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Edited Transcript of BWA earnings conference call or presentation 22-Apr-04 3:00pm GMT

Q1 2004 BorgWarner, Inc. Earnings Conference Call

Auburn Hills May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of BorgWarner Inc earnings conference call or presentation Thursday, April 22, 2004 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mary Brevard

Borg Warner Inc. - VP Investor Relations and Communications

* Tim Manganello

Borg Warner Inc. - Chairman, CEO

* Robin Adams

Borg Warner Inc. - CFO, CAO, EVP

* Skip Cline

Borg Warner, Inc. - VP, Controller

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Conference Call Participants

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* Scott Merlis

Thomas Weisel Partners - Analyst

* Chris Ceraso

CSFB - Analyst

* Rob Hinchliffe

UBS - Analyst

* Mike Heifler

Deutsche Bank - Analyst

* Brett Hoselton

Key Bank Capital Markets - Analyst

* Richard Hilgert

Oppenheimer & Company - Analyst

* Chris Sherafu

Credit Suisse First Boston - Analyst

* Michael Wilmes

Westwind Partners - Analyst

* Darren Kimball

Lehman Brothers - Analyst

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Presentation

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Operator [1]

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Good day everyone and welcome to this Borg Warner First Quarter Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over the Vice President of Investor Relations and Communications, Ms. Mary Brevard, please go ahead ma'am.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [2]

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Thank you very much and welcome to all of you, and thank you for joining us today. You should have received copies of the release, which went out today before the market opened. We have also posted financial talking points that should help you follow the financial discussion. They're posted at bwauto.com, on our investor information page.

These notes will be helpful to you as we review the financials in our operations. The talking points also include a reconciliation of any non-GAAP financial measures. Also want to mention that we will be participating in the McDonald conference in Boston, and the Thomas Weisel conference in California, both are in June. 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 we discuss today. Moving on to our results, Tim Manganello, our Chairman and CEO, will be providing comments on the quarter and reiterate our outlook for the year. Skip Cline, controller, will discuss operating results. We're also very pleased to have Robin Adams with us today, our new Chief Financial Officer and Chief Administrative Officer, but we aren't letting him take any credit for our great first quarter. With that, I'll turn the meeting over to Tim.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [3]

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Thank you, Mary, and good morning everyone. Our year is off to a great start. At yesterday's annual meeting, our shareholders approved an increase in the number of shares of common stock, allowing for a two for one stock split in May. For the first quarter, we delivered earnings growth of 10%, or $1.82, versus $1.65 per share last year. Sales were up 16% in an essentially flat automotive market.

Our results are on track with our growth expectations. We saw improvements in each of our operating businesses and across our diverse customer base. Demand for fuel-efficient engines in Europe, and for four-wheel drive systems in North America continue to drive our growth. During the quarter, we expanded our presence in Korea with the opening of a new plant to supply timing chain systems for Hyundai's new high volume gasoline engine. We also announced the formation of a joint venture for the manufacture and sale of turbochargers.

Both businesses are located in our new engine group campus in Kwon Taek (ph), Korea. In North America, we announced that we are providing complete timing chain systems for the Nissan engine that powers the new Titan pickup truck, Armada full size SUV, and Infiniti QX56. The systems incorporate Morse TEC's new small fit silent chain. And this business award means that Borg Warner now supplies timing chain systems to 100% of Nissan's North American V8 engines.

In addition, General Motors has awarded us a contract to supply our new Hypo Transmission chains for GM's 4T40 and 4T45-E transmissions. These include the Cavalier, Sunfire, Malibu, Grand Am, Alero and Saturn LS vehicles. Now let's go to Europe. In Europe, our dual tronic transmission technology made available on the Audi A3 and the Volkswagen Touran, in addition to the Volkswagen Golf R32 and the Audi TT.

The launch of this transmission, along with continued demand for our turbo diesel passenger cars, or for their turbo diesel passenger cars, means strong Borg Warner sales with Volkswagen Audi, despite some softness in their other volumes. Given our current assumption, we reiterated our guidance earlier this month, for full year earnings per share of $7.10 to $7.30.

This is an increase in earnings per share of 11% to 14%. North America continues to provide a stable foundation for our growth, since we sell to all the vehicle manufacturers in this market. Europe remains our fastest growing market, and we are expanding in Asia as well to take advantage of all the growth opportunities for those markets. We also are focused on productivity improvements and cost cutting to fuel continued earnings growth.

We have developed and are implementing a new disciplined cost reduction process throughout our organization. This process hides cost reductions back to our forecast, and makes people at all levels of our organization part of the effort. From design and purchase materials, through manufacturing and support functions. Borg Warner continues to meet industry challenges by delivering efficiencies that provide, or shared cost savings for our customers, and improvement in our business.

