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BorgWarner, Inc. (NYSE:BWA)

Q4 2008 Earnings Call

February 12, 2009 9:30 AM ET

Executives

Mary Brevard - Vice President of Investor Relations

Timothy M. Manganello - Chairman and Chief Executive Officer

Robin J. Adams - Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Analysts

Brian Johnson - Barclays Capital

Himanshu Patel - JP Morgan

Richard Kwas - Wachovia Capital Markets

Itay Michaeli - Citigroup

Brett Hoselton - KeyBanc

John Murphy - Merrill Lynch

Joseph Amaturo - Buckingham Research

Rod Lache - Deutsche Bank

David Leiker - Robert W. Baird & Co., Inc.

Operator

Good morning. My name is Theya and I'll be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2008 Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on a mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

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

Mary Brevard

Thank you very much. Welcome and we appreciate all of you joining us this morning. We issued copies of our release this morning before the market opened. It's also posted on our website at borgwarner.com, under Investor Information.

The conference call today will be replayed through February 19. The phone number is 800-642-1687. Our conference ID is 80716755. There is also a replay available on our website.

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.

I'll now turn to Tim Manganello, our Chairman and CEO, who will be providing comments on the quarter and the year. And then, Robin Adams will discuss operating results. Tim?

Timothy M. Manganello

Thank you, Mary and good day everyone. Before talking about the quarter, I want to look back on 2008.

The incredible disparity between the two halves of the year is truly amazing. During the first half of 2008, we enjoyed strong demand for our products with particular strength in our turbochargers and dual clutch transmission business leading to record sales and record earnings. However, with the mid-year escalation of gas prices, vehicle production in North America contracted.

In addition, the economic crisis and sharp downturn in the consumer confidence caused a dramatic reduction in global auto production in the second half of the year. So let's talk about our full year highlights.

Against this backdrop, 2008 sales were basically flat at $5.3 billion. This compares with worldwide auto production that was down 4%. Full year 2008 earnings per share for BorgWarner were $2.07 excluding non-recurring items. And our operating income margin was 6.3%, excluding these same one-time items.

For the fourth quarter, sales were 932 million, down 32% from last year's fourth quarter, and we were breakeven for operating profits, excluding one-time items in Q4. These items include major restructuring charges and a warranty issue on a transmission product sold in Europe for the period mid-2007 through May of 2008, and Robin will cover more of this in detail in the financials.

So, let's talk about our restructuring actions. In the face of these very challenging market conditions, BorgWarner has acted swiftly. Our focus has been, and continues to be, aimed at improving operational efficiency and sizing our business to manage through these very uncertain times.

The deep declines in North America and sudden cuts in European production schedules late in the year made it difficult to reduce our costs fast enough to match those rapidly changing conditions. However, we proactively and aggressively restructured our business in the second half of the year to position BorgWarner to weather a difficult 2009.

We have reduced our global employee workforce 24% from the mid-2008 levels. This is a reduction of about 4,400 people, including temporaries and contract employees. We shut down our North American and European operations for an extended holiday period from December 12 through January 12.

Four-day work weeks have been implemented in many of our European facilities, and we will consider further cuts, if needed, including three and two-day work weeks. Wage freezes from employees... or for employees have been instituted and officers and Board members have taken a 10% pay cut.

We are closing two Drivetrain facilities that produce four-wheel-drive systems, one in Muncie, Indiana in April of 2009 and another at Margam, Wales in 2010.

We are modifying our operations to respond to evolving customer and business needs, and this includes reducing inventory and cutting capital spending. While we improve our operational efficiency, we continue to spend wisely on research and development to enhance our future growth.

Let's talk about our 2008 accomplishments. Despite the turmoil, 2008 had many accomplishments for BorgWarner. These accomplishments continue to strengthen our position as a global powertrain technology leader.

We are associated with a record number of awards in 2008, about 20 total. And these include recognition for technology that helped our customers win environmental honors and industry innovations for our turbochargers, all-wheel-drive systems, dual clutch transmission technology, variable cam timing and ignition systems.

