BorgWarner, Inc.'s (BWA) CEO James R. Verrier on Q1 2014 Earnings - Call Transcript

BorgWarner, Inc. (BWA) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

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.

 

So, as I said, this is only a high level overview of our updated guidance and Ron will take you through the details shortly. So I see the first quarter was a strong start to what we expect to be another strong year for BorgWarner. We are expecting industry-leading revenue growth and continued excellence from our operation and we see this combination resulting in tremendous earnings power for our company.

The industry's adoption of our leading-edge powertrain technology, we see will continue for years. And because of this, I feel very, very good about our company's future. And really believe that no company in the auto sector is better positioned for long-term profitable growth than BorgWarner. So, now with that, I'd like to turn the call over to Ron.

Ronald T. Hundzinski, Chief Financial Officer & Vice President

Thank you, James, and good day, everyone. Before I begin reviewing the financials, I also would like to commend all of our employees for their hard work and congratulate them on another great quarter. Once again, the team exceeded expectations, congratulation. Now, on to our financials. James already provided a detailed review of our sales performance in the quarter. In summary, sales were up 9% from a year ago excluding the impact of foreign currencies and the Wahler acquisition.

The growth in the quarter came from both segments from nearly every product group and from around the world. Overall, a strong quarter for sales. Working down the income statement, gross profit as a percentage of sales was 21.4% in the quarter. That's a 120 basis point improvement from a year ago, tremendous performance.

SG&A as a percentage of sales was 8.3% in the quarter, down 30 basis points from a year ago. R&D spending, which is included in SG&A, was 3.9% of sales in the first quarter in line with R&D spending a year ago. This implies that all of the 30 basis points decline was in other SG&A spending. We attribute this to good execution of our cost control plan.

Reported operating income in the quarter was $233 million. However, this includes a $40 million charge related to restructuring activities that I will discuss shortly. Excluding the charge, operating income was $273 million or 13.1% of sales compared with 11.7% of sales on a comparable basis a year ago. After excluding the impact of foreign currency, the Wahler acquisition and restructuring charge, our year-over-year incremental margin was 34%, well above our mid-teens incremental margin target.

In summary, operational efficiency led to an improved gross profit margin. Cost controls led to lower SG&A spending. This enabled us to maintain R&D spending and expand our operating income, outstanding performance by operations and a great start to the year.

As you look further down the income statement, equity in affiliate earnings was $9 million in the quarter, down slightly from $10 million last year. This represents the performance of NSK-Warner, our 50/50 joint venture in Japan, which sells transmission components to our Japanese customers in Japan and China, as well as TEL, our turbocharger joint venture in India.

Interest expenses and finance charges were $8 million in the quarter, down slightly from $10 million a year ago. Provision for income taxes in the quarter on a reported basis was $68 million. However, this includes a $9 million tax benefit related to restructuring. Excluding the impact of restructuring, provision for income taxes was about $77 million, which is an effective tax rate of about 20% in the quarter. Our estimated effective tax rate for the full year, excluding non-comparable items, is now 28%, up from 27% previously. This change is primarily due to a shift in our cash repatriation strategy.

We are now forecasting that the cash generated by our Chinese operations will be enough to fund our growth in China as well as supplement other corporate initiatives. Therefore, we will begin repatriating cash from China in 2014 and expect this to continue for the foreseeable future. On an EPS basis, this will cost $0.05 per share in 2014.

Net earnings attributable to non-controlling interest was $8 million in the quarter, up from $7 million a year ago. This line item reflects our minority share - partners' share and the earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings, which were $159 million in the quarter or $0.69 per share. Excluding the impact of restructuring activities, net earnings were $.83 per share, up 28% from $0.65 per share a year ago.

Now let's take a closer look at our operating segments in the quarter. As James said earlier, reported Engine segment sales were $1.4 billion in the quarter. Excluding currency and Wahler, Engine segment organic sales growth was 8% from a year ago. On a reported basis, adjusted EBIT for the Engine segment was 16.4% of sales. Excluding currency and Wahler, adjusted EBIT for the Engine segment was 17.2% of sales, up 110 basis points from 16.1% reported a year ago. Excluding currency and Wahler, the Engine segment's year-over-year incremental margin was 31% in the first quarter, excellent performance by the Engine segment.

In the Drivetrain segment, reported sales were $681 million in this quarter. Excluding currency, organic sales was up 12% from a year ago. On a reported basis, adjusted EBIT was 11.8% of sales. Excluding currency, adjusted EBIT was 11.9% of sales, sharply up from 9.3% of sales a year ago. Excluding currency, the Drivetrain segment year-over-year incremental margin was 34% in the first quarter, another outstanding quarter for the Drivetrain segment.

As mentioned earlier, the Drivetrain restructuring continues. We have reached several agreements with the labor unions of both European facilities that we intend to close. The $40 million charge taken in the first quarter of 2014 was primarily related to one of the agreements. Charges related to the other agreement will come in future quarters.

In summary, of the estimated $140 million total cost of restructuring plan, we have now taken approximately $90 million in charges, just over $50 million in the fourth quarter in 2013 and $40 million in the first quarter of 2014. To-date, nearly two-thirds of the charges have been cash outlays for severance and other activities. We expect the remaining $50 million to also be primarily cash.

From a performance perspective, we expect this restructuring plan to improve segment margins by 100 basis points or more and make the Drivetrain segment a solid double-digit business. We now expect that these actions will be taken through the next - through the end of 2015, and the full benefit of restructuring is expected to be realized beginning in 2016.

