博格華納 (BWA) 2016 Q2 法說會逐字稿

Good morning. My name is Christy and I will be your conference facilitator. At this time I would like to welcome everyone to the BorgWarner 2016 second-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, Christy. Good morning and thank you all for joining us.

We issued our earnings release this morning at around 8 AM Eastern time. 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 August 11. The dial-in number for that replay is 800-585-8367. You'll need the conference ID, which is 26650635, 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 JPMorgan Automotive conference in New York on August 9. The RBC Capital Global Industrial conference in Las Vegas on September 8. The Morgan Stanley Laguna conference on September 15.

Finally, I would like to cordially invite the investment community to our Investor Day in Auburn Hills on September 7. We will be presenting new information regarding our views on the future of the industry and our role in it. We will have product displays to demonstrate some of our newest technologies and vehicles available for you to experience these technologies firsthand. Our senior leadership team will be present and available to answer questions throughout the event.

We've set up an RSVP link for you to confirm your attendance. You can find the link in the press release we sent out on June 13, or send me an email and I will get you the information. Please join us for what we expect to be the most meaningful investor event in our history.

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 Form 10K. 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 2016, and 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 our website. You will 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. As Ken said, Ron and I are really pleased to share our results from the second quarter with you and also talk about what the rest of the year looks like. What I would like to do is just start and make a few high-level comments on some of the bigger picture perspective as we look out into the macro industry -- or the macro environment in our industry. And you can see a couple of points on slide 2. For those following along.

I think the theme I would talk the most to in terms of the macro view is the notion of uncertainty out there in the world. Whether that is some of the civil unrest issues that we see particularly in Europe; we see tense political environments, recently in Turkey and Middle East. Pending US elections, and of course fairly recently the Brexit vote. All of that creates, I think we all realize, a sense of uncertainty at a macro view. But interestingly when I look at the world of autos, we generally see a pretty stable, steady as you go-type environment and things playing out pretty much as we would expect it.

As we look forward I think that macro uncertainty will continue, but I do see the auto side remaining fairly stable. As I articulate that a little further and talk to you about the market Outlook, first of all from a light vehicle perspective, I would say from a BorgWarner viewpoint, we are pretty well aligned with IHS. We see the China market growing in the mid-single digit 5% to 6% type range. We see Europe in a 2% to 3% growth environment range, and we see the US in that 2% to 3% range of growth, the light vehicle production. We do see and we acknowledge that the US plateau, it's effect is certainly on the horizon and we are very mindful of that.

From a commercial vehicle point of view, we still see that space challenged for sure. As you look around globally there is really not a lot of growth at all. We do see some pretty continued strong weakness around off-road. Some of that translates into a lot of new programs under further review and consideration.

As I look at that, I always like to share with you, what are the leading indicators, or the areas of watch for us as a Company at BorgWarner. The ones that can be most relevant to us. I would characterize the North American market, how is the plateau going to play out, and how is the inventory production levels going to play out, and we pay good attention to that. I will talk about how these relate to our guidance shortly.

VW remains a critical customer and a very important customer for us, and we have to monitor the share for VW around the world. And like everybody, we are going to pay attention to the potential impacts of volumes in Europe in light of Brexit. And we will obviously monitor the commercial vehicle weakness.

All of that said, I would say so far things have absolutely planned out per our guidance, and as you'll see in the guidance going forward, we still feel good about our guidance, and we are building these in and going forward with good guidance. Yes, we are watching, but we are also performing as expected and we expect to perform strongly going forward.

Let me comment a little on the regulatory or the technology aspects of the Business. First thing I would say to you is the pull and the drive for fuel economy and emissions regulations -- absolutely unchanged. The pull for powertrain technology remains a strong as it did last quarter and the quarter before that and the quarter before that. We are not seeing any slowdown in customer engagement and programs that are driving and pulling Advanced Technology as we go forward.

We do see the strong shift to increase powertrain electrification continues. We know that because we are right in the middle of it and we are talking to customers literally every day around the world, working with them on solutions for them in that additional electrification content. That applies across the board. That is 48 volt architectures, it's other hybrids, and it's electric vehicles. We have content and discussion there not just for the long-term, but products in the short-run as well. I would say also relative to electrification our quoting activity remains very strong, multiple customers and multiple products, and we will be making further announcements on specific programs in the coming weeks and months.

I would just say this, I feel very pleased and very happy where we're at in terms of the level of engagement around new technology aligned with electrification. As Ken alluded to in his opening comments, we plan to showcase a lot of those products, a lot of those technologies at our upcoming Investor Day on September 7.

Let me give us some high-level view here on the BorgWarner summary, and let me start off with Q2. Needless to say, Ron is going to provide a lot more detail and commentary in his comments.

But I would just say this. We had a really good quarter. I was very pleased with our second quarter. The growth came in at the high end of our guidance and we delivered strong operating performance. Breaking that down a little further, it was $2.3 billion in sales, which is up 3.5% when we exclude FX and Remy.

