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BorgWarner Inc.

Q3 2008 Earnings Call

October 29, 2008 9:00 am ET

Executives

Mary Brevard - VP, Investor Relation

Tim Manganello - Chairman, CEO

Robin Adams - EVP, CFO, CAO

Analysts

Richard Kwas - Wachovia

Itay Michaeli - Citigroup

Brian Johnson - Barclays Capital

Christopher Ceraso - Credit Suisse

Rod Lache - Deutsche Bank

John Murphy - Merrill Lynch

Patrick Archambault - Goldman Sachs

Himanshu Patel - JPMorgan

Brett Hoselton - Keybanc Capital Markets

David Leiker - Robert Baird

Operator

Good morning. My name is Stia and I will be your conference facilitator. At this time, I would like to welcome everyone to BorgWarner 2008 third quarter results and new business conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions).

I would now like to turn the call over to Ms. Mary Brevard, Vice President, Investor Relations. Ms. Brevard, you may begin you conference.

Mary Brevard - Vice President, Investor Relation

Thank you, Stia, and good morning, and thank all of you for joining us today. You should have copies of both of our third quarter earnings release and our new business backlog release that went out before the market opened this morning. They are also posted on our website, borgwarner.com, on investor information and also the home page, if you need to get copies. Our conference call will be replayed to date to November 5. The calling number is 800-642-1687, conference ID 64002844. And a replay is also available on our website.

We have a number of conferences in the next couple of months. We'll be on a panel on fuel economy, that Goldman Sachs is going to use that in Industrial Conference on New York on the 6th, the Robert W. Baird conference in Chicago on November 11th, and of course at the Auto Analyst conference in New York, in conjunction with the Detroit Auto Show here in Detroit in mid January.

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. Moving onto our results, Tim Manganello, chairman and CEO, will be providing comments on the quarter and walk you through the new business. And Robin Adams, will be discussing operating results the rest of the year and some comments on next year. Tim?

Tim Manganello - Chairman, Chief Executive Officer

Thank you Mary and good day everyone. We have a lot to talk about today. The world has changed dramatically since last quarter. The crisis in the financial sector and deteriorating global economic conditions have caused significant turmoil and uncertainty around the world and the global falloff in the auto production has negatively impacted our third quarter performance.

These conditions and the resulting rapid deterioration in European production schedules are reflected in our outlook for the rest of the year and for 2009. However, with our technology and growth profile, we view these issues as a 12 to 18 months challenge.

As a preliminary look at 2009 calendar year, we expect a build schedule of 11.8 million units in North America and 13.1 millions in Western Europe. BorgWarner sales will probably be flat year-on-year for 2009 excluding currency and our earnings may also be flat.

Our message today is a simple one: We have successfully managed through difficult market conditions before and we will do it again. The underlying fundamentals of our business remain strong, our financial structure is strong, we are responding swiftly to the challenges caused by the current environment, or the economic environment, and by responding by resizing our business and controlling our costs.

We had operating profits of $51.6 million or $0.44 per share in the third quarter and today we announced a $2.1 billion backlog of new business over the next three years. Our new business provides a good long-term view of our expected growth beyond the current crisis.

Let's look at the third quarter. Overall our international sales offset steep declines in the US market due to deteriorating economic conditions. Third quarter sales were $1.3 billion flat with last year. Sales outside the US were up 5.5% excluding currency. And engine group sales were up 4%, this includes a 19% decline in the US and a 5% gain in other markets excluding currency.

Drivetrain Group sales were down 10% with US sales down 30%, and sales in other regions up 9%, excluding currency. The deep declines in North America and the overnight cuts in the European production schedules made it difficult for us to reduce our costs at the same pace.

Operating earnings for the quarter were $0.44 per share, as I said earlier. This excludes a number of one-time items that Robin will discuss in detail. Our operating income margin was 5.6% excluding the one-time items I just mentioned.

We also revised our 2008 full-year earnings guidance to reflect the unprecedented current economic condition. Our new guidance is $2.25 to $2.35 per share excluding the one-time items. Now let's look at our restructuring response. We've responded swiftly to deteriorating economic conditions.

W e expanded our North American restructuring program during the third quarter and initiated actions in Europe. During the quarter, we reduced our North American workforce by approximately 1200 people versus the 1,000 people previously stated last quarter, or 16%.

And our European workforce is being reduced by approximately 500 people, or about 6%. In addition, we have initiated significant levels of global cost controls while at the same time remaining focused on our global growth.

We will continue to take whatever actions are necessary to manage effectively through this period of global uncertainty. While at the same time meeting the future needs of our customers and being sensitive to our global employees

Let's look at technology for a minute. The fundamental growth drivers for BorgWarner centered around our fuel economy and emissions reductions, which have not changed. As the market improves, numerous BorgWarner technologies will power the more fuel-efficient vehicles of the future.

During the quarter, two BorgWarner technologies remained finalists for the prestigious 2009 Automotive News PACE awards. They are BorgWarner's industry first Cam Torque Actuated, Camshaft Phasing System from Morse TEC and award-winning, patented Pressure Sensor Glow Plug for diesel engines from BERU.

Introduced on the 2009 Volkswagen TDI Jetta, the BorgWarner Pressure Sensor Glow Plug is the first technology that allows OEMs to implement closed-loop combustion control in a mass-produced vehicle at a reasonable cost.

We will supply Cam Torque Actuated variable cam timing technology for the upgraded Ford Duratec 3.0-liter V-6 engine, which launches on the 2009 Ford Escape. Our patented technology improves engine performance and fuel economy, while reducing emissions.

Now, in addition, our patented DualTronic Performance Package was one of 11 innovations to earn an honorable mention for the same PACE award. This is the same technology that earned us a 2008 Global Innovation Award from Nissan in recognition of our technology used in the all-new 2008 Nissan GT-R.

W e also announce that had we will supply our clutch modules for the seven-speed double clutch transmissions in the BMW M3, recently launched in Europe, the United States and other markets worldwide.

So now, let's talk about our new business announcement today for the period 2009, '10, and '11. Probably the best news of all is our $2.1 billion of net new business over the next three years. This is up from $1.9 billion announced last year. While the current economic crisis is expected to slow car sales in the near-term, global climate change and fuel economy remain major issues that automakers around the world must address.

Our $2.1, billion of new business reflects an 8% growth over the prior three year period. About 80% of the programs are expected to be launched in Asia and Europe, and as in the past, turbochargers and dual clutch transmission technology continue to be our major growth platforms.

Our solid backlog is significant in this time of contraction within the auto industry. For this backlog estimate, the production volumes were realistically reduced to reflect today's environment with some modest industry recovery towards the end of the period. And the euro assumption is $1.25 to the euro.

Now, details for this new business are as such, of the total new business, 80% of anticipated from engine-related products like turbochargers, ignition systems, starting systems for diesels, emission products, timing drive systems, variable cam timing and cooling systems. The other 20% is expected in Drivetrain related products including our fuel efficient dual clutch transmission technology, automatic transmission products and all-wheel drive technologies.

We have outpaced the growth of the industry by developing and launching products with customers in those regions of the world that are adopting fuel efficient technologies. Even with expected market declines during the next three years Europe accounts for 50% of our new business, Asia is about 30% with half of that in China and North America is approximately 20%.