Now let's take a look at our balance sheet and cash flow. We generated $46 million of net cash from operating activities in the first quarter, up from $16 million a year ago. This increase was primarily related to higher net earnings. Capital spending, which was $126 million in the first quarter, up $39 million from a year ago. This increase was driven by capital acquired to support our backlog of net new business, which is gaining momentum.

Free cash flow, which we define as net cash from operating activities less capital spending, was an outflow of $80 million in the first quarter. The first quarter is typically a challenge as it relates to cash flow. Our investment in working capital ramps up in the first quarter to match higher levels of business activity compared with the end of the year. Despite this, we still expect to generate strong free cash flow in 2014.

Looking at the balance sheet itself, balance sheet debt increased by $144 million at the end of the first quarter compared with the end of 2013. Cash decreased by $131 million during the same period. Net debt increased by $275 million, primarily due to the capital expenditures and the Wahler acquisition. Our net debt to capital ratio is 13%, up from 7.2% at the end of 2013. Net debt to EBITDA at the end of the year on a trailing 12-month basis was 0.4 times. Our capital structure remains excellent shape.

Before I review our updated guidance, I would like to go over some of issues - some discussion of the Wahler acquisition. The total consideration for Wahler was $143 million, or about 0.4 time sales. From a performance perspective, the operating income margin for the business is mid-single-digits today. However, we've identified operational efficiency and footprint opportunities to present a clear path to double-digit margins for this business. We expect to achieve these levels in two years to three years.

As James mentioned, Wahler is a very good strategic fit for us with great technology, an attractive customer base and BorgWarner-like growth. Once we've had a chance to restructure the business, it will be a solid contributor to our bottom line as well.

Now I'd like to discuss our guidance for 2014. James reviewed our guidance at a high level. I will discuss some of the finer points. Our sales guidance range is now 12% to 15%, up from 7% to 11% previously. From midpoint to midpoint, that's a 450 basis point increase. The two components of the increase are Wahler and currency.

Wahler sales are expected to add about 350 basis points to 400 basis points of sales growth in 2014. But please note, that's for 10 months of sales. Previously our sales growth guidance assumed very little currency impact, however, due to the favorable impact of currency on the first quarter sales and a more favorable outlook for the euro, we now expect currency to contribute 50 basis points to 100 basis points of sales growth this year. We still expect raw material inflation of $5 million to $10 million in 2014, still a headwind but less than what we see in a typical year.

 

As James mentioned earlier, our operating income margin is expected to remain at 12.5% or better in 2014. This should be viewed in two parts. Wahler is not expected to contribute operating income in 2014 because of purchase price accounting adjustments, which will have an unfavorable impact on our operating margin. However, due to an improved outlook for the rest of our business, we are able to maintain our operating margin guidance.

On an EPS guidance range, the range has been raised to $3.15 to $3.30 per diluted share, up from $3.10 to $3.25 per diluted share. The $0.05 per share increase has two components, a $0.05 per share unfavorable impact from a higher tax rate and a $0.10 per share favorable impact from an improved outlook for the business.

Finally, our expected diluted share count for 2014 is unchanged at approximately 230 million shares. This diluted share count guidance excludes any share repurchases that may be executed during the year. We continue to be confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost control. This focus resulted in highly efficient growth and record margins each of the last four years. With a return to historical growth rates and our operations performing at a very high level, 2014 should be another year of record sales and record profits for BorgWarner. As we look beyond 2014, we intend to execute our growth plan, yielding high single to low-double-digit growth and to efficiently convert our sales growth to profits. The future is very bright for BorgWarner.

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

Kenneth P. Lamb, Director-Investor Relations

Thanks, Ron. Now, let's move to the Q&A portion of the call. Melissa, please remind everyone of the Q&A procedure.


QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] Your first question comes from the line of Rich Kwas with Wells Fargo Securities.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Hi. Good morning, everyone.

<A - James Verrier - BorgWarner, Inc.>: Good morning, Rich.

<A - Ron Hundzinski - BorgWarner, Inc.>: Good morning, Rich.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Just a couple for me on - Ron, on the guide here - so, you talked about Wahler and then FX. So, it doesn't sound like you've assumed any improvement beyond - or any production improvement beyond what you were thinking at the beginning of the year, is that a fair statement?

<A - Ron Hundzinski - BorgWarner, Inc.>: Coming into the year, Rich, our guidance was based on program level volume assumptions. So, basically, our projections haven't changed today than they were when we came into the year. So, we're still executing to our plan this year and that's where our guidance is set at.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Okay. And in South America, I know that you have some commercial business down there. How much of a drag on the business is that at this point going forward?

<A - James Verrier - BorgWarner, Inc.>: Yeah, Rich. This is James. It's - you're right. It's primarily for us a commercial vehicle business. It's not that significant for us. Some of the conditions down there are not too great right now as you know, but it's not too material for us.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Okay. All right. And then on Drivetrain, so the margins were very strong. You're still early stages on the restructuring. How should we think about that 100 basis points of structural margin expansion going out a couple of years and the benefit from that given the performance here over the last couple of quarters?

<A - Ron Hundzinski - BorgWarner, Inc.>: Yeah, Rich. Let me set the starting point on this 100-plus basis points improvement. I think what everybody should do is they should take a look at 2013 as the base year and do your projections from that base year. I would not say take a look at the current run rate of the margins in that segment. So go back to 2013, which I'll give you a number, I think it was 10%, 10.3% for the full year.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Okay.