Regionally, we came in about as we had expected. Which really was characterized by stronger growth in North America and a particularly strong quarter in Korea, which was balanced with the lower growth as we had expected in Europe and China.

EPS came in at $0.84 a share when we exclude non-comparables and that does include Remy. Operating margin was 12.4%; when we exclude Remy, 13.2%. The word I would use is impressive. Breaking that down by segment, engine sales $1.4 billion, so we grew at about 2.2% on a reported basis, or 2.8% when we exclude currency. Primary drivers of the engine growth were Turbo and Variable Cam Timing.

Switching to Drivetrain, sales of $895 million; that is up almost 43%, but when we exclude currency and Remy, still a good quarter of 5.4% growth. Largest part of the growth came from strong all-wheel drive sales in both North America and also in Europe.

Let me shift gears and talk a little about the Outlook for 2016, and again, Ron will provide more color on this. Basically we have narrowed our guidance range to the high-end of our previous range, which we think is very good news. We also have highlighted through the last couple of quarters four major launches this year that we have talked about that are very critical to our success in the second half of the year.

Just to remind you folks, it was the Pentastar Engine, Ford Scorpion, Ford Super Duty, and the GM Duramax. All of these programs have launched except for Duramax, which will launch in September. I would say to you that the launches have been probably slower than the original assumptions, but here's the good news: this is exactly what we had anticipated and planned for in our guidance back in January. That is why we did it, and as a result of that, our launch activity remains on track.

So the Outlook on the second half of the year, if I talk about that, I would characterize it to you that I think our risks and our opportunities are pretty well-balanced. I alluded earlier in my comments, there are some risks and some watch points out there, but I also see positive aspects too, and in general I think we are balanced. And with that, that is why we feel confident in our full-year guidance, that mid-single digit growth and continued strong operating performance.

Let me make a few comments around growth in general and give you a little update on the Remy acquisition and integration. First of all, from an integration perspective it is going well. I think it is fair to characterize it that both financially and operationally it is performing very much as we had expected. We remain very positive about the technology that came with the acquisition, and we have had many, many discussions with our customers, particularly around the combination products where we are going to leverage the rotatum electrical capability of Remy with our clutching capability. That is very much on track, and you will see that hardware, for those of you lucky enough to be with us on September 7.

In general, our quoting and our booking activity remains strong and very good about the win rates on our booking business, and all of that leads to in-line expectations are on track for growth. Let me wrap up before I turn it over to Ron.

We had a good first half to the year. We feel very good about, we delivered what we said we would. I think the business is operating well. We continue to be heavily focused on driving growth through the adoption of our technology, and we remain upbeat and positive about delivering our full-year guidance. So, with that, let me turn the call over to Ron.

Thank you, James. Good day everyone.

Before I review the financial details, I would like to bring you some of the highlights as I see them for the quarter. In summary, we saw solid growth, great operating performance, and a return to normal CapEx spending and free cash flow generation. Now as Ken mentioned, I will be referring to a supplemental financial slide deck as posted on our website, so I do encourage you to follow along. First, I would like to focus your attention on slide 2. I am sorry, slide 3.

Throughout the presentation I will highlight certain non-US GAAP measures to provide a clear picture of how the core business performed. And for comparisons with prior periods. Specifically we will be excluding the impact of FX, Remy, and non-comparable items from certain US GAAP measures. So, when you hear me say -- on a comparable basis, that means excluding the impact of FX, Remy and non-comparable items. When you hear me say -- on a reported basis, that means US GAAP. With that our of the way, let's move forward.

Let's turn to slide 4. On a reported basis, which includes the change in sales due to market growth, price, net new business, FX, and Remy acquisition, sales were up 14.6%. On a comparable basis, our sales were up 3.5%, just above the midpoint of our guidance.

On a reported basis, gross profit as a percentage of sales was 21.3% in the quarter. On a comparable basis, gross margin was 21.4%, up 30 basis points from last year. On a reported basis, SG&A was 8.7% of sales. On a comparable basis, SG&A was 8.2% of sales, or basically flat from the same period a year ago. R&D spending, which is included in SG&A, was 3.6% of sales; however, this did include the impact of Remy, so on a comparable basis R&D spending as a percent of sales was flat year-over-year.

Now, let's look at the year-over-year comparison for operating income, which can be found on slide 5. Starting on the right, second quarter 2016 Operating Income excluding noncomparable items, but including Remy was $288 million, or 12.4% of sales. If you also exclude Remy's $13 million net contribution, Operating Income on a comparable basis was $275 million, or 13.2% of sales, up 30 basis points from a year ago and yes, James, that is impressive.

On a comparable basis, Operating Income was up $16 million, on $71 million of higher sales. That gives us an incremental margin of 23% in the quarter; outstanding performance.