As we turn the meeting over to Skip, I'd like to thank him for his effort in the role of acting CFO. I don't think we skipped a beat during his transition. I also am very pleased to welcome back Robin Adams to Borg Warner in his expanded role and CFO and CAO. I will now turn the meeting over to Robin for some brief comments, Robin?

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [4]

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Thanks Tim. You know, I'm real excited about returning to Borg Warner and the opportunity to support the strong growth initiatives currently underway here in the company. This is my fourth day on the job, so as Mary said, I can't take any credit for the strong quarterly performance Borg Warner had. I also won't be taking any questions. I'll be taking notes along with the rest of you and try to understand what happened in the quarter. And with that, let me know turn it over to the expert on our quarter's operating results, and that's Mr. Skip Cline, Skip?

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Skip Cline, Borg Warner, Inc. - VP, Controller [5]

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Thank you Robin, thank you Tim, and good morning to everyone. As Tim said, this past quarter was another very good one for Borg Warner. We achieved record results in both sales and net income, and we're able to do it in a soft market. While Warner sales increased 16.4% in the quarter, when worldwide production was relatively flat.

Light vehicle production was flat to slightly down in North America and Europe from last year. Additionally, the Big Three, who are still important to our business mix, continue to lose market share. North American business volume was up slightly from last year, but the bulk of our sales increase is due to increased levels of business in Europe and Asia. This increased business also benefited from some favorable changes in currency rates, and the overall impact on sales of currency changes was $42.5 million.

However, without the currency impact, our sales increase would still have been 10.9%, very solid given the state of the industry. First quarter earnings of $51.1 million were 15.6% greater than last year's $44.2 million. We earned $1.82 per share, 17 cents, or 10.3% above 2003. The issuance of about a million new shares in 2003, typically for stock option exercises, caused dilution of seven cents per share in 2004 versus 2003.

Gross margin for the quarter was 19.1% compared to 19.5% last year. This decrease was caused by the continued shift in our mix. We are selling more systems such as turbochargers that have a higher content of purchase material, and consequently a slightly lower sales margin. Also affecting the margin were some increases in the price of commodities including steel, aluminum, and copper.

Other issues effecting earnings included favorable currency rates, particularly the Euro, new product launches, and increased penetration in new geographic areas. Selling and administrative expenses were down to 10.5% of sales, versus 10.8 last year, although up by $11.1 million. The dollar increased was in a number of areas to support the high level of business we're experiencing.

For the quarter, our R&D spending increased slightly from $29.5 to $29.6 million. The percent of sales was down to 3.3% quarter to quarter, but we will maintain our four percent target level for the year. Affiliate earnings were up slightly for the year, and interest continued to decline, principally from lower rates. Our tax rate was about 30% in 2004 compared to 29 for the first quarter last year.

This change was due to some changes in the tax laws in countries where we do business. And we anticipate that 30% will be the rate throughout 2004. The strength of the Euro versus the dollar leveled off in the first quarter of 2004, but nevertheless is higher when compared to the first quarter of last year. The impact on income was about a little less than $4 million, or 14 cents per share.

This was offset by the seven cent per share dilution effect of the increased shares outstanding. Operations accounted for 10 cents per share earnings improvement. Looking at our segment, drivetrain had 11.8% sales growth, and earnings before interest and taxes grew by $12.6 million or 17.6%. The sales increase was the result of strong demand for four-wheel drive systems, principally in North America, and for transmission components and systems worldwide.

Sales in emerging markets such as India, although small, continue to increase. The EBIT increase was due primarily to the increase in sales as well as better productivity on the higher sales. Engine group sales increased 19.6%, and earnings before interest and taxes were up $7.1 million of 11.7%. Engine sales growth, and principally from turbocharger gains in Europe.

And while currency contributed a portion of the sales increase, turbocharger volumes were substantially up from last year. Sales of timing chains increased as well, particularly sales to our Asian customers. The EBIT increase was due to the higher sales, but somewhat offset by startup costs for variable cam timing, it will be introducing next year, as well as our Asian operations as Tim referred to.

With respect to our balance sheet, from an ROI perspective, we continue to stay focused on asset utilization. And our return on capital on the trailing 12-month basis was 12.3%. Our target continues to be 13% for full year 2004, and reach a run rate of 14% by the end of 2004. Our debt leverage continues to decline as our debt to capital ratio improved to 31.6% at the end of the quarter, from 33.8% at the end of 2003.

Our actual debt level of $612 million is $32 million lower than year-end, despite a $3 million foreign currency impact relative to some yen borrowing. Our cash balances decreased $34 million during the quarter, consistent with the reduction in debt. Regarding working capital levels, our net operating provision, which we define as receivable as an inventory less payables and accruals increased by $24 million since year-end.