Gasoline and advanced diesel direct injection turbochargers will account for about 35% of that business. And six of our top 25 new business projects are now tied to new gasoline direct injection engines. This is a significant shift from the previous year's new business and reflects the growing importance of GDI engines.

The market for GDI engines is expected to triple over the next three years from about 2 million units today to over 6 million units by 2011. Europe will remain the largest market for gasoline turbochargers. While North America and the emerging Asia markets of China, India and Thailand will be the fastest growing.

Another 16% of the new business is tied to our dual clutch technology and by 2013, the number of dual clutch transmissions is expected to grow tenfold to about 5 million units. With our leading technology and demanding focus on cost, we have successfully managed through difficult market environments before and we will do it again.

I want to reiterate that the underlying fundamentals of our business remained strong and our financial structure is solid. We expect to continue to outpace the growth of the auto industry and to strengthen our competitive position to our focus on fuel efficient technologies, our diversified customer base, a strong geographic presence and our robust pipeline of new business.

And with that, I'll turn the meeting over to Robin for some financials.

Robin Adams

Thank you, Tim and good morning everyone. As Tim said, we are facing a challenging global economy for the remainder of this year and through 2009. But BorgWarner has the tremendous benefits of leading technology and a strong capital structure that position us well to get through this difficult market environment.

Now, let's look at the quarter from an industry production perspective. During the quarter, the global auto industry grew less than 1% for about 140,000 units. US production declined 19% with a 36% decline in light trucks and SUVs.

Western Europe was down 8%, all of Europe was relatively flat. Asia experienced growth of 8%, which is a slowdown from previous quarterly growth rates. As difficult as this market is, this may be one of the best quarters from an industry production perspective that we'll see in a while.

BorgWarner's third quarter sales given this environment were flat with last year, are down 5% excluding the impact of foreign currencies. Our sales in the US were down 24% in the quarter, more than the overall US market, but less than the decline in SUV and light truck sales where we have a heavy concentration.

Our sales in the US now represent 26% of the total versus 34% in the third quarter last year. Europe now represents 60% of our sales. Our European sales were up 5% versus a Western European industry production decline of 8%, as I said earlier and total European production, which was flat.

Our Asian sales were up 10% versus the 8% regional market growth. So you could see, we outperformed the European market and the Asian market underperformed in the US market. The impact of foreign currencies, primarily the euro increased sales by about $65 million in the quarter, again, about five percentage points.

US GAAP earnings reported for the quarter were a loss of $1.12 per diluted share. For comparison with other quarters, third quarter 2008 earnings were $0.44 per diluted share, excluding a number of one-time items. These items are detailed in a table on page three, of our press release, and include a charge of $1.27 a share for a goodwill adjustment related to the BERU acquisition. There is an evaluation adjustment for foreign tax credit of $0.12 a share. A third quarter restructuring charge of $0.16 a share and a charge related to the outcome of retiree healthcare benefit litigation of $0.03 a share.

Now, let us go quickly over these one-time items. As of the end of September, we recorded an impairment charge of a little over €100 million or $147 million, to adjust BERU's goodwill to its estimated fair value. The pretax and after tax amounts are the same, as there is no tax benefit related to this charge.

The carrying value of BERU is being negatively impacted by the rapidly declining European economic conditions. With equity valuations around the globe down 35% to 50% this year, many companies are faced with the same investment impairment issues related to recent acquisitions.

In addition, the German legal process of acquiring 75% control of BERU, through a domination of profit transfer agreement, required a court dictated share payments to the BERU minority shareholders in excess of the fair market value of the company.

On the tax valuation adjustment, we established a valuation allowance for foreign tax credit carry forwards of $13.5 million in the third quarter, which appeared on the provision for income taxes line item in the income statement. Our foreign tax credits from international operations have increased over the past few years.

The recent falloff in the North American market has resulted in a decline in our US income which impacts the probability of our ability to utilize these credits before they expire. As far as the restructuring charge is concerned, during our second quarter call we told you about our plans to restructure our North American operations to align on going operations with the continuing fundamental market shift in the North American auto industry.

How much has changed in the past three months? The crash of the US financial sector has basically frozen liquidity in our US economy. The economic issues of the US have spread to other regions around the world, particularly Western Europe. And as a result, we expanded our North American plan during the quarter and also initiated actions in Europe. We are reducing our North American workforce by approximately 1200 people or 16%, and our European workforce by approximately 500 people, or 6%.

We recorded a charge of $25 million in the quarter to reflect that restructuring, which included $18 million related to people costs in North America and Europe, and $7 million for impaired assets in North America. In addition to employee termination costs, we recorded $7 million of asset impairment charges related to the North American and European restructuring, again which was primarily in North America.

And there may be more work to be done in Europe in the future. The restructuring expenses broken down by segment were $19 million for the Engine side and approximately $6 million for the Drivetrain side. The litigation charge in the quarter relates to a settlement for changes we made in 2006 to retiree healthcare for hourly employees in our Muncie, Indiana manufacturing facility.

Excluding these one time adjustments, third quarter 2008 net income was $51.6 million or $0.44 a share. Third quarter 2007 included a net gain of $16.7 million or $0.14 a diluted share related to tax account adjustments in 2007. So on a comparable basis year-over-year in the quarter, earnings per share were down $0.12 or 21% versus third quarter last year.

In the quarter, our gross margin and operating margin were 15.4% and 5.6% respectively versus 17.4 and 7.5 in the third quarter of 2007. Margins were negatively impacted by unfavorable product mix due to the production declines in the U.S. Start-up costs for facilities outside the US and new product launch issues that we experienced in Europe.

Sales in our base U.S. operations declined approximately $108 million in the quarter, which is more than originally anticipated because of the financial sector crisis and the result in increased industry volume declines. The lost operating income on those sales was a $0.27 on the dollar, which is above our 20% to 25% target for detrimental margins.

The U.S. operations sales decline was offset by growth outside of the US of $47 million and currency of 65. Outside of the US, expected incremental profit margins on the 47 million of sales growth was completely offset by start-up costs for new facilities in Poland, Mexico and China, plus as I mentioned earlier some product launch issues for new product in Europe.

Third quarter SG&A costs were approximately 135 million for the quarter relatively unchanged from the third quarter of 2007. Factoring out currency SG&A spending actually was down 6 million year-over-year.

As a percentage of sales, SG&A was 10.2% in both quarters. R&D costs increased about $2 million to 3.8% of sales in the third quarter versus 3.7% in the third quarter of 2007. Raw material costs net of recoveries increased $13 million for the quarter, pretty much in line with our expectations in our June call, and $20 million for the year-to-date.

Below the operating income line, equity affiliate earnings basically flat year-over-year down slightly, and that's due to lower production as well as higher raw material costs at our joint ventures.

We're starting to see the impact of the global industry decline on our Japanese customers through our NSK-Warner joint venture whose sales are down for the first time in a number of years.

Third quarter interest expense and finance charges a little over $11 million increased $2.8 million versus the third quarter last year primarily due to the costs related to the BERU domination agreement, which again was put in place in the second quarter.