<A - Ken Lamb - BorgWarner, Inc.>: Let me add one thing, Rich, before you go to your next question.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Sure.

<A - Ken Lamb - BorgWarner, Inc.>: We did say that, while we are growing during this restructuring, you can still expect us to get our mid-teens incremental margins on that growth in Drivetrain while we're doing the restructuring.

<A - Ron Hundzinski - BorgWarner, Inc.>: Yeah.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Okay. All right. But I mean, it - so it sounds like here in Q1, you had some things that went very favorable that are not necessarily sustainable. Is that...?

<A - Ron Hundzinski - BorgWarner, Inc.>: Well, Rich, a couple of things. One is the restructuring activities have just really begun. We have agreements now with the works councils, but now I'll just say this for the operating guys, the hard work starts. They have to start moving machinery and equipment and start-up. So although they had a great quarter, I'm not going to take that away from them. Fantastic quarter, but in the subsequent quarters now we have those agreements. This is when all the equipment starts to move, and anytime you start going through that process, it can get a little choppy.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Okay. And then - and just last one from me on Wahler. You said double-digit margin. Is there any reason to not believe that Wahler can get to this 12% range, 13% range that the corporate average is currently?

<A - James Verrier - BorgWarner, Inc.>: Yeah. Richard, what I would, the way I think about it right now is, I mean, first of all, we're delighted to get the transaction completed. I think it's going to be a really terrific asset for us with the technology it brings and the growth and the European customer relationships primarily. So, feeling very, very good about it. The start point as Ron alluded to is quite a bit below the normal BorgWarner level, it's mid-single-digit type numbers.

So, we've got a good two years or three years ahead of us to get it - to get it to that kind of double-digit range. And I think, bear in mind, we're only - we're a couple of months in. We'd like better clarity on that as time plays out, Rich, but I think the real message is, great technology, great growth, and we're going to walk - get it up over the next two years or three years to that double-digit. Where it rests two years or three years from now, Rich, I'm not sure, we'll just keep working on that over the period.

<Q - Rich Kwas - Wells Fargo Securities LLC>: Great. I'll pass it on. Thanks for the color.

<A - Ron Hundzinski - BorgWarner, Inc.>: Thanks, Rich.

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

<Q - John Murphy - Bank of America Merrill Lynch>: Good morning, guys. I just wanted to follow up on Drivetrain because there was such a strong performance in the quarter. I mean, is there anything going on with mix there on trucks or anything that might be sustained through the course of this year as we go through a recovery in North America and potentially a stronger mix in Europe?

<A - James Verrier - BorgWarner, Inc.>: Hey, John, I would say sales came in at pretty much about where we thought they would be. I think the operating performance was strong. It wasn't so much of a revenue or a mix shift that drove good performance. I think we just executed well. That's really the driver.

 

And as Ron alluded to, we over the - over some of the recent quarters, it's been a little bit choppy, a little bit that way and I think this was certainly one of our strong quarters, but no big shift in volume or mix, John.

<Q - John Murphy - Bank of America Merrill Lynch>: Okay. And then just a second question on bringing cash back to the U.S. from China that's driving up the tax rate. What's the sense of urgency to pull that cash back to the U.S. and get hit by this higher tax rate? Is there something going on, on the acquisition front or return of capital to shareholders that we would expect to see that you'd be bringing that cash back for so quickly?

<A - Ron Hundzinski - BorgWarner, Inc.>: No. John, I wouldn't say there is any urgency. However, it does provide a lot of flexibility to do things like share repurchases. But I would say, one of the other items is, when we started taking look at the long range plan for the business in China, we see tremendous amount of opportunities to bring cash out in the future. So, with no urgency, but it does provide us some flexibility and it's going to continue to provide us flexibility in the out years.

<Q - John Murphy - Bank of America Merrill Lynch>: Okay. And then, just lastly, as you look at the acquisition landscape, it sounds like - because you didn't do many buybacks, you see a lot of stuff out there. What does it look like? Is there - is the pace of activity picking up which it sounds like it is? And is there a potential for you guys to maybe get involved with direct injection technology and some technology there, because that would be sort of a nice complement to your existing portfolio.

<A - James Verrier - BorgWarner, Inc.>: John, first off, the activity is still pretty intense. So, we've certainly not slowed down with the Wahler acquisition now getting completed. And I would tell you or say that the level of opportunities we have kind of in the pipeline, so to speak, is pretty similar to where we were a year ago. So, it's a good healthy number. And just like we've talked about in the past, some of those are relatively early in the phase, pretty preliminary and a couple of those are much further down the process.

The way I would think about it from a technology point of view, John, we're focused heavily on the powertrain space that we're in. Drivetrain or Engine were agnostic; both, either or both are good. Light vehicle, commercial vehicle is fine. And regional, we don't have a bias there because ultimately these products that we participate in do go global. So, I don't want to talk specifically on individual technologies, John. But, bolt-on or kind of related products to where we're at right now are likely to be the primary focus for us going forward. And whatever technology we bring, it's going to deliver the type of growth that we've become used to with the company. So, hopefully that gives you a bit of a flavor for it, John.

<Q - John Murphy - Bank of America Merrill Lynch>: Yeah. That's great. Thank you very much.

<A - James Verrier - BorgWarner, Inc.>: Thanks.

<A - Ken Lamb - BorgWarner, Inc.>: Have a good day, John.

Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Good morning everyone.

<A - James Verrier - BorgWarner, Inc.>: Good morning.

<A - Ken Lamb - BorgWarner, Inc.>: Hi, Ravi.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Hey, just a couple of questions on Wahler. How much of Wahler revenues actually was included in 1Q?

<A - Ron Hundzinski - BorgWarner, Inc.>: One month.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: One month. Okay.

<A - Ron Hundzinski - BorgWarner, Inc.>: Fiscal month of March.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Got it. And do you have a dollar number in that or do I just take one month of the $350 million for the year?

<A - Ron Hundzinski - BorgWarner, Inc.>: We said $350 million for the year divided by 12. So that's a rough number.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Got it, understood. And how much of a drag is the PAA [purchase accounting adjustment] right now in 2014 numbers?

<A - Ron Hundzinski - BorgWarner, Inc.>: All right. Ravi, let me just take one quick second here.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Yep.

<A - Ron Hundzinski - BorgWarner, Inc.>: For the purchase price accounting at a normal run rate, you can look at the Q for some details and do some math, but I'll shorten up for you and give you the numbers. Roughly $3 million to $4 million is a run rate drag. However, that's for a full year, but I would like to point out that when you do an acquisition, you have to do fair value for inventories. So basic, I'm going to have two months with no profitability in the business. So the normal run rate is $3 million to $4 million, but I did have two months of - I'm not going to call them abnormal - of no profit because of the way PPA, that goes away going forward.

<A - Ken Lamb - BorgWarner, Inc.>: So, Ravi, just let me - this is Ken, let me add on to that. So essentially what we're saying is, this year, you can expect operating income to be almost nothing.

<A - Ron Hundzinski - BorgWarner, Inc.>: Nothing.

<A - Ken Lamb - BorgWarner, Inc.>: This year, and then it'll improve going forward from growth and incremental income, restructuring and also the PP&A will diminish.

<A - Ron Hundzinski - BorgWarner, Inc.>: Right.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Got it. So do you have any benchmark on what we should put in our model for like 2015? I know you said, you gave your double-digits margins over a two-year or three-year period, but just, once you get that accounting headwind now, is it like a high single-digit margin for that business?

<A - Ron Hundzinski - BorgWarner, Inc.>: Well, double-digits and then I gave you the purchase price accounting and then you can assign a growth rate to the top line as well, Ravi.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Okay, understood. And just lastly, can you also help me with where you picked up any debt or any pensions or anything else that came with it?

<A - Ron Hundzinski - BorgWarner, Inc.>: Very immaterial. We did - all right, on the debt side, it was - cash paid was about $106 million, a little bit north of that, you can read that in the Q. We picked up about $33 million of debt. So, the enterprise value gets up to that $146 million. Pensions were very small. I will just say that, just fairly immaterial.

<Q - Ravi Shanker - Morgan Stanley & Co. LLC>: Great. Thank you.

<A - James Verrier - BorgWarner, Inc.>: Thanks, Ravi.

Operator: Our next question comes from the line of Rod Lache of Deutsche Bank.

<Q - Rod Lache - Deutsche Bank Securities, Inc.>: Good morning, everybody.

<A - James Verrier - BorgWarner, Inc.>: Good morning, Rod.

<A - Ken Lamb - BorgWarner, Inc.>: Good morning, Rod.

 

<Q - Rod Lache - Deutsche Bank Securities, Inc.>: Can you just - maybe just clarify for us, the guidance for incremental margins ex-Wahler were mid-teens, and as you've indicated, you converted at 34% in the quarter. So what is causing - it was a pretty dramatic variance versus your expectation in the first quarter. And what are the headwinds that you're anticipating in Q2 through Q4, obviously ex-Wahler, which isn't going to contribute any EBIT, but what are the headwinds that would cause that to moderate back down to the mid-teens?

<A - Ron Hundzinski - BorgWarner, Inc.>: A couple things. I said earlier in the call that Drivetrain going forward would be a little bit more choppy as we start to move our production facilities to Eastern Europe, that's going to be a drag. Also, the deferred spending in the SG&A lines that we've done in 2013 will start to come back into the business that would start to reduce our incremental margins. So, two items, all right?

<Q - Rod Lache - Deutsche Bank Securities, Inc.>: And would those items be kind of - if you were to think about things on a year-over-year basis, I would presume that those don't recur in 2015, so the inefficiencies associated with moving your footprint or some of the extra SG&A spending, that would moderate, is that reasonable?

<A - Ron Hundzinski - BorgWarner, Inc.>: Our long-term incremental margin guidance still would remain at mid-teens, though, Rod. So I'm not quite sure - yes, you're right. We would - and the move to Eastern Europe, those headwinds would go away, but that's already in our expectations of 100 basis points plus, okay? On the SG&A side, in general, we will continue to invest in SG&A at some rate close to or slightly less than the sales growth.

<Q - Rod Lache - Deutsche Bank Securities, Inc.>: Okay. And just to clarify, on the Wahler acquisition, I missed what you said about the contribution that you're expecting for the 10 months. Were you just saying, take the $350 million, divide it by 12, times 10, or was there a specific number you gave? And is Wahler actually growing organically kind of similar to the rate that you guys have been experiencing?

<A - Ken Lamb - BorgWarner, Inc.>: Rod, this is Ken. So, yes, what Ron was saying was that the contribution in the first quarter was basically that $350 million of sales divided by 12. That was the one month of sales that we had for the first quarter. And the growth rate for Wahler going forward is similar to BorgWarner type growth, as we think about how it's going to grow going forward.