As you look further down the income statement, Equity and Affiliate Earnings was about $10 million a quarter, down slightly from a year ago. Interest expense and finance charges were $21 million in the quarter, up from $18 million a year ago, and increases primarily due to the $500 million Euro fixed rate senior notes issued in the third quarter of 2015.

Provision for income taxes in the quarter on a reported basis was $84 million. However this included $2 million net tax benefit related to our non-comparable items and a favorable tax adjustment. You can read about each of these adjustments in our 10-Q, which will be filed later today. Excluding these items, the provision for income taxes was $86 million for an effective tax rate of 31%, which is in line with our full-year guidance.

Net earnings attributable to non-controlling interest was about $11 million, up $2 million from the second quarter of 2015. And this line item reflects our minority partner share in the earnings performance of our Korean and Chinese consolidated joint ventures.

Now let's take a look at our diluted earnings per share on slide 6. Net earnings, excluding non-comparable items but including Remy, were $0.84 per diluted share. On a comparable basis, net earnings were $0.80 per diluted share.

Now let's take a closer look at the Operating segments in the quarter, beginning on slide seven of the deck. Reported engine segment net sales were just over $1.4 billion in the quarter. Sales growth for the engine segment on a comparable basis was 2.8%, primarily due to higher turbocharger and variable cam timing sales, partially offset by weak commercial vehicle markets around the world.

Turning to slide eight, reported adjusted EBIT was $235 million for the engine segment, or 16.3% of sales. On a comparable basis to engine segment adjusted EBIT, was up $8 million on $39 million of higher sales, for an incremental margin of 20%; again solid performance for the engine segment.

Turning to slide 9, and starting from the right, Drivetrain segment net sales were $895 million in the quarter. This included $240 million of sales from Remy. Sales growth for the Drivetrain segment on a comparable basis was 5.4% primarily due to higher all-wheel-drive sales. On slide 10, reported adjusted EBIT was $93 million for the Drivetrain segment, or 10.4% of sales. Excluding Remy, adjusted EBIT was 12.2% of sales, up 70 basis points from the prior year. On a comparable basis, the Drivetrain segment's adjusted EBIT was up $10 million on $34 million of higher sales for an incremental margin of 29%, a very good performance for the Drivetrain segment.

Now, let's take a look at our balance sheet and cash flow. We generated $362 million of net cash from operating activities in the first half of the year, which is up $43 million from a year ago. Capital spending was $235 million in the first half, which is down $15 million from a year ago. Capital spending was above our trend in 2015, but we have returned to normal spending levels. As a percentage of sales, CapEx was 5.1% in the first half, at the low end of our historical range of 5% to 6% of sales.

Free cash flow, which was defined -- which we define as net cash from operating activities less capital spending, was $127 million in the first half. Up $93 million from a year ago. We are still on track to generate between $400 million and $475 million of free cash flow in 2016, and at the midpoint that's up 50% from 2015.

Looking at the balance sheet itself, balance sheet debt increased by $85 million and cash decreased by $83 million. In the first half compared with the end of 2015, we have purchased -- our debt increased $168 million, which is primarily due to share repurchases. We spent $100 million repurchasing 5.4 million shares in the first half, 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 36.3% at the end of the second quarter, 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%.

Now I'd like to discuss our current 2016 guidance, which has improved from our previous guide, as James mentioned. Returning to the deck, let's start with our sales growth guidance for the full year on slide 11. Note that the baseline 2015 net sales excludes Remy. We have raised the low end of our guidance range by 100 basis points. All in, we expect to grow between 13.7% and 17.5% this year, up from 12.7% to 17.5% previously.

Half of the improved Outlook is due to greater comfort with volume and launch-time assumptions in our net new business. The other half is because we expect the impact of currency to be less negative compared with our previous guide. Market-related growth and new business growth net of pricing is now expected to be between 3% and 5.5%.

Now, let's looking at our operating income guidance on slide 12 from an operating performance perspective. We are expecting 15% to 17% incremental margins on our core business sales growth, which is slightly down from our previous guide of 16% to 18%. This is nothing to get excited about, just a few minor adjustments after taking a closer look at the remaining part of the year.

On our incremental margins, incremental margins will be lower in the second half than the 19% we delivered in the first half, primarily due to a tough comparison in the third quarter last year. In the third quarter of 2015, we implemented sharp cost controls in response to the macro uncertainty we saw last year. That spending has returned to normal, making the year-over-year third quarter comparison challenging. On a comparable basis, we still expect our operating income margin to be greater than 13%, and including Remy, our operating income margin is still expected to be greater than 12%.

On slide 13, we have our EPS guidance. We now expect earnings of $3.16 to $3.32 per share, and this includes $0.12 per share contribution from Remy, up from the $3.11 to $3.32 previously. The primary driver of the change is a lower share count, which raised EPS by about $0.04 across the range. Raising the low end of our sales guidance range added another $0.01 per share to the low end. At the high end of the range, the lower incremental margin and other minor adjustments offset the lower share count.