The run rate tax rate in the quarter was approximately 25% versus 27% in the third quarter 2007, and we continue to expect our rate to approximately 25% for the full year. Now, let's move onto our operating segment performance.

As Tim mentioned, the Engine segment net sales increased $40 million or 4.3% and the segment EBIT decreased $6.8 million or 6.7% from the third quarter last year. Sales were down 19% in the US, up 5% outside the US, excluding the impact of stronger foreign currencies.

The EBIT margin decreased over a percentage point from 10.8 to 9.7 primarily as a result of new-plant start-up costs outside the US and additional purchase price amortization related to the increased investment in BERU as a result of the domination agreement.

The Drivetrain segment net sales decreased $40 million or 10.3% in the quarter, and segment EBIT decreased almost $30 million from the third quarter 2007. Sales in the US were down 30% and up 9% outside the US again, excluding the impact of foreign currencies.

The Drivetrain segment's EBIT decreased due to the combined effect of start-up cost pressures outside the US, new-product launch issues in Europe and again, lower North American production of light truck and sport utility vehicles.

Let's talk about the balance sheet and cash flow. Net cash provided by operating activities was $265 million in the first nine months of 2008, down almost a $100 million from the first nine months of 2007. This $100 million difference is working capital-related and we expect improvements in working capital by year-end.

Investments in capital expenditures totaled 265 million for the first nine months of 2008, compared with $195mm for the same period 2007. These investments in capital are targeted towards supporting the $2.1 billion in net new sales over the next three years, outlined by Tim earlier in his comments.

In the quarter, the company purchased approximately 55 million of BERU common stock, in conjunction with the domination agreement and continues its BorgWarner stock repurchase program.

Balance sheet debt increased by $78 million at the end of the third quarter compared with the end of 2007. Our investment-grade capital structure continues to remain strong in this difficult economic environment. The ratio of net balance sheet debt to capital was 21% at the end of the third quarter. The company has ample liquidity with $136 million of cash on hand at the end of the quarter, and no outstanding borrowings under its $600 million revolving credit facility.

Gross debt to trailing 12 months EBITDA is nine times, and we continue to be well-positioned to weather the difficulties in this current environment and also have the financial strength to take advantage of strategic opportunities as they present themselves in the market.

We refined our 2008 full-year earnings guidance this morning to $2.25 a share to $2.35, excluding one-time items, and that compares with the previous guidance of $2.80 to $2.95 per share or about a $0.55 to $0.60 per share decline. Our adjusted guidance reflects the rapid deterioration of the global economic environment beyond North America, and the resulting near-term pressure on both sales and margins for BorgWarner.

As Tim said earlier, and I've said as well, the world has changed dramatically since our last earnings call just three months ago in late July. Compared to previous guidance, our current expectations excluding foreign currency reflect a 12% reduction or about $325 million in sales for the last six months of 2008 versus our previous guidance. And two thirds of that decline is occurring in our non-US operations.

That $325 million in sales, at a 27% decremental margin translates to a $0.55 per share decline in earnings for the year. In addition, the stronger US dollar could cost approximately $0.07 a share from previous guidance. The dollar currently looks to be closer to $1.45 to the euro for the year versus our previous $1.50.

When you look at 2008, it's definitely a tale of two different economic environments for BorgWarner. Our revised guidance translates to about 4% sales growth for the year, after we achieved 14% growth in the first six months of this year. It also translates to operating income margins of around 7% after generating operating income margins at 8% for the first six months of this year.

Our other guidance includes net cash provided by operating activities of about $475 million, capital spending looks to be about 375, so net cash available from the two activities, about $100 million. R&D spending still targeted at 4%, return on invested capital in the 12.5% to 13% range.

Now given the uncertainty in the markets today, we felt we needed to provide some direction for 2009, even though it may be preliminary. So, consider this more of a back of the envelope view versus our formal guidance.

Our preliminary view of 2009 looks like flat year-over-year sales excluding the impact of foreign currencies, which will definitely be negative. So, on a reported basis sales will decline. Excluding flat currencies, impact of foreign currencies will be negative.

In our current view of the dollar-euro for 2009 as Tim mentioned earlier is, approximately $1.25 to the euro that compares to our $1.45 look for 2008. Current production outlook is a build rate of under 12 million units in North America and slightly over 13 million units in Western Europe.

Industry production declines could be in the high teen's percentage wise in the first half of the year. Production is not expected to pickup in the back half of the year, but the year-over-year comparisons get easier versus the last six months of 2008 and we're looking at more like single digit percentage to year-over-year declines in the last half of the year versus the high teens in the first half the year, again but not an expected pickup in production activity.

We're expecting our approximately $600 million of net new business in 2009, to offset these industry production related sales declines. We also expect to get some help from commodity prices in 2009 versus 2008 based on current commodity levels, particularly nickel, which is currently hovering around $5 a pound versus the $11 a pound, we experienced year-to-date in 2008.

Now based on this rough scenario, earnings could be flat year-over-year, including the impact of currency, and cash flow will be positive. So, this should give you some indication of what the next 12 months could look like for BorgWarner. And as we've said, we will provide more formal guidance for 2009 in January as we always do, when we presented the analysts meeting with the Detroit Auto Show.

Let me finish up by reiterating Tim's comments. We have a growing backlog of net new business. We continue to have a strong investment grade balance sheet. The current period of global economic crisis and unprecedented industry volume reductions will strain even the best performing companies in our industry, and in most other industries in every geographic region of the world.

We have the capability to continue to invest in new capital investments, invest in more research and development, and in addition to pursue strategic acquisitions to further strengthen our competitive position in the marketplace.

As Tim mentioned, we are taking actions to mitigate the downside of the current global economic situation, while continuing to position ourselves for future additional growth. Despite the external economic environment that is beyond our control, BorgWarner employees around the world are focused on effectively executing our technology driven growth strategy.

So, when this global economy turns around, BorgWarner will once again be at the forefront of the growth curve. With that, I'll turn the call back to Mary.

Mary Brevard

Thanks very much, Robin. I'll now ask Stia to provide the Q&A procedure for everyone.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Rich Kwas with Wachovia.

Richard Kwas - Wachovia

Hi, good morning everyone.

Tim Manganello

Hi, Rich.

Robin Adams

Good morning, Rich.

Richard Kwas - Wachovia

Robin, with the restructuring activity, you going to be running around a 7% operating margin. What do you think about longer term in getting back to the 8% plus operating margin over the next two to three years, assuming that production does recover slowly?

Robin Adams

Rich, I wish I could give you some timing on when we'll get back to a little bit more normalized level of activity around the globe from an economic perspective. But when we do, and I don't know, Tim's a little closer to economic data than I am. He's a whiz on this stuff. But I don't know if it's 2011, but when we get back to that level of activity, we certainly expect our operating income margins back to the 8.5% to 9% level.

There's been no fundamental change in this business that when production levels get back to the more normalized level. There's no reason that we shouldn't be back in the 8.5% to 9% level and that's what we expect.

Tim, I don't know, maybe you can help.

