BorgWarner, Inc. (BWA) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014
Kenneth P. Lamb - Director-Investor Relations, BorgWarner, Inc.
James R. Verrier - President and Chief Executive Officer, BorgWarner, Inc.Ronald T. Hundzinski - Chief Financial Officer & Vice President, BorgWarner, Inc. Other Participants Rich M. Kwas - Analyst, Wells Fargo Securities LLC John J. Murphy - Analyst, Bank of America Merrill Lynch Ravi Shanker - Analyst, Morgan Stanley & Co. LLC Rod A. Lache - Analyst, Deutsche Bank Securities, Inc. Itay Michaeli - Analyst, Citigroup Global Markets Inc. (Broker) Brett D. Hoselton - Analyst, KeyBanc Capital Markets, Inc. Joseph R. Spak - Analyst, RBC Capital Markets LLC David Leiker - Analyst, Robert W. Baird & Co., Inc. (Broker) Ryan J. Brinkman - Analyst, JPMorgan Securities LLC Colin Langan - Analyst, UBS Securities LLC Dan M. Levy - Analyst, Barclays Capital, Inc. MANAGEMENT DISCUSSION SECTION Operator: 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 2013 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to turn the call over to Ken Lamb, Director-Investor Relations. Mr. Lamb, you may begin your conference. Kenneth P. Lamb, Director-Investor Relations Thanks, Melissa. Good morning and thank you all for joining us. We issued our earnings release this morning at 8:00 a.m. Eastern Time. It's posted on our website, borgwarner.com, on our home page. A replay of today's conference call will be available through May 8. The dial-in number for that replay is 855-859-2056. You'll need the conference ID, which is 18708099. The replay will also be available on our website. With regard to our Investor Relations calendar, we will be attending two conferences between now and our next earnings release. May 7, we'll be at the Wells Fargo Industrial and Construction Conference in New York. May 14, we will be at the Barclays America's Select Franchise Conference in London. May 28, we'll be at the KeyBanc Automotive, Industrial and Transportation Conference in Boston. And June 4, we'll be at the Deutsche Bank Industrial Conference in Chicago. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now, moving onto our results, James Verrier, President and CEO, will comment on first quarter results as well as some of our accomplishments during the quarter. And then, Ron Hundzinski, our CFO, will discuss the details of our operating results and also, our updated outlook for 2014. With that, I'll turn it over to James. James R. Verrier, President and Chief Executive Officer Thank you, Ken, and good day, everybody. Ron and I are very pleased today to review our first quarter results as well as our recent accomplishments. First of all, I'd like to take a moment to congratulate and thank all of the BorgWarner employees for an excellent first quarter and your efforts just continue to drive outstanding results for the company. So now on to our results; reported sales in the quarter were $2.1 billion, which is up 9% from a year ago when we exclude the impact of foreign currencies and the Wahler acquisition. U.S. GAAP earnings are $0.69 per share, or $0.83 per share excluding the restructuring charges. Our operating income again excluding non-comparable items was an impressive 13.1% in the quarter. We see two key factors that drove our strong results; solid sales growth in both Engine and the Drivetrain segments and operational efficiency and cost controls that enabled strong incremental margins. Really outstanding performance by our operations. Let me go through the two segments. First of all, the Engine segment. First quarter sales were just over $1.4 billion, which is up about 8% from a year ago after excluding the impact of foreign currencies and Wahler. These results were led by strong turbocharger sales in Europe and China, new engine timing and BCT launches in China and higher EGR cooler and valve sales around the world. Into the Drivetrain segment, our sales were approximately $680 million, and that's up 12% from a year ago when we exclude foreign currencies. The Drivetrain results were driven by strong all-wheel drive sales in North America. We saw higher dual clutch transmission module volumes in Europe and higher transmission component sales in Korea. Now while the Drivetrain business continues to grow, our restructuring plan is paving the way for a more profitable business in the future. We're minimizing Drivetrain's high cost footprint and simultaneously investing in Poland, Hungary, Mexico and China. And we see these actions will enhance Drivetrain's competitive position, which we expect to translate into winning more business in the future. Now these segment reviews highlight a couple of the core strengths of the company. Now, the first one is our entire product portfolio is in high demand and contributed to our global growth. And we are seeing the improvements in Drivetrain as expected and continued strong performance in the Engine group. Now as we look to the future, we see BorgWarner continues to invest for the long term. Capital spending continues to grow. We spent about 6.1% of sales on capital in the first quarter, which is pretty much in line with our expectations, and we remain committed to supporting our future growth and productivity improvements. Our spending for R&D was about 4% of sales in the quarter, again in line with our targeted spend of greater than 4% of sales this year. I see the intensity around organic innovation and product development remains very strong inside the company. I'd like to take a moment or two to review some exciting announcements that we did make during the quarter. As I mentioned before, we completed the Wahler acquisition in the first quarter. And from a strategic perspective, Wahler's EGR valve technology, we see very well positioned to exploit the rapid adoption of EGR in gasoline engines. And this combined with its thermostat technology makes it a very strong addition to our portfolio. Ron will discuss the financial details of the Wahler transaction in just a few minutes. The company's Board of Directors declared a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable on May 16th to shareholders of record on May 2nd. BorgWarner also received an Automotive News PACE Innovation Partnership Award for its collaboration with General Motors on the Eco-Launch solenoid valve. We have several patents pending for this innovation and GM has already committed to using the technology on an upcoming vehicle. BorgWarner's innovation also received a 2014 Automotive News PACE Award. Last, but not least, BorgWarner was formally named the North American supplier of all-wheel drive transfer cases for the Toyota Tundra pickup truck. Now, I'm going to provide an overview of our guidance for 2014, which has been updated a little since our last earnings call. We see sales growth in 2014 expected to be between 12% and 15%. This is up from the 7% to 11% previously, primarily due to the impact of the Wahler acquisition. Our operating margin remains at 12.5% or better and our earnings guidance has been raised to $3.15 to $3.30 per diluted share, which is up from the $3.10 to $3.25 per diluted share previously. Again, both ranges exclude non-comparable items.