<Q - Rod Lache - Deutsche Bank Securities, Inc.>: Okay. Great. Thank you.

<A - James Verrier - BorgWarner, Inc.>: Thanks, Rod.

Operator: Our next question comes from the line of Itay Michaeli from Citi. Your line is open.

<Q - Itay Michaeli - Citigroup Global Markets Inc. (Broker)>: Great. Thanks. Good morning.

<A - James Verrier - BorgWarner, Inc.>: Good morning.

<A - Ron Hundzinski - BorgWarner, Inc.>: Good morning.

<Q - Itay Michaeli - Citigroup Global Markets Inc. (Broker)>: Just on the guidance for the year, I'm just trying to get an understanding of what the operating margin would have looked like outside of the Wahler acquisition. I think, Ron, you talked about the $0.05 headwind from tax, offset by $0.10 of improvement in the business. That seems to work out perhaps to about 40 basis points of margin improvement versus the prior outlook for the full year. Is that - am I thinking about that correctly in terms of maybe you'd be brushing closer to 13% if not for the acquisition?

<A - Ron Hundzinski - BorgWarner, Inc.>: You're close. You're right, Itay. I mean, it's easy math. You can add back in the sales that we gave you some general numbers around and then recalculate it, but you're right in the 30 basis points to 40 basis points. You're right.

<Q - Itay Michaeli - Citigroup Global Markets Inc. (Broker)>: Okay. Perfect. And then just a couple housekeeping items. One, equity income looked like it was down a bit in Q1. Any thoughts on that for the full year? And then I think with the repatriation going forward in China, should we think about the tax rate in that 28% ballpark beyond 2014 as well?

<A - Ron Hundzinski - BorgWarner, Inc.>: At this point, I'll answer the tax question. At this point, yes, 28% going forward. Affiliate earnings, you have to go back and say, where are those earnings coming from? And they're coming from Japan and they're coming from India. India has been a challenged market. I think it will stabilize. I don't think it's going to deteriorate, but it's been a challenged market for everybody. And in Japan, that market if we - as everybody knows, they're moving production outside of Japan. Now, going forward, I would say that I should see improvement going forward. I don't think we're going to see any continued deterioration in those markets as far as on my equity line.

<Q - Itay Michaeli - Citigroup Global Markets Inc. (Broker)>: Great, and then just lastly, any general comments on booking activity in the first quarter?

<A - James Verrier - BorgWarner, Inc.>: Itay, it was a good quarter for us. I would say relatively consistent with prior quarters, certainly the last three or four quarters, which is good and healthy. Good balance across pretty much all of the products and a nice balance globally. So, I would say it's been a good typical booking business quarter for BorgWarner if that makes sense to you.

<Q - Itay Michaeli - Citigroup Global Markets Inc. (Broker)>: Absolutely. That's very helpful. Thanks so much guys.

<A - James Verrier - BorgWarner, Inc.>: Thank you.

<A - Ron Hundzinski - BorgWarner, Inc.>: Welcome.

Operator: Your next question comes from the Brett Hoselton with KeyBanc. Your line is open.

<Q - Brett Hoselton - KeyBanc Capital Markets, Inc.>: Good morning gentlemen.

<A - Ken Lamb - BorgWarner, Inc.>: Good morning, Brett.

<A - Ron Hundzinski - BorgWarner, Inc.>: Good morning, Brett.

<Q - Brett Hoselton - KeyBanc Capital Markets, Inc.>: Wanted to ask you just, first of all on the Wahler acquisition, kind of just the progression of margins over the next two years to three years. Is there pretty steady progression of margins in your opinion or is it more of a stair step in the out years for some reason?

<A - Ron Hundzinski - BorgWarner, Inc.>: You know, Brett, I think James said this earlier, we've owned this asset for two months now. What I would say is we're refining where this business is going. We know the endgame. We know where we can be. The timing it takes to get there I think over time you'll hear more from us on how it's going. For us to give you an exact timeline right now is premature.

<Q - Brett Hoselton - KeyBanc Capital Markets, Inc.>: Fair enough. And then as I look at your balance sheet after you completed the Wahler acquisition, you've got kind of in around $500 million, $600 million of net debt, sounds like you're starting to repatriate some cash from China, certainly you've got a lot of - you have a lot of cash. I didn't see that you repurchased any shares in the quarter. I might have overlooked that in your press release, but how do we think about things going forward in terms of capital deployment? I know you've either can do acquisitions or share repurchase, but in the past couple of quarters, it seems like you're really slowing your share repurchase down to kind of a standstill?

<A - Ron Hundzinski - BorgWarner, Inc.>: Brett, let me - you're right. First, we did not do any share repurchases in Q1. So you don't have to go dig through a bunch of documents to find that out. We didn't do any in Q4, but let's talk about that for a second. In Q4, I funded a pension in Germany of some $150 million-ish, $137 million in Germany, which is a big cash outflow. Q1 is typically a low cash generating quarter historically for a lot of companies, and as result, we also did the Wahler acquisition, right? So if you look at two quarters, I wouldn't say that's indicative of us turning off to share repurchases, I would just say that was just two circumstances that happened back-to-back quarters that put us in a position where we just kind of had to hold still for a while, okay?

Now, you mentioned China; we see that China is going to generate a lot of cash for us and we want to bring that back to the States so that we can continue to initiate a lot of corporate items like share repurchase in the future and give us the flexibility going on future - in the future with our cash. So, two quarters are not indicative and China is going to be a great cash flow for us, and we still remain flexible in share repurchases.