Tim Manganello

Yes, we don't expect anything in terms of recovery until sometime in 2010. But let me answer your question, Rich, from a slightly different angle. I've got a couple of operating issues inside this company which are dragging us down a little bit. We're working to fix those operating issues if I can, and when we get those operating issues cleared up, that's actually going to help our margins a little bit, in spite of the fact that the economy may be flat or the production schedule's going to be flat.

Robin alluded to one of them in Europe and some of our launches in Europe. So, we've got some low hanging fruit that we're going after in addition to just over and above whatever we're doing in terms of resizing or restructuring.

Tim Manganello

One last thing, Rich, if you do the math on kind of what I laid out for 2009, you'll see that we expect a margin improvement in 2009 versus 2008. Not that 8.5% to 9% level, but moving back to that direction.

Richard Kwas - Wachovia

Okay, and then Tim, on the turbocharger front, backlog pretty good, just with kind of the competitive landscape out there, there seems to be a push from the percent of the Japanese competitors, I just wanted to get your thoughts on how you view your position right now. I know the market is growing, there is lot of opportunity for everyone, but how do you view risk of pricing pressure over the next several years?

Tim Manganello

First of all, I agree with what you just said, but I don't see pricing pressures. There is always market growth, there is all those other stuff. We're actually penetrating the Japanese market; we're penetrating the Asian market. Some of our competitors are picking up some volume, but our market share is in the low to mid-30% level. At 35% market share, 37 % market share, we're not going to get every order, and we don't expect to get every order. So we're going to continue probably because of our technology, we'll slightly grow our market share, we're going to pick up some of the high-tech premium end of the market, because of our leading technology, and the world's going to fight over the other 65% market share probably.

Richard Kwas - Wachovia

Thanks, and then Robin, housekeeping question, what's your initial outlook for pension for next year in terms of expense in outlays?

Robin Adams

You know that's a great question, unfortunately what drives our liability and determines our expense as some people know interest rates at, and I don't know the exact date but close to the last day of December. Given where interest rates are today, we could see a slight decline but in this volatile market who knows where interest rates are going to be in December.

Richard Kwas - Wachovia

Right, and in terms of cash contribution with the equity markets down as much as they are, how are you positioned with your portfolio?

Robin Adams

When we started 2008 in the US, we where in a net funded position, we had an overfunded plans, there was slightly underfunded plan, and obviously with current market conditions there has been an unfunded position growth. Obviously our expectations is eventually the markets will turn around and the liability for our pension plan is kept. There are no new entrants going into the plan, so it's just slowly liquidating. Given our expectation that these markets will come back eventually, we really don't see any need to fund anymore cash into our North American plans.

Richard Kwas - Wachovia

Okay. Thanks so much.

Tim Manganello

Thanks Robin.

Operator

The next question is from Itay Michaeli with Citi.

Itay Michaeli - Citigroup

Hi. Good morning. Robin can you just quantify some of the start-up and launch cost issues you started in the Drivetrain business and how do you expect that to proceed in the next couple of quarters?

Robin Adams

Let me put it another way, as I said most of the start-up costs were outside the US and if you look at that $47 or so million of incremental sales outside the US, we would have expected that to generate anywhere from $7 to close to $10 million of incremental operating income. A good portion of that was eaten up by start-up costs.

Traditionally we've been starting, I mean, BorgWarner traditionally has always been in a start-up mode. We continue to grow and we've got a backlog that we continue to put in every year. We're in a little bit of a unique situation right now with building a new facility in Poland, and bringing that up to speed, building a new facility in Mexico, bringing that up to speed, expanding a facility in Hungary and bringing that up to speed, construction, a new engineering center, a technical center in China as well as putting manufacturing production in place.

So I think from a historical perspective, we've got a lot more activity going on in new brick and mortar and bringing up operations than we have historically. Having said that as Tim mentioned, we also have a few start-up problems that are not related to investment that we need to work ourselves through.

Tim Manganello

Let me give you an idea Itay, of what's going on here. Over the next three years, we're probably launching almost 500 programs, and over the last couple years, we've been probably launching at a similar pace. You're never going to hit every one of them right on the mark and you're never going to get a grand slam on each one of them. So we've got a few clunkers out there that we're bringing along that are basically going to have to start shaping up in terms of delivering the profitability that we expect.

The other thing is that, like Robin said, we put in a lot of buildings out there. We're pretty much done now with expansion in terms of buildings. We may have one or two based on some new opportunity in China, or something like that, but we're pretty much done with expansions. So you're going to see our building, our construction business slowing down.

Itay Michaeli - Citigroup

Right, thanks, and just a couple of quick follow-ups on the 2009 back of the envelope. Should we be still using about 23% contribution margin on the new business next year? Also if you could comment on what you're seeing in steel. I know it's always been typically a $25 million to $30 million headwind for you. Just wondering if that's changed at all in the last month or two?

Tim Manganello

Itay, on the incremental margin on the upside, as we've always said, we're looking anywhere between 15% to 20%. If it's in a developing part of the world, if it's new sales in Poland, for instance or Mexico or China or Hungary, Korea, India, it tend to be more closer to $0.15 on the dollar because we are putting infrastructure in place. If it's on more established facilities, it's $0.20 on the dollar. We've been trending closer to 15 to 20. But the midpoint of the range is a good starting position.

On the downside as we've said, our target is $0.20 to $0.25 on the dollar. Most of that decline has been in the North American market. What we're experiencing now is declines in Western Europe, where some of the labor costs are little stickier, and therefore it takes a little bit longer time to shed.

So as I said, as we look to 2008, instead of that $0.20 to $0.25 on the dollar, we're actually experiencing about $0.27 in the last six months of the year. But those are fair incremental, detrimental.

On the steel side, as we said in July, we experienced raw material price increase about $6 million year-to-date and we expected a good $10 to $12 million in the third and fourth quarter, primarily related to steel. You saw the third quarter actually came in at about $13 million, which was steel. We are seeing, obviously, as everyone's seeing, some pullback a little bit price on steel, but we will expect some impact in the fourth quarter.

As I said, in 2009 right now, commodities we expect in general to be less of a pressure on us from a cost perspective, and the big hitter for us is nickel. With nickel at about $5 a pound plus or minus around that range, we expect to get a pretty sizable benefit versus a cost penalty for commodities in 2009 versus 2008.

Itay Michaeli - Citigroup

Great, thank you so much.

Operator

The next question is from Brian Johnson with Barclays Capital.

Brian Johnson - Barclays Capital

So, again, sort of hitting the decremental margin point, if you look at Drivetrain in the quarter, it looked more like $0.75. How do we kind of tease out the start-up cost, operating issues from the volume related impacts?

Tim Manganello

Well, I think if you look at it from my perspective, it is really simple. I recon most of that decline was in the North American market, if you see that. So, we would have expected no more than $0.25 on a dollar decline in operating income related to the volume decline. So, the rest is start-up for new facilities, China and Mexico particularly, and then launch problems in North America and in Europe, as I said earlier. We had some launch problems in Europe that are dodging us. So that's the difference, the whole difference there. We should have lost $0.25 on the dollar on the decline in sales in the quarter and we didn't. The rest is start-up and operational issues.

Brian Johnson - Barclays Capital

In Europe going forward to next year, do you get to the point in European productions, where you're operating leverage would become nonlinear, for example unionized workers or other costs that don't scale as easily?