Now let's review our third-quarter guidance issued this morning, starting with the sales growth on slide 14. All in, we expect to grow between 13% and 21%(sic-see press release "20.8%") in the third quarter, excluding 13 percentage points due to Remy. Excluding Remy, our growth in the quarter is expected to be between 0.3% and 7.6%, but this includes a negative impact of currency. Currency is expected to lower sales by 220 basis points at the low end and 10 basis points at the high end.

On a comparable basis we expect to grow between 2.5% and 7.5% in the quarter. Our growth is improving in the second half primarily due to major truck launches with GM and Ford. From an earnings perspective, as shown on slide 15, we expect earnings of $0.74 to $0.81 per share in the third quarter, which includes about $0.03 per share from Remy. Excluding Remy, we expect earnings to be $0.71 to $0.78 per share.

In conclusion we had a very good second quarter. This is the third quarter in a row of exceeding our EPS and sales goals. As we look forward at the rest of the year, we expect to continue on this path: solid sales growth, strong operating margins and improved cash flow from a year ago. I absolutely remain confident that we will deliver our 2016 guidance. And with that, I would like to turn the call back over to Ken.

(Operator Instructions)

Your first question comes from the line of Rich Kwas from Wells Fargo Securities.

Good morning, everyone.

Good morning, Rich.

I want to follow up on the launches here. So Ford indicated some issues on their end, at least with Super Duty. You indicated that it launched on your end. So is there -- as you look at it right now, what have you factored into potential incremental risk for the launches into the back half of the year?

I think, Rich, what I would say is -- let me try and take it this way with you. As we started out the year, obviously we had a lot of launches and what have you. And the approach we took was to build some judgment into launch cadence, right, both timing and volume, and then obviously we factored in some macros.

I gained confidence that we've delivered the first couple of quarters where we have gone through other launches around the world. Clearly the second half is a little more weighted. As I sit here today, I think we have done a pretty good job of factoring in the launch cadences as we see it today.

It is never perfect -- you don't know. But I think we continue that mantra of applying some judgment to both the timing and the volume ramp. And I think as we sit here today we are as good as we can be in terms of forecasting it out.

Okay. Within Ford and VW, two of your most important customers, when you look at Ford within North America and then VW within Europe, what has changed since the beginning of the year in terms of outlook? Ford looks to be a little heavy on inventory, in particular F-series has been. Have you factored any additional risk as it relates to some of the key programs for both of those customers?

Yes. Again, if I think of it in the first half/second half view, Rich, as a good example, actually, the first quarter we talked about, VW ran light in China. Remember that? They had a tough time in China. Even in the second quarter in China we anticipated some challenges there, and we still delivered.

Again, it gives me some comfort. And I think it is fair to say we built in some judgment factor here about whether it is VW market share or whether it is volume ramps, and I think at this stage we have got pretty well covered by it.

Okay. And then a last quick one for me on the fuel efficiency standards, those got initial proposal or updated proposal for mid-term review got released a couple of weeks ago. James, you indicated that the discussions are still very healthy around powertrain and whatnot -- the changes seem to be pretty modest, at least if they go through as detailed? What are your updated thoughts now that we have something on a piece of paper that we can debate?

I think you captured it really well, Rich, actually. It is very modest changes.

The only thing that is a little different to what it was a while ago, obviously the truck/car mix is a little different in North America. So that moves things around in how companies look at their overall fleet averages.

But fundamentally, the standards are not changing of any note in our view, and I would say the pull for the types of technologies we have to deliver on those standards is as strong as it was 6 months, 12 months, or 18 months ago. So we are not seeing any pull back at all in terms of desire and drive for the types of technologies we have.

I think our best guess as we engage with EPA and others is there could be some nuancing and some modest, minor tweaks to the standards, but we have not seen anything material enough to change the direction of the OEMs and what we're doing with them.

Okay. Thanks, I will pass it on. I appreciate it.

Thanks.

Your next question comes from the line of David Leiker from Robert W. Baird & Company.

This is Adam on the line for David.

Morning.

I appreciate we are still several quarters away from you guys giving a bookings number, but as we sit here halfway through the year, can you give a little more color on the pace of new bookings over the past several years and how they have trended relative to 2015?

Yes. I think you are right. We will do our new business update as we go into January. It is a few months away.

If we reflect back on the current backlog or net new business, this year was a mid-single-digit type growth. As you can see, so far we are delivering against that, so that gives us comfort.

It stepped up just a little into 2017 and 2018, but still in that mid-single-digit range. I think we will give you a lot more color as we get closer to it. But I don't think there has been any material shifts to sway us away from sustained mid-single-digit growth, at least for the next couple of years. That is typically how I think about it, Adam.

Great. On the strong incremental margins in the quarter driving your margin gains, how sustainable are these moving forward, just given some of the restructuring actions you've taken, and some of the improvements and Wahler and Remy, et cetera?