We were especially pleased that the clean diesel Jetta with our turbocharger, instant starting system and dual clutch transmission technology won a number of green awards in the United States and Europe.

During 2008, customers continued to adopt our solutions for improved fuel economy and had a number of major launches of our dual clutch transmission technology in Europe and in Asia with their OEMs.

And the pace continues. Over the next five years, the market for dual clutch transmissions is expected to grow four-fold from 1 million units today to about 4 million units in 2014.

And at Ford, Forded awarded us a major portion of their new six-cylinder EcoBoost gasoline direct injected engine program. We expect the GDI engine market to grow about 260% over the next five years from 3 million units worldwide to 11 million.

In October, we announced our net new business of $2.1 billion over the next three years. While 2009 new business launches may lag our projections, over the full three year period, the net new business is expected to continue to build.

Let's talk a little bit about China. We also made significant progress in China. One of the most important company developments in 2008 was the formation of a joint venture to produce dual clutch transmission modules with the consortium of top Chinese OEMs. This collaboration is significant because it positions our dual clutch technology as the preferred automatic transmission for China and its major automakers.

Our joint venture partner is a government coordinated company owned by 12 leading Chinese OEMs, including First Automotive, Shanghai Automotive, Dongfeng, Chery, Geely, and Great Wall.

Together, these vehicle manufacturers account for over 90% of the domestic passenger car volumes in China and will source dual-clutch transmission modules exclusively from our joint venture.

Now 80% of the automated transmission passenger cars from these 12 OEMs are expected to use our dual-clutch transmission technology. The JV will assemble various dual-clutch transmission modules with BorgWarner supplied components and this arrangement will help protect our intellectual property.

Production is scheduled to begin in 2011, and we continue... we hold a 66% majority ownership in the JV.

Production of dual-clutch transmissions with BorgWarner modules is expected to reach 1.7 million units of total volume in China. So, now we are done with China.

Let's talk a little bit about 2009. Looking at 2009, our visibility for the year remains very limited. We expect reduction in industry schedules of 25 to 30% in North America and 20 to 25% in Western Europe from full year 2008 levels.

In both North America and Europe, we expect first quarter volumes to be worse than those that in the fourth quarter of 2008.

For the full year even though we expect sales to decline from 2008 levels for BorgWarner, we expect our earnings and cash flow will both be positive in 2009. In addition, the underlying fundamentals of our business remain strong, and our financial structure is sound.

Now, let's talk a little bit about powertrain technology. Beyond the current crisis, powertrain continues to be the major area of emphasis within the auto industry. And BorgWarner will be a major beneficiary of this focus on powertrain. We believe that powertrains for the foreseeable future will include downsized advanced internal combustion engines either gas or diesel. There will be hybrid powertrains and electric vehicles. And we are developing new products for all types of powertrains, and we've intensified our work around hybrids and electric vehicles.

However, as many of you heard me say, I personally continue to believe that clean diesels are the most viable economic and technical solution to improve fuel economy. And as a founding member with Bosch, BorgWarner has launched the new U.S. coalition for advanced diesel cars.

The purpose of this coalition is to promote the energy efficiency and environmental benefits of clean diesel passenger cars in the United States. The coalition will urge legislatures and regulators to support technology neutral public policies that foster energy independence, reduced CO2 emissions and create jobs in diesel powertrain technology.

Now, I am also encouraged to see that the new U.S. administration was bringing fuel economy to the forefront of their discussions. And I welcome the vigorous debate among the legislators, the press and our customers on this issue.

So let me close by reminding you that we have a seasoned executive team here at BorgWarner that has managed through difficult market environments before all the way back to 1973. And the underlying fundamentals of our business, what I've always called the BorgWarner difference, remain strong.

While the market remains highly challenging, we continue to benefit from our technology leadership, customer and geographic diversity, robust balance sheet with ample liquidity. These factors combine to position BorgWarner far more favorably than our industry peers to ride out the economic storm.