Tim Manganello

Well, I'm not so sure I quite understand your question, but I'll answer it, the way I think it is. You asked and that is, in Europe there is a lag between when we announced an employee will be leaving the company versus when they actually leave the company because and every country's got different laws. So there is, you know, there is an announcement, then there is a period, where they're still working, but they'll be phased out after so many days. It could be 45 days, 60 days and 90 days. I don't know if that answers your question or not Brian.

Brian Johnson - Barclays Capital

Yes, the point being if the production decline is slow and relatively foreseeable, do you have one operating margin, say 20%, 25%, and if it's so, overnight you have another say 35%, 40%?

Tim Manganello

Yes. If it's slower, we can react on a more even pace and take it out over the time, and match the production cuts or schedule declines to our manning levels feel with a little bit, with a lot closer or a lot tighter gap. If it's overnight, like what happened in September, we had a waterfall drop in schedules in September and we just can't get the people out that fast in Europe.

Robin Adams

Brian, that's why when I talked about our change in guidance, I said our sales dropped about $325 million from our last guidance and our decremental margin, we're looking at more like $0.27 on the dollar versus our traditional 20, 25 because as I said two thirds of that decline is in Europe and to Tim's point, those labor costs are a little bit stickier and it take a little bit more time to get out of the system.

Brian Johnson - Barclays Capital

Right. On the backlog, could you possibly break it out by year? You mentioned 600 for '09 and also give a sense of the production guidance. I think we know what you're thinking '09, but 2010 and 2011 that you based it upon?

Tim Manganello

Well, I can give you the breakdown on the backlog by 600, 700 and 800 approximately. As far as production schedules, I'm just happy to look past 2008 and 2009, right now. I'm just going to hold with what I've said, and that is, I think things are going to be flat through, or maybe slightly down.

2009, I think is going to be slightly down from 2008. Probably a better way for me to phrase 2009 is, 2009 will probably look like the third quarter of 2008. But we'll have a whole year of the third quarter, not just one quarter of it.

That will go for the full year. 2010, we may start to see some recovery. I think it will probably be in the middle of 2010. Some people, I hear think it's going to start to recover in the third quarter of 2009. I guess I'm trying to be as realistic as I can in the way we size this company and run it for the next 18 to 24 months.

Brian Johnson - Barclays Capital

Would it be fair to say that the 2010 backlog is based on a lower industry production environment than winning that big backlog that included 2010 last year?

Tim Manganello

Yes. I tried to say that in my write up or my overview, and that is, this year's backlog at $2.1 billion, is based on lower volumes than last year's volume, last year's backlog at $1.95 billion. So, if we had the same sales projections for 2009 and '10, that period that we had last year for 2009 and '10, our backlog that we just announced would actually have been higher.

Brian Johnson - Barclays Capital

Right. Any kind of organic CPV number you could point to?

Tim Manganello

No, I don't know.

Robin Adams

We've stayed away from content per vehicle because it depends on the vehicle, it depends on the content.

Tim Manganello

A lot of our product is of option. So, there's about a billion combinations. So, for us we actually just do a bottoms-up forecast on almost every product line we have.

Brian Johnson - Barclays Capital

Okay. Thanks.

Operator

The next question is from Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

Good morning, thanks.

Robin Adams

Good morning.

Christopher Ceraso - Credit Suisse

Good morning, a couple of items. You mentioned the difference in the contribution in Europe versus the US or North America. The headcount reduction there looks like relative to what you're doing here, is that because those jobs are sticky or because you need to keep people around because a disproportionate amount of your new business is in Europe or should we expect over the coming year that the European headcount declines will have to catch up to what you've done here?

Tim Manganello

Well, first of all, you're right on the stickiness. Second of all, you're right on the last point. There will probably be more to come. We just need a clear picture. There is going to be probably more plant wide shutdowns in Europe and maybe some layoffs, because the customers are taking plant wide shutdowns in Europe. They are taking a number of the OEMs in Europe. We are taking complete holiday shutdowns for a large part of December and at least half of January. So, 500 is not the final number for Europe.

Mary Brevard

We also do have new business growth there. So you're right on all counts.

Chris Ceraso - Credit Suisse

Okay. Robin, can you just remind us, I've looked through my notes real quick, but what's the math on nickel, is it just round numbers based on the decline that you've seen in the price? How do we walk through an EBIT change?

Robin Adams

Well, previously we were buying components with the equivalent of about 10 million pounds of nickel. That's dropped a little bit. As you remember when nickel prices went up, we said we're working on trying to move the composition of some of the alloys to reduce the penetration of nickel within those products. So we're somewhere down in the 7 million pounds a year range right now.

Chris Ceraso - Credit Suisse

I always have trouble with European production numbers, everybody adds it up differently. Do you have your expected volume in percent change terms maybe on a PAN Europe basis as opposed to just a volume number for Western Europe?

Tim Manganello

Well, I have a percentage decline from 2008 to 2009, Western Europe year-on-year probably around 12%.

Robin Adams

Total Europe, about 6%, Chris, if that's your question.

Tim Manganello

I have Western that was I gave. What I said was Western Europe. Oh you wanted both, okay.

Chris Ceraso - Credit Suisse

A 6%?

Robin Adams

6% for total Europe down.

Chris Ceraso - Credit Suisse

Okay. Then last one, what was your foreign exchange assumption under the old backlog, the $1.95 billion?

Tim Manganello

1.95, 1.40, $1.40 to the euro.

Chris Ceraso - Credit Suisse

Okay and the new is based on 1.25?

Robin Adams

Yes. As Tim said it was $1.25 to the euro.

Chris Ceraso - Credit Suisse

Okay. Great. Thanks a lot.

Robin Adams

Thank you, Chris.

Operator

The next question is from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank

Most of my questions have been answered just a couple quick ones, the SX that you've got in the backlog is it 125 all the way through?

Tim Manganello

Yes.

Rod Lache - Deutsche Bank

Okay.

Tim Manganello

Yes. It's consistent.

Rod Lache - Deutsche Bank

Did you say that the European revenue was up 5% X foreign exchange? For the company?

Tim Manganello

This quarter?

Rod Lache - Deutsche Bank

Yes.

Tim Manganello

Yes.

Rod Lache - Deutsche Bank

That's excluding foreign exchange?

Tim Manganello

Right.

Rod Lache - Deutsche Bank

Okay. So it's 15% or something with it? Lastly, just maybe we could just refine that walk that you're thinking about for next year. How much savings are you anticipating on a year-over-year basis from restructuring? You know, just net of hedging in other factors that you've got in raw materials. ]What are your thoughts on that factor on a year-over-year basis, how much of a plus could that be?

Tim Manganello

Well as I said, it is on the back of the envelope. I didn't have enough room for all those calculations. But, obviously we do expect some improvement. What I think of the restructuring, I'd like to think of it this way. It's taking detrimental margins for instance that in the quarter were third quarter where 27% to 28% and getting them back in line in the 20% to 25% range.

So, what I don't want is people throughout these numbers of saving $60 million a year, and if sales were flat, you know, I could give you a number of what we're going to save, but sales are not going to be flat. We're going to see a continuing decline in sales in our North American operations and to give you a number of dollars savings I think would end up being misleading.