The increase was from receivables, which grew by a little bit more than $100 million. As general guidance, we expect working capital to increase at a rate of 15% of our increase in sales. Capital expenditures were $40.5 million for the first quarter of 2004, compared with $25.3 million last year. But this higher level of capital spending is required to support new programs and sales growth, as well as some of our cost reduction and productivity efforts that are underway.

Now let's look at our outlook for the rest of 2004. We previously reiterated that we expect our 2004 earnings to be in the range of $7.10 to $7.30 per share. Once our stock split is completed, this range would of course be adjusted to $3.55, $3.65 per share. Our build assumptions continue to be a slight increase in North America, and basically flat in both Europe and Asia.

Interest expense will continue at the current run rate as any decrease in debt levels will probably be offset by potential rate increases in the second half of 2004. Based on our current mix of business, as well as tax law changes in Europe, our tax rate will remain at approximately 30% for the full year 2004. Capital spending is expected to be at about 5.5% of sales, excluding tooling.

For SG&A, our target continues to be at 10% to 10.5% of sales range. Any increases in R&D spending will be offset with control elsewhere. For the first quarter, we were at the top end of this range. And speaking of R&D, we do expect it to approach four percent of sales by the end of the year. And R&D, I will remind you, is included in our overall SG&A spending.

Although first quarter spending was low, we plan to pick up spending for the rest of the year. We expect our net cash flow to exceed $100 million, and finally if currency rates stay at their current levels, we would expect the impact on sales to be about $82 million, and about $10 million in earnings for the year. And I would note that the first quarter bears a disproportionate share of this full year impact because of the increase in rate throughout 2003.

Overall, the first quarter of 2004 was strong, and we are optimistic that the remainder of 2004 will continue to show a very positive trend. With that, I will return the call back to Mary.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [6]

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Thank you, Skip. I will ask the call coordinator to turn to the Q&A portion of this call. Chris if you would please provide our listeners with the Q&A procedures.

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Operator [7]

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Thank you, ma'am. At this time ladies and gentlemen, if you would like to ask a question, please press the star key, followed by the digit one on your touchtone telephone. If you are using a speakerphone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment. Once again, please press star one for questions.

We'll take our first question from Scott Merlis with Thomas Weisel Partners.

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Scott Merlis, Thomas Weisel Partners - Analyst [8]

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Good morning everybody, congratulations.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [9]

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Thanks.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [10]

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Thanks Scott.

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Scott Merlis, Thomas Weisel Partners - Analyst [11]

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Welcome back, Robin.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [12]

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Thank you, Scott, great to be back.

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Scott Merlis, Thomas Weisel Partners - Analyst [13]

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Could you discuss what impact of your growth margin, the most in the quarter, specifically GM's production being down seven percent, currency, et cetera. And what do you need to happen to have steady increases in your gross margin given the raw material cost increases.

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Skip Cline, Borg Warner, Inc. - VP, Controller [14]

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With respect to margins, the increase in commodities probably had between a .1 and .2% effect and the rest is a mixed impact of the relative sales of various parts of the business. We still expect to see our margins strengthened in the second half of the year based on where we see the growth in the business coming, as well as, in speaking of commodities, programs we have underway to offset our future exposure on potential commodity increases.

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Scott Merlis, Thomas Weisel Partners - Analyst [15]

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Are you getting some de-bottlenecking in the turbocharger business? There were some unusual costs there last year, are you achieving some efficiencies in the capacity constrained turbocharged business?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [16]

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We are continuing to put in capacity, but what we find is that as soon as we get the capacity, they're demanding more and more turbochargers. So, yes, we are improving some of the bottlenecks and we are getting ahead of the curve in some areas. We still have not completely eliminated expediting costs, premium freight costs. A lot of over timing and so forth that we have, just to get product out the door to make every sale we can make and keep every one of our customers happy. The good news is they're buying everything we can make.

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Scott Merlis, Thomas Weisel Partners - Analyst [17]

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Does it help pricing any? I doubt it, right?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [18]

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Let's just put it this way, you know this market as well as the rest of us.

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Scott Merlis, Thomas Weisel Partners - Analyst [19]

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I was just joking. Thanks for the update.

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Operator [20]

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We'll take our next question from Chris Ceraso with Credit Suisse First Boston.

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Chris Ceraso, CSFB - Analyst [21]

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Thanks, good morning everybody.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [22]

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Morning.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [23]

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Hi Chris.