A good example, Adam, is if you take a look at Drivetrain segment, which is nearly 30% incremental margins, there is a portion in there of the restructuring activities benefits that we're getting. When you go to a comparable basis, eventually year over year that is going to moderate back to a normal mid-teen type of incremental margins.

I think we are going to expect a little bit of that still in this year, but as we go into next year is when you start to see it moderate. I think the Engine segment at 20% was actually a little bit better performance probably than we anticipated going in; just a great job. Our target still is mid-teens, but I think the majority of that really was the benefits of the restructuring costs year over year.

Great. Lastly for me, you have one of the largest European businesses across the auto supply space. Just wondering what you are hearing from your customers, post-Brexit?

Yes. I think you are right, first of all. Second quarter was a good quarter for Europe, and in general pretty much across the board with most of the OEMs. It was a good solid quarter. I would characterize year to date has been actually stable and good in Europe.

I would say from a post-Brexit perspective, we anticipate, I think like everybody else, that the UK car production itself will have some impact as we go forward into 2017 and 2018. From a BorgWarner perspective, our UK content is very small.

How much of that then will flow into Europe in general, I think we need a little more time. I think everybody needs to digest that. So we are watching it, and I think it is a little early from a -- how does it impact Europe in general?

I would tell you we have not seen any impact thus far in schedules and releases and those types of things. So I think it is going to be more of a 2017 type event than a 2016 event for Europe.

The UK will trim itself up, but again, that's -- about 1% of our revenue is in the UK. We feel pretty good where we're at right now.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Chris McNally from Evercore.

Hi, guys. Thanks so much.

I want to go into a little detail on the Drivetrain margin, which was extremely strong for the quarter. You guys discussed that the incremental margin maybe in the second half would be a tougher compare, particularly in Q3. Could we go into that in a little bit more detail some of the costs that you took out, and where costs may be coming back?

And also can we start to think about the Drivetrain margin sequentially throughout the year? Is this ex-Q3 seasonality where it is a little bit down -- is this a good level going forward?

Let's talk about the Drivetrain incremental margins for the second quarter, first. If you look at -- and I will go back to slide 10, you have got this 29% incremental margin, which is about $10 million. Probably a little bit less than half of that is because of the tailwinds we were having for the full year from the restructuring activities. So we will call it $4 million, for example.

That is the benefit we are getting from the restructuring. And if you take a look at the full-year guidance, you can see $15 million roughly -- I think we're $7 million year to date of restructuring tailwinds.

So we had about $2 million, I think it was, in the first, or something. So the remaining is in the second quarter; that is going to continue for the rest of the year. We will get the other $7 million, say -- I am rounding numbers here -- the rest of the year.

Now, the third quarter might be a little bit tougher, but the fourth quarter, we will get that through the year. I think we are on track in that range that we have for tailwinds. That is Drivetrain. [Books] to best. We are on track.

Now, the other issue we are dealing with is the year over year; I mentioned in my script that we took some cost controls, primarily in SG&A, last year when we saw some difficulties in the macro environment we are facing. Some of this SG&A spending is going to come back in the second half of the year, specifically probably in the corporate spending rates will uptick a few million bucks here and there in the next two quarters. So that is what you are going to see going forward sequentially on the SG&A side, primarily in the corporate.

Okay. Perfect. Thank you so much.

Thank you, Chris.

Your next question comes from the line of Brian Johnson from Barclays.

Yes, good morning. One third quarter, more housekeeping-ish, and second more strategic.

On the third quarter, fairly wide range of revenue estimate for the guide. Can you talk maybe a little bit more about the factors around that plus or minus, that 5% swing that it could be?

Yes, Rich. I mean, sorry, Brian. What I would say, Brian, good observation, because it is a wide range. It is there intentionally, for several factors.

First, James mentioned our launch cadence. There is a lot of, still, uncertainty in the launch cadence. We're comfortable with our guidance as far as the range, but they could swing fairly wildly because some of it is new conquest business, right? It is not carry-over business. So those have a significant impact on us.

The second item is we're going through the third quarter where you have customer shutdowns; and although they say one thing, they may behave another way. That could be plus or minus; there is uncertainty on shutdowns.

The third, I would like to point out, James talked about, just a general uncertainty. A good example is Ford this morning -- their announcement. James gave all of the macro political issues going on. So when you factor in all of this variability, we kept the range wide, quite frankly, because there is a lot of variability going on right now.

Okay. Second question, and I know you will discuss this more at the investor day in September 7, what did you say in terms of booking activity during the quarter around 48 volt and hybrid systems? And certainly we noted Valeo a couple of days ago had some very strong momentum in that segment of its business, in terms of the pipeline. What are you seeing around that?

Brian, we will show you -- as you said, we will show you in a few weeks a little bit more around that. But we have a wide range of activities going on.

Our quote activity is strong. You know, we are quoting a lot of products both across pure EVs, hybrids in general, and then 48 volt architectures. We continue to see strong activity.