So what you really need to think of is a more reasonable detrimental margin on the sales decline versus what we've experienced this year.

Rod Lache - Deutsche Bank

Okay. So you're thinking that the detrimental margins come down, and what about on the raw materials?

Tim Manganello

As I said, we expect the benefit for raw material.

Rod Lache - Deutsche Bank Securities

Yes.

Tim Manganello

2009 versus 2008. Primarily nickel is the big driver.

Rod Lache - Deutsche Bank Securities

Didn't you hedge some of the nickel though?

Tim Manganello

About 10% to 15% is hedged with actual hedges. The rest, there is some pass through, but there is a floor on the pass through.

Rod Lache - Deutsche Bank Securities

Okay. All right, thank you.

Operator

The next question is from John Murphy with Merrill Lynch.

John Murphy - Merrill Lynch

Good morning, guys.

Robin Adams

Hi, John.

John Murphy - Merrill Lynch

I just wanted to focus on the balance sheet a little bit here. First, just on your write down of the goodwill for BERU. Is that written down to zero at this point, there is no more future write downs?

Tim Manganello

No, it's not written down to zero, it's written down to fair market value, there is still some goodwill there.

John Murphy - Merrill Lynch

Okay, then Robin, on some of the debt that's coming due, you got $200 million coming due in February of '09. Should we assume that you're able to generate cash from operations to fund that, or is that something that might need to be rolled or paid for by the revolver?

Robin Adams

Actually it's more like $140 million public debt that comes due next year. We've got the three options you mentioned right now, the public debt market, which is probably be our first option, given that the market settles down a little bit, we'd go to market and refinance that with public debt. If not, we have that revolver to draw on, as I said its $600 million underutilized.

Right now, on the balance sheet we have just about the right amount of cash to be able to pay that off with cash. As I said, we expect to generate cash flow in the fourth quarter, so we'll have a little bit more cash than what we have on the balance sheet today. So we have the capability to pay it off with cash, draw down the revolver. Our preference will be to go to market and refinance that in the debt market.

John Murphy - Merrill Lynch

Okay. When we look at the current revolver of 600 million, it looks like it matures in July of next year. So, I mean, it looks like you'd have five months. So, when we look at it, I mean have you had any discussions with the banks to renew that because it's looks like in the past that you guys have been renewing the revolver at least a year in advance. It seems like this would have renewed already, I mean is there anything that's going on there in mortgage, had advanced talks?

Robin Adams

All of our major banks, including your firm, have been in to tell us that they have.

John Murphy - Merrill Lynch

I have no knowledge of that, Robin.

Robin Adams

Yes, I know that. That's why I'm telling you.

John Murphy - Merrill Lynch

I know that.

Robin Adams

Including your firm, they've all been into assure us that the credit markets are available for us. We are a very desirable partner, and they have reiterated the credit commitment to this company. So we're not concerned at all. The reason we have not refinanced that yet is just we don't like pricing in the market right now.

John Murphy - Merrill Lynch

Got you. Then, just on the backlog, I mean, it's a great number. I was just wondering, have you seen in quoting activity if there's been any pullbacks in request for proposals or anything like that from some of the major manufacturers, or this just been a slowdown out there in spend?

Tim Manganello

John, not at all. In actuality we're probably more active than we've ever been and working on new technology and advanced programs, we're quoting projects all over the world that are related to fuel economy. I got arthritis, I just came back from China, and I'm still feeling the trip, but I just came back late last week, beginning of this week, and there's going to be more activity for BorgWarner in China than I ever imagined. Whether it's all targeted to fuel efficiency, whether it's on a dual clutch side or it's on the turbocharger side or variable cam timing, or on-demand cooling. So, the manufacturers still have to meet all these stringent requirements and all these customer demands for better fuel efficiency. The programs aren't backing down.

John Murphy - Merrill Lynch

Tim, as far as the auto makers that are most active, just curious in the backlog, I mean I know you don't give exact customer mix, but I mean, is it a very, very small percentage that's the Detroit three in your backlog?

Tim Manganello

Actually, I can give you some kind of an idea. On the backlog for 2009 to 2011, I'm happy to say that the number one participant in the backlog is Ford, and about half of that is in North America and half of that's in Europe. Then it's followed by a number of the traditional customers that we've always had in Europe, Volkswagen, Audi, Daimler, Renault/Nissan, BMW, GM, Hyundai, Chrysler, then we get into some of the off highway guys with Cat and Deere. We got a good cross section.

Mary Brevard

But John, the overall backlog is about 10% of the North American big three. So, it keeps declining as a percentage of the total.

John Murphy - Merrill Lynch

Great. Thank you very much, guys.

Tim Manganello

Thanks John.

Operator

The next question is from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs

Hi, good morning.

Tim Manganello

Good morning, Patrik.

Patrick Archambault - Goldman Sachs

Yes, most of my questions have been answered; I guess just one incremental one on, launch costs. How do you see that playing out next year? I mean, obviously you've had a lot, and experiencing a lot of incremental costs right now. Is that something that becomes maybe a bit of a tailwind or just given, you know, the new business ramp you have, which is substantial, is that going to be flattish or maybe even negative next year? How do you think about that?

Robin Adams

Well, I'll talk about the facilities and maybe Tim can talk about the operational launch issues. But the Poland facility should be up and running early 2009. The investment in China will stretch into late 2009, early 2010. The investment in Mexico will stretch to late 2009 early 2010.

Patrick Archambault - Goldman Sachs

Mostly complete.

Robin Adams

Yes. This will become a board fairly soon. So, those are the major expansion activities. Tim, do you want to talk about individual product launch working through?

Tim Manganello

Well, I think that what we typically have is, I think the launches will be just normal and that will be covered by our normal start-up costs and everything else and that's pretty much covered in just our normal operating conditions.

So, I don't think anything's going to be any better or any worse next year than we've seen in the past. I think it will be just probably on a percentage basis just reasonably flat. We had a couple of projects like I said earlier, we have a couple of programs we've launched already that, we've got to go back and tighten up and clean up to get pull some of the margin out of it.

Patrick Archambault - Goldman Sachs

Okay. I guess, that's helpful. Not to ask for more detail from your preliminary guidance than you're willing to give, but any kind of thoughts then on kind of CapEx and D&A for the next year? Because it sounds like both of those will be up.

Robin Adams

You know our guess estimate for this year on capital is about 375 and given the backlog, we could see a little bit of increase with that but certainly, it's not going to be a 50% increase. As I said earlier, we will generate positive cash flow again in 2009. Depreciation will inch up a little bit. Capital spending could inch up a little bit, but not significantly. We're going to have a strong year from a cash flow perspective.

Patrick Archambault - Goldman Sachs

Okay. Perfect, thank you. Last one, sort of housekeeping one here, you know, in your cash flow statement there's a line item in investing of payments for businesses acquired of $59 million headwind.

Robin Adams

Yes.

Patrick Archambault - Goldman Sachs

I guess I assume that the BERU purchase was part of that, right, which I think was 35? I just wanted to see if we could kind of reconcile to the other piece.