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Chris Ceraso, CSFB - Analyst [24]

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I've got a few questions, first is looking at a little bit longer term. GM and Ford are working together on a six-speed transmission that I'm sure they'll do in pretty big volume. Is that good news for you in terms of maybe some opportunities in the wet clutch area if the transmission doesn't have a torque converter, is that in your backlog at all, or is that further out?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [25]

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It's further out, Chris, and GM actually has two transmission programs out there. One of them is a high volume, rear wheel drive transmission that we're going to have significant content on. That will be the first program to launch. The second one which is a front wheel drive program that now includes Ford still, the suppliers are having all been finalized on that.

I think it does have a torque converter however, so it's a more traditional technology. And GM has said that they're going to split suppliers between the two programs. So it's an '07 program, so it's not even in the backlog.

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Chris Ceraso, CSFB - Analyst [26]

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Okay, thanks, and just a follow up question with regard to transmissions. Tim, you mentioned a win with GM on their small cars, should I assume that carries over to the Cobalt, et cetera, once the Cavalier and Sunfire go away later?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [27]

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Yeah, what that is that it's a win in terms of incorporational and new chain technology, and some of the smaller transmissions that GM has in their vehicles, and let's just say it's a win-win for everybody. It's a better product for us and a better product for General Motors and their customers.

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Chris Ceraso, CSFB - Analyst [28]

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Okay, one more, I don't want to take too many here. Can you give us an update on the variable turbo issue? Has Volkswagen finished their validation process, are we comfortable that this goes away in the second half of this year?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [29]

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As far as we know, everything is still on track, we're going to be phasing out of that quite abruptly towards the second half of this year, just like you said. The product performed better than our previous version of the turbocharger, and actually probably, what we hear, better than the competitive version that it replaces. So, it, all in all, it's going to be a great product for us, and we're ramping up production as the customers get it validated and incorporating the next generation, we're supplying it.

But most of the stuff will be incorporated by the middle of this year, and that's still on target.

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Unidentified Participant [30]

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OK, great. Thanks, I'll get back in the queue.

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Operator [31]

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We'll take our next question from Rob Hinchliffe with UBS.

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Rob Hinchliffe, UBS - Analyst [32]

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Good morning, everybody.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [33]

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Hi, Rob.

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Rob Hinchliffe, UBS - Analyst [34]

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On the variable cam timing, you mentioned some startup costs. Can you quantify how much those are, and then have you said any details who that's -- which customer's that's for?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [35]

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Aside from the customer being a major North American OE, no.

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Rob Hinchliffe, UBS - Analyst [36]

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OK, and then how much were the startup costs, and when does it actually enter production?

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Unidentified Participant [37]

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Well, sales will begin in early 2005, and with regard to the startup costs, we don't talk about specific programs, but we have said that overall our startup costs in dollar terms should be fairly equal this year versus last year.

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Rob Hinchliffe, UBS - Analyst [38]

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Skip put the euro, dollar's picking up a little bit here. Could you remind me, what's your assumption for your guidance this year, the euro assumption?

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Unidentified Participant [39]

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The assumption for the guidance was 1.15, so even if the dollar strengthens some, we've got a ways to go.

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Rob Hinchliffe, UBS - Analyst [40]

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OK, and then, last one, I guess for Tim. How much is left in this - your turbo boom here.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [41]

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I think there's quite a lot left in the ride. They're still growing in Europe, both on the diesel side of the equation, but then you also have direct-injected gasoline engines - that's a tongue twister. And those are starting to use turbochargers as well, so, and we're the leaders in that market in Europe as a supplier of gasoline turbochargers.

So, in Europe, there's still growth. We're - overall, I think the total numbers are 45%, roughly, of today's market. Our expectation shows it's going to penetrate up to roughly about a 60% level for the European market. We're going to Korea, and we're putting capacity in with our new operation, and we're going to have a majority joint venture in Korea for our turbochargers, and they just announced legislation that will allow turbo diesels in passenger cars for Korea.

China's still an unknown. I'm pretty sure they're going to end up with turbochargers, but it's going to be a longer - probably a little bit longer on the horizon. And then you've always got the question, what's going to happen on North America. And if you don't ask it, we will.

And the issue there is, we think turbochargers, either in diesel engines or in gas engines, are coming to North America. The diesel engines will probably be towards the end of the decade, just like Europe is more now in the earlier portion of a decade.

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Rob Hinchliffe, UBS - Analyst [42]

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OK, thanks for the update.

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Operator [43]

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We'll take our next question from Mike Heifler with Deutsche Bank.

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Mike Heifler, Deutsche Bank - Analyst [44]

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Good morning, everyone.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [45]

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Hi, Mike.

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Mike Heifler, Deutsche Bank - Analyst [46]

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Congratulations, Robin.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [47]

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Thank you.