With that, I'll now turn the meeting over to Robin for some financials.

Robin J. Adams

Thank you, Tim and good morning everyone.

Before I get into the financials, let's go over the industry environment a little bit more detail. For the full year, global vehicle production was down about 4%. In the U.S. production was down 19%. And when you look at the light truck portion of the market, it was actually down 38% year-over-year in the U.S.

When you look at production outside the U.S., it was down 1% for the year. In Europe, production was down 5%, and Asian production was actually up slightly about 2% during the year. For BorgWarner in the U.S. our sales were down 18%, pretty much in line with the U.S. production declines and 2% outside the U.S. excluding currency, if you look which is better than the global market.

Excluding currency, our sales were up 2% in Europe, again, versus European production which was down 5 and our sales were up 5% in Asia. As Tim mentioned, the world and the light vehicle production market changed dramatically in the fourth quarter. We saw vehicle production fall in every region of the world with the exception of China.

Vehicle production U.S. was down 28% in the quarter and our sales were down 27% in the quarter in the U.S. Production outside of the U.S. was down 17% and our sales outside the U.S. excluding currency were down 22%.

European industry production in the quarter was down 25%, and Tim and I remember discussion back in, I think it was September of the Paris Auto Show about the fourth quarter. And I don't think anyone was expecting that type of performance in Europe. Nonetheless, production was down 25%. Our sales were down 18% in the quarter in Europe.

As we look at the full year in consolidated... the fourth quarter and full year consolidated results from an income statement perspective, our sales in the quarter were $931 million down 32% from the fourth quarter of prior year as Tim said.

The impact of foreign currency in the fourth quarter, primarily the Euro actually had a negative impact on us and that's the first time we've seen that in almost eight quarters and actually decreased sales by 114 million.

If you exclude currency, our sales declined in the quarter by about 24%. For the full year, the sales were $5.3 billion, down 1% from last year, basically flat. The impact of foreign currencies, however, primarily the Euro, added $190 million to sales. So, excluding currency, our sales were down about 5%.

As we look at the makeup of our sales, our sales in the U.S. represented 28% of our total in 2008 versus 34% in 2007.

So, a dramatic shift continues in this company with respect to geography and customer.

Put it another way our sales outside the U.S. represented 72% of our total.

Sales to GM and Chrysler are each less than 4% of our sales and combined are little bit more than 7%.

Looking at earnings, we provide a table in the press release which we issued this morning to identify our U.S. GAAP reported earnings and identify the non-recurring items in the quarter and the year that we believe should be understood and considered in reconciling our financial performance to prior periods to current period expectations and for assessing our future expectations.

We also intend to file our 10-K by the end of the day. And so for those of you who really want to dig into the details, you can get through that later tonight or tomorrow.

For 2008 fourth quarter, U.S. GAAP earnings were a loss of $0.70 a share. For comparison with other quarters, fourth quarter earnings per share were breakeven, excluding the nonrecurring items. And these nonrecurring items on a per share basis included a 10 million pre-tax goodwill impairment charge related to the investments in our BERU subsidiary which is about $0.09 a share, a pretax restructuring charge of 102.5 million or $0.56 share after-tax, a 23.5 million pretax warranty related charge which was caused by a supplier and associated with the transmission product sold in Europe.

And as Tim mentioned that was limited to production from mid 2007 through May of 2008. That impact was on after tax basis of about $0.14 a share. A $0.07 a share positive impact, the effective full year tax rate are turned out to be 23% for the year and for the first nine months we had used 25%.

So, the first nine months of the year actually were $0.07 a share better once you adjust for the full year 23% tax rate. And we had a $2 million favorable tax account adjustment in the fourth quarter of approximately $0.02 a share.

As we look at the pre-tax charges for restructuring and goodwill, 125 million pre-tax charges which again was about $0.65 a share combined. Approximately, 76 million of that was non-cash.