We are a little limited as to what we can say on specific business wins, Brian, just because of the customer approvals and communication. But it is a wide range of products ranging from belt alternator starter systems, E-booster technology, P2 hybrid clutching control modules. It is a wide range and it is -- the activity is very, very strong, to be open. It is across a wide spectrum of products that is all leading to generating growth.

What we will show you as we get to investor day, Brian, is what is the ramp in the cadence of that growth. Because obviously it is not this quarter or next quarter. These are programs that are going to kick in, in the next couple or three years. But we will take you through that basically product by product and growth outlook.

But to summarize to your specific question, quote activity is very strong and robust, and we are winning a pretty good share of what we want. More to come in September, Brian, if that is fair.

Just one quick follow-up, on Ron's comments about third quarter. Ford indicated the need -- we would not necessarily argue there is a need to work down Ford inventory. So as you put together your guide, were you thinking in terms of what you would consider to be conservative Ford schedules as you thought about Q3 in second half?

Yes. The way I would articulate it, Brian, is the way we have been modeling for our Business was sequentially a step down in the second half of the year versus the first half of the year. That is how we had modeled it.

I think it is fair to say, through the first half of the year, we have modeled maybe a little lighter than customer releases and schedules. And as you see, we have done well in the first couple of quarters.

I think we are pretty well aligned at this stage. Obviously inventory adjustments and those things can be a little choppy and can create some noise, but I think thus far we have done a pretty nice job of anticipating a model, and modeling it out in a balanced way, Brian, is the way I would characterize it.

Okay. Thank you.

Next question comes from the line of Ryan Brinkman from JPMorgan.

Hi, this is Samik Chatterjee on for Ryan. The first question I had -- a lot of discussion today on the call about Ford Super Duty launch. So just wanted to get a context here from you. I know you have roughly indicated what sort of revenues from Ford, but are you able to share what ballpark the Ford Super Duty is in terms of revenue for you guys?

I can give you a couple of thoughts. If you look at our Business, and let's focus a little bit on North America because I think that is really where the majority of the action is here. If you look at what our percentage is there, it is high-single digit of our total Company.

So, rough numbers, you can think of all of BorgWarner with 40 North America -- maybe, what, an $800 million, $900 million revenue number for the year. Half of that is gone, right? So we are talking about a $400 million-ish number in the second half.

I said earlier that sequentially we are a little lower. So you are south of $400 million in the second half of the year. So let's just play that out, and maybe that moves down a little bit based on some inventory true-up. What are you -- $20 million, $30 million, $40 million type of a number? It is important for us; we are not dismissing it, but it is also scalable and manageable from a BorgWarner point of view, is the way I would think of it.

Specifically on the Super Duty, as Ron alluded to earlier, it is important to recognize that is conquest business for us. We go from zero to whatever. And our view at this stage is, we have been following the schedules from Ford pretty well. We anticipate a good second half of the year on Super Duty.

Got it. A second question -- pretty wide ranges for organic growth, both in third quarter and probably implied for fourth quarter as well. I was wondering what are you really embedding in that guide for the commercial vehicle markets in the second half, and what is the degree of risk you see in that market?

That is good. I think we have factored in overall a very low growth environment for commercial vehicle; we have built in a pretty low class-8 build for North America, and that is a pretty strained area. I would say a low to no growth environment in China, and continued weakness around off-highway, pretty much globally. And then a little bit of growth in Europe over the road. Brazil remaining very challenged.

That is kind of what we have seen. And I would say for us, what we've seen in the first half of the year is commercial vehicle is coming pretty much where we had anticipated for both Q1 and Q2, and those have been some choppy waters. So I would not expect us to be far off as we look into Q3 and Q4.

Just a final housekeeping one -- I got [detail both in incremental margin and the inside] -- just going sequentially and looking from 1Q to 2Q, the margins did decline slightly, even on higher revenue. So I was wondering what that probably was attributable to?

That was what we just discussed just previously. SG&A cost will sequentially probably tick up, so that's a little bit more -- put incremental margins more into what I would call the normal range for us, which is mid-teens. That is what is driving that, is the SG&A spend sequentially.

Okay. Thank you.

Your next question comes from the line of Pat Archambault from Goldman Sachs

Hello, it is actually Dave Tamberrino on for Pat. A couple of quick questions from us.

One, as we're unpacking the revenue growth of the two segments, looking at Engine being up 2.8% versus Drivetrain up 5.4%. Traditionally, you'd think about the Engine business with the turbochargers being really the growth engine here.

I was wondering what is creating this dynamic where Drivetrain is growing faster than Engine? Is it just the commercial vehicle weakness that you spoke to earlier, Ron, in Engine, and the all-wheel drive growth that you are seeing in Drivetrain that is driving it? Or is there something else there?

This is James. Let me take a shot at that for you.

I think, obviously you will see quarters bounce around a little bit; sometimes we are a little up higher in Drivetrain and sometimes it is Engine. It moves around a little bit. But in terms of why Engine was a little lower than some of our historical quarters, you are right, commercial vehicle was clearly a factor -- that only applies to our Engine segment. There is no commercial vehicle revenue in Drivetrain. That was a key weight for us.