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Mike Heifler, Deutsche Bank - Analyst [48]

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I guess most of my questions have been answered, but on the cash flow, Skip, on the $100 million that you're looking for for the year, should we think that that's going to be more weighted to the second half?

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Skip Cline, Borg Warner, Inc. - VP, Controller [49]

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It probably weights most to Qs two and three, and a little bit less in four, which has generally been our historic pattern. We always are very happy the first quarter, considering you come out of December and you go into January and struggle a bit. We're happy to have basically neutral cash flow, and then we pick up a lot of momentum in Q2 and Q3.

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Mike Heifler, Deutsche Bank - Analyst [50]

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OK, and can you quantify what the incremental Honeywell licensing fee was in the quarter?

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Skip Cline, Borg Warner, Inc. - VP, Controller [51]

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Incremental, it was over last year it was very minimal. It was about flat year over year. In Q3, and I think we've disclosed it, it's what, around - six or seven less than the prior year.

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Mike Heifler, Deutsche Bank - Analyst [52]

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OK, great. Thanks.

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Operator [53]

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We'll take our next question from Brett Hoselton with Key (ph) Bank Capital Markets.

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Brett Hoselton, Key Bank Capital Markets - Analyst [54]

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Good morning.

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Skip Cline, Borg Warner, Inc. - VP, Controller [55]

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Good morning.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [56]

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Hi, Brett.

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Brett Hoselton, Key Bank Capital Markets - Analyst [57]

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Skip, could you break down the FX impact on the revenue line between drive line and engine, by chance?

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Skip Cline, Borg Warner, Inc. - VP, Controller [58]

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We have not historically done that. I mean, what we can say is that the engine business is more weighted to Europe than the drive line business sis.

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Brett Hoselton, Key Bank Capital Markets - Analyst [59]

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OK, thank you.

The second question, Tim, can you give us an update as to where is New Venture Gear doing these days?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [60]

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As far as I know, they're still Turkey.

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Brett Hoselton, Key Bank Capital Markets - Analyst [61]

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OK, that clarifies that, and move on to the next question.

What's going on there?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [62]

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I don't know. All we know is what's in the proxy (ph), and basically we understood there is negotiations going on between Magna Thayer (ph) and Chrysler Corporation about what's going to happen in New Venture Gear. There has been no announcements. I see some press about Thayer (ph) doing some other things in other locations. So, to be honest with you, Brett, we don't quite know, and anything I would say would be pure supposition of rumor, and we don't speculate.

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Brett Hoselton, Key Bank Capital Markets - Analyst [63]

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The engine, you had about a 90-basis-point decline in EBIT margins. Still attributable to the same factors that impacted your margins back in the prior quarter?

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Skip Cline, Borg Warner, Inc. - VP, Controller [64]

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Yes, mix and probably some of the startup (inaudible) from transition to engine in '04 versus '03.

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Brett Hoselton, Key Bank Capital Markets - Analyst [65]

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OK, and then finally, China. Can you talk just briefly about how China impacts your earnings? Do you work through NSK-Warner into China at all, or do you have any exposure there?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [66]

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Well, in terms of the way we go to market in China, we have two joint ventures right now. One's a real small one in Beijing that's a residual of our old, huge joint venture on manual transmissions and transfer cases. We restructured that money-losing joint venture, and it's now a small, profitable and growing, albeit small, growing joint venture.

But there is a growing market for four-wheel drives in China, and they are becoming fashionable, and we're going to see that, I think as - in the next few years.

The largest part of our China operations is a joint - is actually a large company. It's - I don't know what they're doing in sales.

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Unidentified Participant [67]

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The did the most (inaudible) $6 million for the quarter.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [68]

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OK, so I was going to say they're about a $30 million joint venture or something like that, or $25 million to $30 million joint venture. We're the majority shareholder. They're doing very well. They're growing in China. They're growing with exports. They're exporting product back to North America for some aftermarket applications.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [69]

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It's primarily a funnel (ph) business.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [70]

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Yes, I forgot. It's fan and cam drive, although that will probably be the basis. It's in a very good location. It's 150 kilometers south of Shanghai, and my sense when I was just there two months ago, and my assessment was that it was a pretty good place to do business. And they're growing, and I think that they're going to be probably one of the launch sites for more growth that's in not just the engine group, but possibly the whole BorgWarner operation.

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Brett Hoselton, Key Bank Capital Markets - Analyst [71]

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So as you think about the future in China and how you're going to go to market, it sounds like you're suggesting that this might be the basis for it?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [72]

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I'm sorry. Could you repeat that again?