For the year US GAAP earnings were a loss of 35.6 million or $0.31 a share. For comparison with other years, full year 2008 earnings were $2.07 a share excluding the non-recurring items, or non-recurring items totaled up to $2.31.

Approximately 230 million of the 284 million pre-tax charges for restructuring and goodwill again were non-cash.

Let me quickly go over the two of those most significant non-recurring items. The first is a goodwill adjustment. As at the end of the year, we recorded an impairment charge... was charged in the third quarter and fourth quarter combined $157 million or $1.35 a share to adjust BERU's goodwill to its estimated fair value.

The pre-tax and after-tax amounts for this charge are the same as there was no tax benefit to this goodwill charge. The carrying value of our investment in BERU has been negatively impacted by the rapidly declining European economic conditions.

And with equity valuations around the globe down significantly in 2008, many other companies are faced with the same investment impairment issues related to recent acquisitions.

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

The other major portion is the restructuring charge. And during our last call for the third quarter we discussed our restructuring actions to that point in time. And in December we announced that more restructuring actions were being implemented in the fourth quarter. And in line with that announcement we have taken additional actions throughout the world to improve our cost structure and operational effectiveness in response to the further declines in global economic activity.

As a result of the combined third and fourth quarter restructuring actions, we have reduced, as Tim said, our total workforce by approximately 4,400 people. By region, that's 2400 people in North America or about 34% of the workforce. Europe, approximately 1600 people or 18% of the workforce. And our Asian workforce reduced to about 400 people or 17%. And remember in addition to the headcount reductions, as Tim mentioned as well, what we have instituted four day work weeks in most of our European facilities.

The restructuring expense recognized for employee termination benefits for those 4400 people is $54.6 million, of which 10.3 million was paid out in the third and fourth quarters of 2008. The remaining liability of 44 million will be paid out over time and completed by the middle of 2010.

In addition to employee termination costs, we recorded $73 million of asset impairment charges related to North American and European net restructuring. So the combined restructuring expenses of 127.5 million or $0.72 a share broken up by segment would be Engine 85.3 million, Drivetrain 40.9 million and Corporate of about 1.3 million.

As we look at net income in the quarter we reported a loss of 81.4 million or $0.70 per share compared with earnings of 71.2 million or $0.60 a share in the fourth quarter 2007.

Excluding the non-recurring items, operating income was 4.4 million or 50 basis points or half a percent of sales in the fourth quarter 2008 versus 126 million or 9.2% of sales in the fourth quarter 2007. The decline in operating income relative to sales, or in other words, a decremental margin was about 28% in the quarter higher than our targeted 20 to 25% range.

The impact of foreign currencies in fourth quarter 2008 primarily the Euro, increased the net loss by $9.6 million or $0.08 a share versus last year.

For the year, the net loss was 35.6 million or $0.31 per diluted share compared with 2007 net income of 288.5 million or 245 a diluted share. The impact of foreign currencies for the full year 2008 actually added about 13 million in net income.

Gross profit, as a percent of sales, in 2008 was 15.9, down from 17.8 in 2007, again primarily a result of the declines in the global automotive market in the third and fourth quarters of 2008.

Operating income margin for the year was 6.3%, excluding the non-recurring items, which is below our historical 8.5 to 9% range and also below the 8.2% level that we enjoyed in the first six months in 2008. So, as Tim said, it was really a year of two separate halves.

Selling, general and administrative expenses, as a percent of sales were 10.3% in 2008 compared with 10% in 2007. And the increase from a dollar perspective is primarily related to additional amortization recognition for acquiring the remaining 18% of BERU.

R&D was 206 million or 3.9% of sales in 2008 compared to 211 million or 4% in 2007. While net spending was down slightly, gross spending actually increased by 27 million but was offset by a $32 million increase in customer reimbursements.

Raw material costs, net of recoveries, increased 50 million for the quarter, pretty much in line with our expectations of 35 million for the year. And if you remember, raw material cost increases were about 5 million for the first six months of the year. We expected 30 in the last six months, and unfortunately we saw that $30 million increase. It was primarily related to this deal.