I would say the other area that weighed a little bit on us was China. Some of our larger customers in China, so I am talking about Volkswagen, I am talking about Great Wall, I am talking about Ford and GM, had pretty low growth quarters. If you aggregate those four, actually, it was no growth. So that weighed more on Engine than Drivetrain as well.

Those are two of the bigger things. It does not really concern us, as I said, because we do have bounces from quarter to quarter, and I think it is explainable and it is, frankly speaking, what we had anticipated in our guide.

Okay. That is very helpful.

Lastly, thinking about the European production guide that is under or production cadence that's underlying your guidance, it does not sound like there is any softness as you are seeing or hearing, and there is not much you have really predicated into 2016 of any contagion from slower European sales growth as a result of the UK referendum. Is that the correct way to think about it?

Yes, that is actually a good summary. As Ron alluded to, there is always a little noise around shutdowns. That obviously plays its part. But we feel we have got that pretty balanced.

And as I said earlier, the UK referendum impact will play itself out over the coming months and probably even into next year. Yes, I think you captured that pretty well.

Thank you very much; I appreciate all of the detail.

Your next question comes from the line of Brett Hoselton from KeyBanc.

Good morning, gentlemen.

Morning.

I wanted to ask you a longer-term strategic question, and I know you talked about this some, but there is, I have a number of questions from clients with regards to Remy. I was hoping you could provide us with some specific examples of how Remy helps you get into the electrification of the powertrain specifically.

And secondly, do you anticipate it resulting in maybe some sort of a hockey stick improvement in your revenue growth rate, or does it allow you to continue to grow in the current range?

And finally, if you do actually see some sort of an uptick in your growth rate, what is the timing on that? If I remember correctly, it is a few years out, but go ahead.

Okay, Brett, I am happy to talk about that. Let me talk a little bit about sources of growth for Remy. I think that was your first key question.

I would encourage you and the investors to think of two channels of growth for Remy. First channel of growth is primarily through their existing off-the-shelf technology for vehicles and applications in service today. What I mean by that is selling more belt alternator starters, starters and motors and generators, than they sell today.

And what I mean by channels is on light vehicle, today they ship to Hyundai and General Motors and that is it. We see leveraging the BorgWarner channels and the BorgWarner relationships that there's no reason on the planet why we can't be selling starters and alternators and belt alternator starter systems to other customers beyond their current customers. Okay?

Regionally, they have almost no presence in Europe, and clearly Borg has a big presence, so there is a regional play where we can accelerate our European relationships to grow what I would describe, Brett, as their core existing product line business. So that is a source of growth for us that we will leverage.

You would anticipate that can be done in a shorter horizon, only because it is quoted activity today and we have product to put on those vehicles. That is the first source of growth.

The second source of growth is where you're alluding to is to help take us further into electrification. There is a number of potential opportunities there. First of all, they have the motor technology that you could use, either in a hybrid vehicle or a pure electric vehicle, and that is a traction motor, of sorts, that we can use.

The second path for them is to combine the rotating electric, so the motor coupled together with our clutching technology, to offer hybrid vehicle solutions where we need to bring together the motor and the clutching technology so we can offer engagement or disengagement between the motor and the combustion engine. We have product on the shelf to do that today, and we're quoting that activity.

The third leg of opportunistic growth is the more advanced starter -- belt alternator starter systems that will emerge as a need for stop-start technology and hybrid technology, and Remy has a number of products in that space that we will be pushing forward onto hybrid applications.

The last area I would say just in general, they bring motor technology that helps us on other product applications. If you think of -- and I talked earlier about an E-booster technology, which is a turbocharger with a boosting device -- compressor device -- requires power electronics and motor know-how; Remy can bring that knowledge to us.

All of that said, Brett, so where does that all translate to into dollars of growth? We are working our way through that. But there is certainly absolutely no reason why Remy would not grow at least at BorgWarner levels. And you have to give us a little bit of time to lay that out for you in terms of cadence and pull all of that together, and we will get through that over the next few months.

What we are going to do, Brett, is we will use the September day to showcase the technology for you and some of the -- and what we're doing on it. And then we will pull all of that together in the January net new business to lay out for you what the next three years of growth looks like for Remy, both conventional products and the combination products with BorgWarner products. Hopefully that helps you a little bit.

Very thorough, James. Perfect. Have a great day, guys.

Thank you.

Next question from the line of Matt Stover from SIG.

Thank you very much. A question just to clarify again on the Drivetrain margins -- when you spoke to the second-half compare, Ron, you referenced incremental margins. So we should expect that your incremental profitability should improve in the second half? You did have quite a heavy third-quarter period there last year. Or am I misunderstanding it?

There is two topics here. One is, the Drivetrain segment will continue to get tailwinds from the restructuring activities that we did. If you look at the full-year guidance from tailwinds, the majority of that tailwind is Drivetrain-related. We have not seen all of those benefits yet go through Drivetrain. We will continue in the Drivetrain segment on the tailwinds.