<Q - Brett Hoselton - KeyBanc Capital Markets, Inc.>: Yeah, I think the - per John's question earlier, I think John's kind of, the flavor of John's question was something along the lines of, it kind of seems like you guys are setting up for an acquisition of some kind?

<A - James Verrier - BorgWarner, Inc.>: Yeah, Brett, this is James. I think, as I was trying to say to John, that intensity has really not slowed down and that philosophy continues on, that's still our primary use of the cash I think as we all know. The approach remains the same really, Brett, that we're working on a relatively large number of possible targets with the belief that one or two of those over the next couple of years will flow through and get executed. We know the variable is often the businesses are not for sale, so these things are a little choppy in terms of how you get them - how quickly you can get them done or even how you can even predict the timing of the event. But what you guys might be picking up on is there is a lot of intensity and a lot of belief that over the next couple of years, we will do additional acquisitions and we remain confident that we'll be able to hopefully get that done.

<Q - Brett Hoselton - KeyBanc Capital Markets, Inc.>: Thank you very much, gentlemen.

 

<A - James Verrier - BorgWarner, Inc.>: Thanks.

<A - Ron Hundzinski - BorgWarner, Inc.>: Thank you, Brett.

Operator: Your next question comes from Joseph Spak with RBC Capital Markets.

<Q - Joe Spak - RBC Capital Markets LLC>: Good morning, everyone. How are you?

<A - Ken Lamb - BorgWarner, Inc.>: Good Morning, Joe.

<A - James Verrier - BorgWarner, Inc.>: Good Morning, Joe.

<A - Ron Hundzinski - BorgWarner, Inc.>: Good Morning, Joe.

<Q - Joe Spak - RBC Capital Markets LLC>: Maybe just following off that last point. How - I mean, this is obviously I think you classified Wahler as a tuck-in. So, I wouldn't imagine it be a huge drag on management resources, but maybe can you give us a sense of how many deals of something around the size of Wahler do you think you can accommodate just from a resource perspective I guess?

<A - James Verrier - BorgWarner, Inc.>: Yeah. From a resource perspective, Joe, we would like to think over the next couple of years, we could probably do a couple more of that size or a little more and be able to manage those. It does depend a little, Joe, in terms of where they land within the business. And what I mean by that is, if all three were in one particular side of the company, that makes it a little more challenging. But our belief is the list of targets are pretty well spread across all of the BorgWarner portfolio. So, for us to do a couple more Wahler-like transactions in the next 12 months to 24 months, that's very doable. If we have to one more than that, that probably be okay too. So, we're comfortable, which is why the intensity is not slowing down, Joe.

<Q - Joe Spak - RBC Capital Markets LLC>: Okay. And then, maybe just on Wahler, and attacking from a little bit of a different angle, I mean, it seems like Engine margins would have been high 16%s this quarter ex-Wahler. So, if I sort of try to extrapolate what you said going forward, is a low double-digit incremental in the Engine business, what you guys are expecting for this year inclusive of Wahler?

<A - Ron Hundzinski - BorgWarner, Inc.>: Our guidance is always mid-teens incremental margins. That's our target. We don't really give guidance any closer than that at this point.

<Q - Joe Spak - RBC Capital Markets LLC>: But it is - it's mid-teens even inclusive of Wahler being neutral?

<A - Ron Hundzinski - BorgWarner, Inc.>: Yes. Yes.

<Q - Joe Spak - RBC Capital Markets LLC>: Okay. Okay, thanks a lot for the help.

<A - James Verrier - BorgWarner, Inc.>: Okay. Thanks.

Operator: Your next question comes from David Leiker with Robert W. Baird & Co.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Good morning.

<A - James Verrier - BorgWarner, Inc.>: Good morning, David.

<A - Ron Hundzinski - BorgWarner, Inc.>: Good morning, David.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: I've been jumping around a little, so I hope I don't repeat myself here on something, but on the repatriation of cash, I don't think I heard you quantify how much cash you've brought from China?

<A - Ron Hundzinski - BorgWarner, Inc.>: You heard correctly, David. I did not.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: How much is that?

<A - Ken Lamb - BorgWarner, Inc.>: Just to clarify, David, what Ron did say is that we will begin repatriating cash in China this year.

<A - Ron Hundzinski - BorgWarner, Inc.>: That is right.

<A - Ken Lamb - BorgWarner, Inc.>: Those were the exact words, you can get that in the transcript. But I didn't give you a dollar amount, David. You're right.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Yeah, can you help us - can you help us out there, how much cash do you think you're bringing back?

<A - Ron Hundzinski - BorgWarner, Inc.>: I would say it's sizeable for me to make a tax change. How is that? I know I'm not giving you exact number. But it's not $10 million, right? It's north of that. It's sizeable that I see opportunities in the future and it's a good chunk of cash this year, to put me in a very flexible position in the U.S.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Did you bring cash back in the first quarter or is that just adjusting it for what you think you're going to do over the course of the year?

<A - Ron Hundzinski - BorgWarner, Inc.>: Course of the year.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Okay.

<A - Ron Hundzinski - BorgWarner, Inc.>: We have not yet brought anything back from China. We will bring it back through the summer months.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Okay. And then as we look at the cash that you generate in China and the excess cash, what portion of that do you think you bring back here versus keep there to reinvest in the business?