Below the operating income line for the quarter and the year, equity in affiliate earnings were down primarily due to fourth quarter Japanese Drivetrain customer's scheduled reductions, which we expect to, continue into 2009.

Interest expense was up and minority interest net of tax was down, pretty much reflecting our domination agreement with BERU. The effective tax rate for the quarter and the year was 23% on a run rate basis or after excluding the non-recurring items.

As we move on to the operating segment performance, on the Engine Group side, fourth quarter sales were $680 million, earnings before interest and income taxes of that segment level was 36.5. Sales outside of the U.S. were down 22%, excluding the impact of foreign currencies while sales in the U.S. were down 19%.

For the full year, sales in the Engine Group were up slightly to $3.861 billion with segment earnings before interest and income taxes of 395 million. For the year, sales in the Engine Group outside of the U.S. were up 2%, excluding the impact of currencies, while sales in the U.S. were down 12.

In the first half of the year, the group continued to benefit from European and Asian automaker demand for turbochargers. But second half production declines reduced sales of the company's engine products in almost every region of the world.

For the Drivetrain Group, fourth quarter sales were 255 million with the segment loss before interest and income taxes of $42.1 million. As we said earlier, segment earnings in the quarter were negatively impacted by that $23.5 million supplier-related transmission component warranty charge.

Sales outside of the U.S. were down 22% in the quarter, excluding the impact of foreign currencies, while sales in the U.S. were down 37% in the Drivetrain Group.

As we look at the full year, sales were $1.4 billion in the Drivetrain Group for the year with a segment loss before interest and income taxes of 18.6 million, excluding again that warranty impact. Sales outside of the U.S. were up 3%, excluding the impact of foreign currencies, while sales in the U.S. in the Drivetrain Group were down 25% for the year.

Dramatically reduced global production volumes significantly depressed second half demand for all our Drivetrain products.

Now let's talk about the balance sheet and cash flow. In the quarter, net cash provided by operating activities was $137 million. Capital spending was 104 million, resulting in 33 million of operating cash flow generated in the quarter.

We purchased an additional $88 million of BERU shares in the quarter that was tendered under the domination agreement, driving debt up approximately $60 million for the quarter.

For the year, net cash provided by operating activities was 400 million compared with 600 million in 2007. The decrease in 2008 versus 2007 was primarily due to working capital management or like thereof (ph).

CapEx, including tooling was $370 million or 7% of sales for the year versus 294 in 2007. After deducting the 370 million of CapEx for the year 2008 from the 400 million of net cash provided by operating activities, operating cash flow was about 31 million for the year.

Balance sheet debt increased 144 million at the end of 2008 compared with the end of 2007, primarily related to $134 million for the purchase of additional BERU shares as a result of the domination agreement.

And consequently, we now own 96% of BERU shares and have started the German legal process to acquire the remaining 4% outstanding and attain 100% ownership of BERU to what is this known in Germany as squeeze out.

The company's capital structure continues to remain strong. The ratio of balance sheet debt net of cash to capital at the end of the year was 25.2%. The company had ample liquidity with $103 million of cash on hand at the end of the year and no outstanding borrowings under our $600 million revolving credit facility.

Now let's talk a little bit about liquidity. We have a bond maturing on February 17 or Tuesday of next week with the principal amount due of $137 million. We have already deposited with the bond trustee the cash required to pay the bondholders on Tuesday. So in effect, that obligation has already been met.

Funds came from available cash on our balance sheet, which I said was $100 million at the end of the year, dividend payments from our NSK-Warner joint venture, and cash from our foreign operations. Note that we did not need to tap into our existing $600 million revolving credit facility to fund this bond maturity and that credit facility continues to remain unutilized.

The credit facility itself, which is scheduled to mature at the end of July, is subject to the usual terms and conditions applied by banks to investment grade company. But the agreement has two financial covenants, our net worth test and a debt to EBITDA test. We continue to be in compliance with these covenants and find it difficult frankly to come up with the scenario that would put us in jeopardy of not meeting either financial test before the July maturity. We currently intend to either extend or replace this facility at or prior to its maturity date.