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Brett Hoselton, Key Bank Capital Markets - Analyst [73]

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China's a big market, growing real fast, and as I look out into the future, I'm thinking to myself, how is BorgWarner going to take advantage of that growth? And I think I heard what - what I think I heard you say was that you were going to use this joint venture, the second one, as kind of the basis to - or foundation to grow your business in China?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [74]

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We may not use the joint venture, but we may use the location and some of the infrastructure that the joint venture has at their disposal as a possible launch site, but at least probably the engine part of our business.

And they - and there's - I was pretty impressed with the local government and the infrastructure there, and the proximity to a large population of customer base. Now, we have - there's opportunities to grow in China right now, and we're looking at China for turbocharger opportunities and localization. We'll be looking at China, and we're there actively, working on programs right now, or plans for transmission systems opportunities in China, and localization of product there, because there is a growing sense of urgency and need for automatic transmission manufacturing in China to supply some of our traditional customers, like General Motors.

Plus, China is a fairly highly populated market for manual transmissions. Consequently, we think it's a good potential site for DualTronic or DCT opportunities in the future, especially when you consider one of the largest transmission manufacturers in China is Volkswagen - their Volkswagen Shanghai operation. And, I mean, who is our number one customer right now for DualTronic. It's Volkswagen, the Volkswagen family so ...

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Brett Hoselton, Key Bank Capital Markets - Analyst [75]

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Excellent. Thank you very much, Tim. Appreciate it. And, Robin, welcome back.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [76]

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Thank you - great to be back.

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Operator [77]

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We'll take our next question from Richard Hilgert with Oppenheimer & Company.

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Richard Hilgert, Oppenheimer & Company - Analyst [78]

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Good morning, everyone.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [79]

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Hi, Richard.

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Richard Hilgert, Oppenheimer & Company - Analyst [80]

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And Robin, now let me add my welcome back to the group here.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [81]

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Thank you, Richard.

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Richard Hilgert, Oppenheimer & Company - Analyst [82]

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I'm sure it's good to be back in Chicago.

Now I hear a little laughing. What's going on with that, huh?

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [83]

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We love Detroit.

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Richard Hilgert, Oppenheimer & Company - Analyst [84]

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I was wondering, Skip, on the margin for engine. Does some of that have anything to do with the currency also adding more operating income from Europe to the total?

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Skip Cline, Borg Warner, Inc. - VP, Controller [85]

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Well, only in the sense that the currency effect - you don't get incremental on the impact of currency to your margins. You get your averages. And it does - in terms of the mix, yes, there's obviously a bigger piece to the mix coming from turbochargers, and the more of a currency coming from turbochargers.

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Richard Hilgert, Oppenheimer & Company - Analyst [86]

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OK, and can you quantify at all what the negative impact was from steel and aluminum in the quarter?

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [87]

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Yes, it was under $2 million fro the quarter. I think we said, what, about 0.1 to gross margin, 0.1% to 0.2%, thereabouts. So it was not a big impact in the quarter, and we think even for the second quarter, most of our businesses have got a pretty good control over their steel supplies.

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Richard Hilgert, Oppenheimer & Company - Analyst [88]

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OK. Also, looking at the SG&A line, on a percentage basis, we improved a bit, but from the fourth quarter to the first quarter, we had a pretty big swing up. Was that also driven by currency?

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Skip Cline, Borg Warner, Inc. - VP, Controller [89]

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No, there is a currency piece, but it's also - we've had higher levels of spending for the hire (ph) business in a number of areas, healthcare, travel, but we're also - because we're a little bit concerned, and sometimes you get a little bit of creep. And we're getting very active in terms of managing the F&A side of this, and at the same time making sure that we're spending appropriately on research and development.

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Richard Hilgert, Oppenheimer & Company - Analyst [90]

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OK. I'm looking at some of the previous quarters', previous years' changes in SG&A, and it's kind of a mixed bag of - from first quarter to second quarter, some are up, some are down. Any idea on what the trend's going to be, going forward, this year?

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Skip Cline, Borg Warner, Inc. - VP, Controller [91]

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And like I said before, it will be in the 10 to 10.5. First quarter, we were at the top and it's my objective to work it down throughout the rest of the year.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [92]

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Richard, I can just say, it's an area of focus, and we're going to tackle it and many BorgWarner people on the phone call will probably find out.

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Richard Hilgert, Oppenheimer & Company - Analyst [93]

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Yes, especially appointing Robin as CAO. That's probably going to help a little.

And Robin, I was referring to the fact that I know that you're a little bit closer to family, not the difference between Chicago and Detroit.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [94]

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OK, Richard. I love both towns.

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Richard Hilgert, Oppenheimer & Company - Analyst [95]

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OK, great. Thanks again.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [96]

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Thanks.

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Operator [97]

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We'll take our next question from Laura Thurow with Robert W. Baird.

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Unidentified Participant [98]

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This is actually David.

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Unidentified Participant [99]

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Hello, David.

