originally achieved and it's just going to take longer? Or are we now to assume that it's just going to be structurally lower than you initially thought?

Thanks, Joe. If you recall, I'm sure you do, when we did the acquisition we talked about a two- to three-year transition period to get to double-digit margins. And then as we went through last year and fought a little bit of the challenge on the restructuring, we pushed that and said it's certainly going to be closer to three. I think two things. One, I think we will be challenged to get it done in three, but we will get there. Now, is that three and half, is it four, is it four and half? I would ask you give us a little bit more time until we can get through some of this heavy lifting on the restructuring that we're right in the middle of.

But structurally, we'll get there. We will get to the double-digit margins. We won't do it in the three-year period, but we're going to get there. And give us a little bit more time, as whether that's a six-month pushout, a one-year pushout -- just because we've got to get through some of the challenges that we're in right now. But we will get there. I'm not worried about that.

Okay. And then on the guidance, I understand that the change in revenue from Remy, the EPS is there. And I know you've baked in a lot of additional risks for the year. Should we read in that holding the EPS guidance you're eating into that a little bit? Or was there something else that I missed maybe, that's a little bit better that allows you to offset some of that softness?

What I would say, Joe, is it's within the range, and we're talking about $0.02, $0.03 here. I don't think it's worth going through a lot of hoops, basically, for immaterial at this point. You're right, the sales guidance was all driven by Remy commercial vehicle.

Now you've got some moving parts on the EPS. I won't go into all the details, but, for example, tax rate went up. That was negative. We had some offsets in the core business, which was more positive, but then it was offset by some negatives in Wahler. So, there's a little bit of a walk, but at the end of the day we're in the same range.

Okay. And then last one, there's been a lot more talk on 48 volt. I know that's something you guys have been incrementally more excited about. Are you seeing any uptick in quoting activity related to that?

I would say, Joe, from our viewpoint, the quoting activity in general across all electrification architectures is very strong and probably getting even stronger. A lot of the dialogue we will be in, because this is how BorgWarner operates, is many times the dialogue with the customer will be, they're not sure whether they want a 12-volt or a 48, or a 12 and a 48-volt. People like BorgWarner can help them find that conclusion.

So I'm not necessarily in the view that there's been a massive uptick in pure 48-volt architecture. I think there's definitely been a move up in electrification architecture, which we've talked about for a while. And I see the suppliers that are going to win, this is James' view, are the ones that can service the flexibility between 12 and 48 volt, and not rely on either one. And we have a bunch of products that do that. So, whether this electric turbocharger, whether that the former Remy motor technology, just to name a couple. Yes, it's strong and we're right in the midst of it.

Thanks a lot.

David Leiker, Baird.

Hi, guys. This is Adam Schmitz on for David. On the two additional electric vehicle programs that you won, are there any additional details you can give, maybe in terms of product or content where you won those programs?

Adam, I would love to but I would get in trouble with the customers. Give us a little bit of time and we'll get that out for you. I just really wanted to convey that we continue to get momentum on these electric vehicle programs. I know, understandably, you want the data. If you can just give us a little bit of the time, we'll get the clarity once we get our customers aligned with us and get that out for you, okay?

All right. That's fair. It was worth a shot. And then you mentioned a higher level of OEM activity over the past several months. Is this seen across the entire business, or are there any products or geographies where you're seeing the strength?

I think it's pretty linear actually, or pretty consistent, Adam. We're seeing quoting activities are strong across pretty much all of the business, and our win rates are good and our booking rates are good. I think incrementally, the one I've talked to a couple times today is the electrification efforts are incrementally a little higher, and they continue to go higher, which is good news for us. But in general it's strong.

What I didn't want to convey, Adam, is all the [contact] activity is high, strong on the electrified products and the core business is not -- because the core business is strong, too.

Great. Thanks. I'll leave it there.

I'd 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 2016 first-quarter results conference call. You may now disconnect.