<A - Ron Hundzinski - BorgWarner, Inc.>: David, that's a little bit of a complex question. And I'll tell you why. What we're really doing is we're able to leverage up a little bit more in China than we have in the past, with local borrowing lines in China. Our banking relationships have gotten really strong there. So, what we're able to do is leverage up, at the same time we can bring cash back out of there, which would indicate that we can bring back a higher percentage of the cash flow because of the leveraging. I don't have an absolute number for you. But that's, in strategy, what's going on in China right now.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Okay. Great. And then as we - as you pull off Wahler and the currency and vehicle production, it looks like your growth above market organically some new business was a little bit on the light side. Is there anything in particular from a headwind that you would call out that's behind this? It's better than what we were seeing last year. But is there anything that's still a headwind for you?

<A - James Verrier - BorgWarner, Inc.>: I wouldn't say anything significant, David. I think where we're at from a revenue run rate, so to speak, is about where we thought we'd be at. And I think when we look at the end markets from where we started the year, European light vehicle production as an example, we don't see it's moved that much, a little bit of nuance in between regions and platforms. But in general, it's about what we thought of the end markets and it's about what we thought inside of BorgWarner, is where we're at right now.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: And then just one last topic here on Wahler. How much of the purchase price was goodwill?

<A - Ron Hundzinski - BorgWarner, Inc.>: Just a second, David - you can get that in the Q, but let's see if I have that right now for you, about $16 million, I think it was.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Okay.

<A - Ron Hundzinski - BorgWarner, Inc.>: You can go into the Q, which we filed at roughly noon today, I think that's what you'll see in the Q, all right?

 

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: And then I know you kind of talked around this a little bit, but how much would Wahler add to your three-year backlog of new business?

<A - Ken Lamb - BorgWarner, Inc.>: David, let me do some work on that and talk to you about that later, but I mean, what we said is we expect growth similar to our own from Wahler.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Growth on the backlog or your current revenue growth versus the market?

<A - Ken Lamb - BorgWarner, Inc.>: If - Wahler should grow at a similar rate to BorgWarner, which we said is high single to low double-digit growth.

<Q - David Leiker - Robert W. Baird & Co., Inc. (Broker)>: Okay. Great. Thank you very much.

<A - Ron Hundzinski - BorgWarner, Inc.>: All right.

<A - James Verrier - BorgWarner, Inc.>: Thanks, David.

Operator: Your next question comes from Ryan Brinkman with JPMorgan.

<Q - Ryan Brinkman - JPMorgan Securities LLC>: Hi, good morning, congrats on the quarter.

<A - James Verrier - BorgWarner, Inc.>: Thank you.

<A - Ron Hundzinski - BorgWarner, Inc.>: Thank you.

<Q - Ryan Brinkman - JPMorgan Securities LLC>: Thanks for the double-digit margin in BorgWarner-like growth guidance that you gave here today on Wahler, that's very helpful. Is there anything more that you can comment on? So, for example, I know that most of its revenues are presumably from Europe, it's based there. But can you kind of break down its geographic and customer exposures for us to sort of compare and contrast how that differs from your current EGR exposures?

<A - James Verrier - BorgWarner, Inc.>: Yeah. Your instinct was right, it's weighted to Europe, European customers, European sales. Does have some revenue in Asia, primarily in China and a little bit in North America, but it's weighted towards the German OEM strength and European sales. Actually one of the mainly attractive aspects of the deal for us, when we lined that up against our current EGR valve business, it's very complementary. Our current EGR valve business is a little weighted to North America and to China. So, when you put the two together, now, I think our geographic balance and footprint will be very, very good for us.

<Q - Ryan Brinkman - JPMorgan Securities LLC>: Okay. That's helpful. Thanks. I think Drivetrain margin has been a huge surprise and a big part of the story recently. I know that your underlying Drivetrain margins are inflecting better because of the increase in sales and cost discipline, and recently you announced some more restructuring actions to increase it even further now. With that said, I think I remember that one of the reasons given historically why margins at Drivetrain were less than Engine was because of like a legacy cost burden that was disproportionately allocated to Drivetrain. Am I remembering that correctly? And then if so, has there been any sort of recent trailing off in that amortization or allocation of legacy costs to Drivetrain that could partly explain the recently better results or that might be one of the drivers of better performance in the future?

<A - Ron Hundzinski - BorgWarner, Inc.>: You're right in your memory. That was some items we discussed in the past. And what I would say is, as - when that segment was smaller, it had disproportional impact on it in that time period. But since the business segment has grown, it's become minimized. That, coupled with some pension funding valuations that have got - have improved over time, the drag in that segment has become to the point where it's minimized where we're at today.

<Q - Ryan Brinkman - JPMorgan Securities LLC>: Okay. Great to hear. And then just last question. And I know you don't provide your granular sort of organic performance versus industry production any longer by region. You did call out in the release sort of turbo strength in Europe and China. Anything you can tell us sort of directionally about how your business is performing by geography? I imagine it's doing better in Europe on the strength there, but any sort of color?

<A - James Verrier - BorgWarner, Inc.>: I think I alluded to this on one of the other questions is, it's pretty much in line with how we thought things would be at the beginning of the year. So, if you think of how we - what color we gave then, I think that still stands pretty well. If you think of how our backlog was put together and communicated towards the back end of last year, Ryan, it's playing out pretty well there. So, what that means is, we were benefiting well from strong North America production, trucks help us. China growth continues to be very strong for the company and good growth performance in Europe off a relatively stable or slightly increasing production volumes in Europe.