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Robin Adams, Borg Warner Inc. - CFO, CAO, EVP [100]

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Hi, David.

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Unidentified Participant [101]

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Hello, Robin, also.

Your payments to Honeywell on this turbocharger thing. Those are lying down and Q2 or is it Q3?

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Skip Cline, Borg Warner, Inc. - VP, Controller [102]

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At the end of Q2 (inaudible).

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [103]

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The payments they made, the impact on income statement falls off in Q3.

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Unidentified Participant [104]

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OK, but there's still some residual for service, parts and things like that, right?

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Skip Cline, Borg Warner, Inc. - VP, Controller [105]

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There will be a residual that runs into '05, and my reference was to shipments, not payments.

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Unidentified Participant [106]

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Right. Right. I've got both of those.

But that's all I have. Thanks.

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Operator [107]

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We'll go next to Chris Sherafu (ph) with Credit Suisse First Boston.

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Chris Sherafu, Credit Suisse First Boston - Analyst [108]

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Hi, thanks. I've got a couple of follow-up questions. First, how much new business, roughly, came on in the quarter, and is the range for the year still expected to be about 350?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [109]

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The range is still about 350. We've said that the ramp-up is towards the end of the year, especially as higher-volume DCT comes on track. So I don't have the exact number, but it will grow throughout the year.

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Chris Sherafu, Credit Suisse First Boston - Analyst [110]

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OK, and can you give me a feel in rough terms, on an unconsolidated basis - were we still looking at, I don't know, 67%, 68% of sales in North America, 30%, 35% in Europe? Or has that started to shift since Europe is growing so much faster this year?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [111]

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You know, we said that by '06 it would be about 35%. I don't - the stronger Europe may have got us there a little ..

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Skip Cline, Borg Warner, Inc. - VP, Controller [112]

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Well, on an unconsolidated basis.

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Chris Sherafu, Credit Suisse First Boston - Analyst [113]

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Unconsolidated.

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Skip Cline, Borg Warner, Inc. - VP, Controller [114]

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You're including the Japanese joint venture for your purposes, right?

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Chris Sherafu, Credit Suisse First Boston - Analyst [115]

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Well, the JV is on an equity basis.

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Skip Cline, Borg Warner, Inc. - VP, Controller [116]

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Right, but what we call unconsolidated we count that - just so we're talking the same thing. Are you counting that or not?

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Chris Sherafu, Credit Suisse First Boston - Analyst [117]

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No, I'm not. Just what hits your top line. Is the answer still the same?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [118]

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Well, because the joint venture is part of the Asian offer ...

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Skip Cline, Borg Warner, Inc. - VP, Controller [119]

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Right, but even on a consolidated basis, we're slightly under 60 for North America, and over 35 in Europe. So we're actually more on track than we thought we would be.

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Chris Sherafu, Credit Suisse First Boston - Analyst [120]

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OK, that's helpful. And then lastly, you covered margins in the engine group that were hurt a little bit by currency and mix. What was the big driver to help margins in the drive line business? Sorry if I missed that.

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Skip Cline, Borg Warner, Inc. - VP, Controller [121]

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In the drive line - hold on. Well, let me - one of the things that has helped us, a lot of our development and startup cost for DCT is behind us. So that - year over year basis, that has been positive. And in addition, the - some of the mix within the four-wheel drive business has been favorable.

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Chris Sherafu, Credit Suisse First Boston - Analyst [122]

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Perfect. Thanks.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [123]

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I would also add, though, that the - there's a - we're continuing to focus on our cost-reduction opportunities, and we've been doing that for a while, but we've been doing it with renewed vigor in the last let's say year, year and a half, and you're starting to see some of that stuff kick in now on the drive train side of the business.

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Operator [124]

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We'll take our next question from Darren Kimball with Lehman Brothers.

Mr. Kimball, your line is open. Please go ahead with your question, sir.

We'll check on his line.

We'll go next to Michael Wilmes (ph) with Westwind Partners.

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Michael Wilmes, Westwind Partners - Analyst [125]

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I just had a follow up question in regards to the six-speed transmission for the front-wheel drive program for Ford and GM. You mentioned that the suppliers haven't been selected yet, but I was just wondering if you knew when the suppliers would be finalized?

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [126]

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I don't have the answer to that question. I would assume it was (audio gap).

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Operator [127]

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And we'll take a question from Darren Kimball with Lehman Brothers.

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Darren Kimball, Lehman Brothers - Analyst [128]

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Hi, guys.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [129]

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Hi, Darren.

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Darren Kimball, Lehman Brothers - Analyst [130]

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I was so excited that Robin's back that I accidentally hung up on you guys.