Robin Adams

That's almost entirely BERU.

Patrick Archambault - Goldman Sachs

Okay. I guess I was just a little confused because you said, I think it was the purchase of the stock was 35, but I guess there were other cash.

Robin Adams

I'm sorry, I said 55.

Patrick Archambault - Goldman Sachs

You said 55, okay. All right. Thank you, that's all I had.

Operator

The next question is from Himanshu Patel with JPMorgan.

Himanshu Patel - JPMorgan

I just had two questions, what is Western European production in the fourth quarter doing?

Tim Manganello

Hold on a second. Himanshu, I'll give you some, are you talking fourth quarter of 2008?

Himanshu Patel - JPMorgan

Yes, if you have western and total Europe that would be useful.

Tim Manganello

It looks like, its for us, not for us but our estimate is from the third quarter to the fourth quarter in Western Europe. Its gone about 200,000 units.

Himanshu Patel - JPMorgan

Do you have a year-over-year percentage?

Tim Manganello

Yes, well the fourth quarter is down about 23% from the fourth quarter of '07 to fourth quarter of '08.

Himanshu Patel - JPMorgan

That's for western.

Tim Manganello

Western Europe.

Himanshu Patel - JPMorgan

Right, okay. So, I guess I am just going back.

Tim Manganello

When I gave you the 200,000 units that was third quarter of 2008 versus fourth quarter of 2008, which is (inaudible).

Himanshu Patel - JPMorgan

So, just going back to the earlier comments, it looks like your '09 guidance is based on total Europe being down 6%. I mean, that sort of suggest that you are assuming Eastern European demand is sort of flat, slight up next year. I am just wondering is there any risk to that, I mean just given what's happening in some of the Eastern European financial markets right now, would you guys be worried that Eastern European demand could actually decline next year as well? Therefore, maybe total Europe production for '09 isn't all that different than Western Europe production for '09?

Tim Manganello

Well, I think you probably are right. There's probably some downside in Eastern Europe. We don't have that much baked in right now. But we're getting a lot of growth in Europe still on dual clutch transmissions and turbocharging.

So, we're probably going to be okay, how should I say this? We're probably not going to see the full impact of the declines. But, I think there will be softness in Eastern Europe, you're seeing that right now in Eastern Europe and you're seeing it in Russia.

Himanshu Patel - JP Morgan

Is there a big content difference for you guys, East versus West or is it, I mean, I'm just trying to understand if Eastern is really the source of disappointment next year, is that kind of a small issue for you guys, just because your CPV may be a fraction of what it is in the west?

Tim Manganello

Well, what happens is that we have some plants in Europe that they are actually shipping to Eastern European OEM plants. But mainly, like we ship to a Volkswagen plant and Volkswagen builds it in Germany. The German vehicles are built by Volkswagen are shipped to the Eastern European countries and to Russia, or actually other parts of world. So certainly for us, we kind of see some of that. Our sales kind of go through a Western European build schedule, you know, what I'm saying?

Himanshu Patel - JP Morgan

Okay.

Tim Manganello

So we don't really ship to, yes, we do have some plants like in Hungary and soon to be Poland, or we're shipping from a Hungarian plant to a polish plant or a Hungarian plant to a OEM's Hungarian plant. But most of our productions is shipped to a western European assembly plant for vehicles and then they export to some other country.

Mary Brevard

The reason we focus more on western European number is that we think that's more important for our outlook than total Europe.

Himanshu Patel - JP Morgan

Understood. Okay and then can I just go back to the product launch issue? You guys brought that up a couple of times. Can you give us a little bit more granularity on what exactly are those issues, any way to quantify the costs in the current quarter and sort of what happens in the fourth quarter, is that behind you by Q4 or does that linger into 2009?

Robin Adams

I'll take, as I said, we have some product launches in Europe and a product launch in North America that as Tim mentioned are struggling. I think again the way to quantify it is we're not going to talk specifically about the cost of those issues other than to think of, again, our non-US sales in the quarter, what the incremental margin we would have expected out on those sales versus what we got.

A good portion of that is new facility start-up, which is normal, and then the remainder is operational issues of some product launches. I'm not going to break it down between 5 million and 3 million here, or 6 and 4, or 2 and 8. But generally, if you look at it from that perspective, that's the issue and that's the size of it.

Himanshu Patel - JP Morgan

When does it get resolved?

Robin Adams

It's up to Tim.

Tim Manganello

Okay. As quick as I can get it fixed. We're working on it. I can tell you right now, there's an issue on DCT, one of the DCT programs we've got in North America, and everyday their plant is improving. So these are things that have to get fixed reasonably fast because they just make [deal].

We're ramping up problems and when you're in a launch mode and you're ramping up, you got to fix problems fairly fast because they cripple if you're ramping up, you don't fix your problems.

Himanshu Patel - JP Morgan

Yes.

Tim Manganello

So these are things that are getting a lot of attention.

Himanshu Patel - JP Morgan

Okay. Then one last question. Tim, I think in Paris you had also mentioned that the production schedules in Europe were falling off a cliff pretty fast in the month of September. What's happening now as you're sort of midway through the fourth quarter? Are they sort of coming in more in line with what was expected or are you still seeing a lot of last minute production cuts in Europe?

Tim Manganello

No, we're not seeing as much last month, I think there is just slight declines more and more and the other and so we're not seeing this huge cliff drop-off. We're probably seeing some tapering off now. We know we've done well in the fourth quarter, we don't see major shutdowns and that's going to spill over into the third quarter.

I don't know if we have seen or have projected all the shutdowns we may end up with in terms of what our OEMs will end up doing.

Himanshu Patel - JP Morgan

Yes. Okay, great. Thank you very much.

Tim Manganello

Sure.

Operator

The next question is from Brett Hoselton with Keybanc.

Brett Hoselton - Keybanc Capital Markets

Good morning.

Mary Brevard

Good morning Brett.

Tim Manganello

How are you doing?

Brett Hoselton - Keybanc Capital Markets

Doing all right.

Tim Manganello

Good.

Brett Hoselton - Keybanc Capital Markets

As I see, cash uses, I know have your typical priority list here, the question is simply do you think there is any potential alteration in that priority list? In other words, would you be more interested in a share repurchase or increasing your share repurchases activity given your solid balance sheet and current stock price?

Robin Adams

Well, let's just say this, a couple analysts I've talked to think we should do that, and they continue to bug me about it, but I won't mention any names, but it's not you, Brett. But there is some really nice buying opportunities out there for some technology. We're looking and we're working it. We said that every quarter for umpteen, last 18 months or so, but good things come slow.

As you know, we're a disciplined buyer. We're still looking at acquisitions, is the short answer. We're obviously going to reevaluate, like we do every year, we'll reevaluate our dividend policy, and we've still got, up until now, we've had six or seven years of increasing dividends year-on-year.

We're doing small amounts of share repurchases right now, but nothing that's out of the ordinarily from one year to another. We actually think we have better uses for our cash than buying back shares. But that's never ruled out. That's never completely off the table and it's not ruled out.

Brett Hoselton - Keybanc Capital Markets

Can you expand on your acquisition comment? In other words, either size or number of acquisitions or potential product interests or timing of acquisitions, anything along those lines?