<Q - Ryan Brinkman - JPMorgan Securities LLC>: Okay. Great. Congrats again on the quarter, and the margin.

<A - Ron Hundzinski - BorgWarner, Inc.>: Thank you.

Operator: Your next question comes from the Colin Langan with UBS.

<Q - Colin Langan - UBS Securities LLC>: Oh, great. Thanks for taking my questions. In your commentary, I believe you said that ex-FX and Wahler, the Engine margins were 17.2%. I mean, that seems like a pretty big delta. And in your comments you also said that purchase accounting is only going to be $3 million to $4 million for the full year. So, what is really causing that big difference? Is it mostly FX or does Wahler impact this in a unique way?

<A - Ron Hundzinski - BorgWarner, Inc.>: Okay.

<Q - Colin Langan - UBS Securities LLC>: Impact you on margin? [indiscernible] (54:20) understand it.

<A - Ron Hundzinski - BorgWarner, Inc.>: No. You're right. Just first of all, it was 17.2%, but what's happening in the first quarter is, I was trying to explain this earlier, the run rate on purchase price accounting is going to be $3 million to $4 million except for two months where we have to get rid of our fair value inventory at no profit. So that's an extra drag for this year. So that's why you see this large delta between the comparable basis versus what the reported number was. It's just - I wouldn't pay too much attention to it, it's just a weird situation for two months.

<A - Ken Lamb - BorgWarner, Inc.>: Just to be clear, it is meaningful, though this year that this inventory markup and the purchase accounting adjustment because of it is meaningful. It's pretty much offsetting all of the operating income from that business this year.

<A - Ron Hundzinski - BorgWarner, Inc.>: Right.

<Q - Colin Langan - UBS Securities LLC>: All right. And if it's two months, does that mean we're going to see the same impact in Q2 or - is that right? Because there's only one month of Wahler in this quarter?

<A - Ron Hundzinski - BorgWarner, Inc.>: You'll see one month in Q2, but you'll have three months of sales. So, it is going to be less, but you will have the same impact.

<Q - Colin Langan - UBS Securities LLC>: Okay. And any color around Wahler in terms of where that puts your total EGR share globally and any color there? Are you a global leader in that product?

<A - Ken Lamb - BorgWarner, Inc.>: So, as you know, we don't really talk about shares very much, but it has definitely positioned us as a pre-eminent player in the space. As far as a producer of both valves and coolers, there's really no one else in the world that does that now. That's pretty much rare air that we're in.

<Q - Colin Langan - UBS Securities LLC>: Okay. Just one last one. Nickel prices have jumped a lot this year. Is that an impact on you at all and can you just remind us of your sort of protection in your contracts around commodities?

<A - Ron Hundzinski - BorgWarner, Inc.>: Nickel prices can impact us. There's no question. And then, primarily, we use that product on our turbocharger business, on the hot side of the engine, because nickel is used quite often in heat applications. However, we experienced this nickel price increase some time ago back in 2006, actually I was in the turbo business then. Since then, we've taken steps to try as much as possible to put in instruments either through hedging or through other activities to mitigate that. At this point, we're able to mitigate it and that's seeing the impact completely on our results.

<Q - Colin Langan - UBS Securities LLC>: And any color on what percent is typically hedged or has pass-throughs?

<A - Ron Hundzinski - BorgWarner, Inc.>: You can see sometimes in the Ks and the Qs and some of those tables. Historic - I can tell you that nickel prices until just recently have not been that much of an issue. So you'll see less amount of hedging being done recently in that space than we have in the past.

<Q - Colin Langan - UBS Securities LLC>: Okay. All right. Thank you very much.

<A - James Verrier - BorgWarner, Inc.>: Thanks, Colin.

Operator: We have time for one final question and that question comes from Brian Johnson with Barclays.

<Q - Dan Levy - Barclays Capital, Inc.>: Hi, Dan Levy on for Brian. Thanks for taking the question. As you go through the restructuring in Drivetrain, how do you think of incremental revenue opportunities, vis-a-vis being in a position of cost leadership? Does that allow you to come out with better price? And if you get incremental revenue upside from being in a position of cost leadership, is there upside? And I believe you had mentioned that there's upside to the 100 bps of margin expansion. Just trying to gauge what that upside may be. Thanks.

<A - James Verrier - BorgWarner, Inc.>: Yeah, I'll comment on more, if you wish, on the growth and I think your observations are very real that as we do go through the restructuring efforts and move our footprint from Western Europe to Eastern Europe, we do still anticipate and expect to see growth in the Drivetrain segment. A good way to think about of it again is, if you take a look at the backlog announcement that we did back in November, a decent way to look at it, where it breaks out and you can see the growth in - by product in dual clutch product, step automatic product and the all-wheel drive product. So, we do see that growth, it's high single-digit, low single-digit type growth for Drivetrain, that we'll move forward with and execute on and you're right that's in parallel to the execution efforts around restructuring.

<Q - Dan Levy - Barclays Capital, Inc.>: Okay. Thanks.

<A - James Verrier - BorgWarner, Inc.>: Thank you.

Kenneth P. Lamb, Director-Investor Relations

Thank you, Dan. I would like to thank you all for joining us. We expect to file our Q before the end of the day, Ron said around noon, which will provide more 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.

Operator: That does conclude the BorgWarner 2014 First Quarter Results Earning Conference Call. You may now disconnect.

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