I don't know if you already touched on this, but I think last quarter you had alluded to the fact that you were continuing to see improving margins in the turbocharger business, along with the growth, but you were still working on capacity increments.

And I was just wondering if you could give us some more color on how you see that trending this year and in the first quarter.

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Skip Cline, Borg Warner, Inc. - VP, Controller [131]

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Well, from a margin perspective, I guess I would say that right now the characterization would be stable. You're getting a positive effect of some volumes, but as Tim noted, there is still a struggle to get every turbocharger out the door because of the demand curve.

I expect to see enhancement, particularly in the second half of the year.

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Tim Manganello, Borg Warner Inc. - Chairman, CEO [132]

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And where we've seen - the pattern we've just started to see in the last couple of years is the first-quarter margins tend not to be the best margins that we see throughout the year in the turbocharger group, but they tend to improve their margins throughout the year. And I think some of it has to do with the way some of their capacity kicks in and how they - how they launch the capacity and how they - how well they get it up and running. And then, as it kicks in, some of the - some of the extra costs that they incur, we're able to take the profits.

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Unidentified Participant [133]

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OK. And let me ask, if I could, a follow-up on the four-wheel drive, all-wheel drive business, which you said was strong and I know you had - I don't think you've anniversaried the pickup of the GM business yet, but I was just wondering if you could provide some additional color. How much of it relates to the additional programs versus just, you know, penetration rates going up on the programs that you serve. And the last part of that question is just with regard to the Ford pickup. I believe you're on the light-duty version, if I'm not mistaken. Just the strength there they're seeing from a mixed standpoint, is that flowing through to you guys? Do you expect that to continue?

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Unidentified Participant [134]

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Well, what we're seeing - Ford pickup trucks are doing extremely well and we're doing well with that in terms of number of units. And so, we're seeing - we're benefiting with some of the Ford volumes on F150 pickup trucks and the fact that they had such a successful launch. We're also growing with the increased penetration - not penetration, but increased ramp up of volumes with the ((Pilot)) and the Acura and VX. We look at that as a whole family because they use for us - they use - they both use the same product from us. And then we're also seeing, I'm pretty sure we're starting to see more increases and there will be future applications kicking in on the ITM1 with the Hyundai family, whether it's the Hyundai Santa Fe or some Kia - future Kia models that will have some more type technologies. So ...

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Unidentified Participant [135]

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I'm just going to say that almost all of our North American customers were up, year over year, from - with respect to GM. It's not because it's not as - that business really had been in place as of the first quarter of '03. But we've seen some strength there. As Tim said, all of the Honda Acura business and the Mercedes business is holding its own, while we're also seeing increases in the Cadillac GM. As we get into the new Cadillacs, rear-wheel drive, with its four-wheel drive with a transfer case, we're seeing - that's starting to ramp up. So, we're also - we are seeing benefits in the ramp up of new applications that are kicking in at General Motors and I think that from the GM truck applications that we have, the transfer cases are also doing well. So, it's a combination of some penetration, but also just basically good market growth.

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Unidentified Participant [136]

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OK. And I guess, lastly, I'm going to throw in a question on the future and the all-wheel drive side of the equation. I mean, how are you feeling about your ability to, you know, make additional penetration in the all-wheel side of it?

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Unidentified Participant [137]

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Well, we will be taking additional penetration. To be quite frank, I would like - I'm not totally pleased with the rate of - the rate of their ((contrary)) new business. But we, in terms of the size of the market for active all-wheel drive technology, we're - we have a very large size in terms of percentage of the market, in terms of dollar value. I would like to get more units and - but we will have some applications coming on in the future, in Europe, at least on some performance vehicles, which I think will give us a good launch platform with a marquee customer in Europe, which I think will help improve our penetration rates in the future in Europe.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [138]

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((Jim)), what we're finding is we have really two products right now in that market and we're sort of trying to broaden that product family to serve more of the market needs and that should help us as well.

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Unidentified Participant [139]

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Back to - it's a fact there's more competitors in that market. So, everybody's splitting the market up into more slices than what - maybe what we're used to seeing in other parts of our business.

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Unidentified Participant [140]

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Yes. And come to thing of it, are you guys on the Acura RL? This (inaudible).

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Operator [141]

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This concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Ms. Brevard for any additional or closing comments.

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Mary Brevard, Borg Warner Inc. - VP Investor Relations and Communications [142]

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I want to thank all of you for joining us today and I will remind you that there's a replay available on this call for three days. You can call 719-457-0820, confirmation code 140202. And it's available for 90 days on our Web site as well. You can direct any follow-up calls to me and, with that, we'll end the call. And thank you all for joining us.

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Operator [143]

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Once again, this does conclude today's conference. We thank you for your participation. You may now disconnect.