When you step back and look at the total Company, what is going to offset that a little bit is probably SG&A spending that is coming into the Business. So you have two dynamics going on. One is Drivetrain benefits tailwind, somewhat offset by SG&A spending coming back in on a comparable basis.

Okay. The second question is on the equity and affiliates. I would assume, although this may be incorrect, that the Japanese profitability was up year to year in the second quarter. How should we then think about the profit contribution from the other geographies?

You know, that line item does not really move that much. It fluctuates $1 million to $2 million historically, although it has been trending up over time.

I would not put a lot of focus on that line item. It has been a little bit volatile, and there is other things that come into play -- FX comes into play, and the production of those areas. But I would say that in general if you are going to have a bias, I guess, in that line item, I would bias it maybe to the positive side at the end of the day.

I am trying to figure out the regional variables in this. I would assume that with the strength in the yen year to year, the NSK-Warner profit contribution would have improved. And I am just trying to think through what happened with Korea and the other equity affiliates?

Right, that is why I was referring to the FX impact. You can see favorable impact from Japan, but the won has suffered a little bit, so they get somewhat offset. So there is a lot of variability up and down in that item and it does not really move that much.

The underlying production for us has been fairly positive. It gets more offset by the FX variability, quite frankly, is what happens. That is why, if you try to model it, what I would do is try to model it to where it has been, and bias maybe to the positive side.

Thank you.

Your next question comes from the line of John Murphy of Bank of America Merrill Lynch.

Good morning, guys. I apologize, I got on the call late, so if any of these are duplicative, please let me know and I can follow up.

Just first, as we look at the Super Duty launch in the second half of this year, I was wondering if you could indicate how much your content is going up on this new truck, and if you could give us a relative indexing or maybe even absolute of Super Duty content versus the F150 for you on Drivetrain?

John, Super Duty, the first thing that is good to know is this is conquest for us, so it is zero. You should probably think in the $400 to $500 range of content for us on that vehicle, it is probably a good reference point, John.

Okay. And relative to the F150?

It depends; it is less than the F150. If you think of the F150 with all of our stuff on, transfer case, turbocharger, some variable cam timing product, you are getting up 2 times versus the Super Duty. But it does depend a little bit -- obviously not all F150s are -- take a transfer case. But directionally, yes, F150 is meaningfully higher on content for us versus the Super Duty.

Okay. Thank you. Second question, and just very simplistically, on Remy, and you may have talked about this, the margin progressioning and cost performance, where is that relative to your expectation? And was that a significant driver to some of the upside we saw in margins in the quarter?

Obviously, the Remy performance second versus first quarter has improved almost 100 basis points, which is, quite frankly, was what we expected given the synergies we talked about when we did the acquisition. Long story short, what I would say, John, we are pretty much on track on executing those synergies right now.

Okay. Lastly, some of the tone of the macro environment or industry environment from the auto makers seems to be changing a little bit, a little bit less positive, not necessarily negative yet, but a lot less positive. Are you seeing any change in your relationship on bidding or pricing with the OEMs at this point, or is there no change in the environment relative to some of the macro pressures that might be seeping into the industry?

I would say, John, really no meaningful change. I mean, not to belabor it, but price and environment is always competitive. It's tough. But we are not seeing any movement there.

I think I alluded earlier, John, and maybe you were not on -- in terms of quoting activity, we are not seeing that tail off or anything like that. R&D reviews, technology programs, advanced engineering programs, all pretty much continuing on as is, so to speak. Yes, we are not seeing any meaningful shift, to your question.

Great. Thank you very much.

Thanks.

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

Hello, this is Jacob Hughes on for Joe. I just had one final question. Can you comment on the M&A pipeline and as well as what you're assuming in your guidance for the buyback for the year?

I will take M&A pipeline first, if you wish, and then Ron can make some comments relative to the stock buyback program.

M&A -- we talked about in recent calls, our primary focus is to do successful integration of Remy. That is our priority one, and I think you heard from Ron and myself that that's playing out well and as expected, so that is moving along well.

We remain active and very interested in additional M&A activities. I have alluded in earlier calls that our primary focus is around electronics, software power electronics type plays, and we have a number of things moving forward in that space. Other areas of interest as we have talked in prior calls around valve train and we have also talked about boosting our thermal management capabilities.

We remain active, and if a deal is there for us, we would move forward. Again, priority one is successful integration of Remy.

Relative to buybacks, Ron can give a quick --

Yes, buybacks, real quick -- our guidance for the year was $200 million to $300 million. If you took a look at our year to date, which is about $180 million, obviously I would say we are to the high end of our guidance range right now where we are trending, in short.

Thank you.

All right, Jacob.

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.

Christy, please close out the call.

That does conclude the BorgWarner 2016 second-quarter results conference call. You may now disconnect.