Robin Adams

Yes. Small to medium-sized, nothing greater than medium-sized. No bet the farms, nothing that's going to rock the boat. We like our credit rating, we like our investment grade credit rating and we want to keep it that way. I think in this environment having cash is a really good thing. There is a lot of companies that are very envious of our cash position. We want to keep it that way. I would hope that some are more sooner rather than later, Brett.

Brett Hoselton - Keybanc Capital Markets

Then you've obviously talked about some potential restructuring or additional restructuring actions here. It sounds like you're obviously thinking about that. Can you kind of talk about when you might be able to provide some more details, or is that something you might be able to update us on in lets say a month or is that something more along the lines January time frame?

Robin Adams

I expect you think more about January, because right now we kind of know what we know for the year and there may be uninterrupted plant shutdown, or I should say unscheduled plant shutdowns that we'll have to react to. But we'll probably do that with our own shutdowns.

But in terms of manpower balancing and so forth, I think we're probably going to have to wait until we get a better look at what's going to happen next year. So, we probably have more to say about that in the January presentation.

Brett Hoselton - Keybanc Capital Markets

Right. Thank you very much.

Robin Adams

Sure, Brett.

Operator

The final question is from David Leiker with Robert Baird.

David Leiker - Robert Baird

Hi, good morning.

Tim Manganello

Hey, David.

Robin Adams

Good morning Dave.

David Leiker - Robert Baird

Hi, Rob. Actually, I want to clarify something, did you make a comment earlier that operating margins will be up in '09 versus '08?

Robin Adams

Yes. I did make that comment. We expect an improvement in operating income margins '09 versus '08. If you look at the equation, Dave, sales flat excluding currency, currency will be negative in order to generate the same type of income year-over-year. We will need some improvement in operating income margin.

David Leiker - Robert Baird

Okay.

Robin Adams

The one good thing about currency-related sales decline, incremental margin's only about $0.09 on the dollar.

David Leiker - Robert Baird

Yes. But I was going to ask about that is there any reason to expect that number to be different going forward than what we've seen here in '08?

Robin Adams

The incremental margin on the currency?

David Leiker - Robert Baird

Yes.

Robin Adams

No, that's going to be in the 8% to 10% range consistently. But basically, it's the operating income margin, close to the company, and it's where our operating margin is on average for our non-US operations.

David Leiker - Robert Baird

Then, a clarification in the comment on guidance, you say earnings flat year-over-year. Is that excluding currency as well?

Robin Adams

That includes the impact of currency. So that's why I say, you've got sales flat, you've got a negative impact from a currency perspective, so on a reported GAAP basis sales will decline next year.

David Leiker - Robert Baird

Right.

Robin Adams

We expect net income, earnings per share, even with the currency impact, to be definitely flat with this year's guidance.

David Leiker - Robert Baird

Okay.

Robin Adams

This translates to some margin improvement.

David Leiker - Robert Baird

Right, okay and I'm following you. What kind of tax rate do you think you're going will be looking at in '09?

Robin Adams

Still about 25%.

David Leiker - Robert Baird

Okay. Then on the backlog, now, you usually kind of update what your actual, what's your estimate in the actual new business has done in the current year. So historically you pull some of that forward into the current year. Did that happen here as well or you can discuss some sense on what happened in '08 in terms of new business?

Robin Adams

David, the way '08 is in the third quarter and expected during the fourth quarter, we're trying to sort out a lot of things, and how much of this is new business is not on our top priority list right now. I mean we'll work to it eventually, but frankly, as Tim said, we're looking at a 27% decline in production activity in the fourth quarter and we're trying to focus Western Europe. Trying to focus more on that then some of the other metrics that we might have had a little bit more time to focus on.

Tim Manganello

As Robin said, we've been a little busy.

David Leiker - Robert Baird

I understand.

Tim Manganello

I think I can help you there, Dave. If we'd had continued on for the full year at the same pace we ran at the first half, some of that backlog would have been pulled forward.

But I think we ran at a fast pace in the first half of the year, you know as you know with record sales and profits, but then in the second half of the year things really slowed down.

So I think what happened is that because the second half of the year is so slow, there probably wasn't much pull-forward.

David Leiker - Robert Baird

Right. Then the last item here, you've put together a great slide in your investor presentation though and keep new programs and that backlog, that you guys do.

Tim Manganello

Yes.

David Leiker - Robert Baird

Conferences, here in the next couple of weeks, what are some of the new things that we'll see pop up on that chart?

Mary Brevard

David, that chart includes on the top programs, quite a number of turbocharger programs. Tim can talk to you.

Tim Manganello

Yes I got a number of turbocharger programs, dual clutch programs, control modules for transmission that may or may not be dual clutch. Some variable cam timing projects that over and above the one I talked about in the backlog with the Ford 3 liter, there is some other variable cam products in there. There is an all-wheel drive project in there, some timing drive projects in there. A good cross-section, but I will tell you David, a fair amount of turbocharging.

David Leiker - Robert Baird

Okay. Then, I guess one last item here, on the commercial vehicle. I think your business is about 15% commercial vehicle right now, is that number correct?

Tim Manganello

Yes.

David Leiker - Robert Baird

Is that North America or Europe?

Tim Manganello

Global.

David Leiker - Robert Baird

Global. What do you expect in your '09 comment in terms of that end market?

Tim Manganello

We're seeing weakening in that market, David. I don't have the exact numbers.

David Leiker - Robert Baird

Weakening may not be the right word.

Tim Manganello

Yes, okay. It's all relative, but certainly...

David Leiker - Robert Baird

In your comment about flat guidance, X currency, what do you have kind of built in there?

Tim Manganello

We have a decline in medium-duty, heavy-duty truck builds, I just don't know what the percentage is.

David Leiker - Robert Baird

There is some talks of 20%, 25% declines in Europe. Are you looking at that magnitude?

Tim Manganello

You know, again, David, I am sure we're looking at some strong declines, I don't know if it's 20%, 25%, but we are expecting and we are starting to see already in the third quarter and expecting to see in the fourth quarter further declines in that segment of the market.

David Leiker - Robert Baird

Okay, great. Thank you.

Robin Adams

Hey, Dave, I can help you a little bit more on that backlog. There's, on the turbocharger side, on the higher tech side of the turbocharger business is about 35% in the backlog, about 20% in the transmission side with a fair amount of that dual-clutch. On the timing drive or the variable cam timing decline, that's a little less than 15% range. Then there's the rest of the product lines are in that 5% range.

David Leiker - Robert Baird

Great, all right. Thank you very much.

Robin Adams

Sure.

Operator

Ladies and gentlemen, we've reached the end of the allotted time for questions and answers. At this time, I would like to turn the conference back over to Ms. Brevard for any closing remarks.

Mary Brevard

Thank you, and thank all of you for joining us. If you have any follow-up questions, please direct them to me. Sorry, we ran out of time today, we actually went over our time. So, thanks for the great questions. We'll conclude the call now. Thank you.

Operator

That does conclude the BorgWarner 2008 third quarter results and new business conference call. Thank you for joining. You may now disconnect.

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Source: BorgWarner Inc.Q3 2008 Earnings Call Transcript
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