From a credit quality perspective, the company was downgraded two notches at the end of the year by both rating agencies along with the rest of the auto sector companies. After the recent downgrades, we are currently still carrying investment grade ratings of BBB from S&P and Baa3 from Moody's although Moody's does have us under review.

As I stated earlier, our net debt to capital ratio was 25% at year end and debt to EBITDA was approximately 1.2 times which are solid investment grade statistics. And we currently expect to maintain investment grade credit statistics throughout the year 2009 and beyond.

Let's talk a little bit about 2009. Tim mentioned it already. Our visibility into 2009 is currently a bit cloudy as we wait for customer schedules to stabilize and give us a sense of industry run rate production for the rest of the year. While we do expect sales to decline in 2009 from 2008 levels, it is due to significantly lower global light vehicle production. But we also anticipate, as Time mentioned, that both earnings and cash flow will be positive for the year based on an assumption of North American vehicle builds of approximately 9.3 million units versus 12.7 last year and 16.6 million units for total Europe versus 21.2 last year.

Our currency assumption is currently $1.25 to the Euro. I should point out that many of you have different assumptions for 2009. And they are all over the place but those kind of where we sit right now.

The restructuring activity recently completed in addition to the four and even three-day work weeks at many of our facilities positions us favorably to achieve our targeted 20 to 25% decremental margins for 2009.

In addition, raw material costs should be favorably impacted in 2009 versus 2008, primarily by approximately $25 million of lower nickel prices and nickel related hedging activity.

We currently estimate the impact of our net new business backlog for the year 2009 to be at about 80% of the 600 million we had discussed last October. R&D spending is still targeted to be at least 4% of sales and capital spending is currently estimated to be close to the $200 million level, or quite a bit below... over 60% below the 370 million we invested in 2008.

We also see the need to significantly reduce our inventory levels in line with current business activity, and there is a major initiative going on right now to achieve that.

Turns, for instance, declined last year to 9.8 times at year end, versus 10.5 from the prior year end. And while our sales were down 32% from prior year end, our inventory levels were essentially flat.

For the first quarter, current indications are sales will be 7 to 10% below fourth quarter levels, and second quarter sales could be as 10% higher than fourth quarter 2009 levels. And this is primarily as a result of more production days in the second quarter than the fourth quarter of 2008 and the first quarter of 2009. However, as we continue to plan, our customer schedules do continue to change.

Let me finish up by reiterating Tim's comments. We have taken and continue to take actions to mitigate the downside of the current global economic situation while continuing to position ourselves for future additional growth.

We have a growing backlog of net new business. We continue to have a strong investment grade balance sheet. We have retired our only outstanding debt maturing this year, without having to draw down on our revolver.

Our next public debt maturity isn't until the year 2016 or 7 years into the future and that may be the next CFO's worry. 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 and it will, BorgWarner will once again be at the forefront of the growth curve for this industry.

With that, I'll turn the call back over to Mary. Mary?

Mary Brevard

Thank you very much Robin. I will have the call coordinator Theya to give you the procedures for the Q&A session. Theya?

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Brian Johnson with Barclays Capital.

Brian Johnson - Barclays Capital

Good afternoon or good morning.

Timothy Manganello

Hi Brian. All right.

Brian Johnson - Barclays Capital

As we look forward to 1Q, we saw 28% decremental margins in 4Q. When do you get margins back to the 20 to 25% decremental that you are looking for in '09? And when do that flexible stat... and what gets you there, is it flexible staffing, I mean how do we can come around that?

Robin Adams

I’ll start with that Brian. We continually target the next quarter to get to 20-25%. But as you know we have been chasing volumes here for the last couple of quarters. If we get some stability here, which we haven’t seen, the restructuring actions we’ve taken and the four-day work weeks in our European operations should get us close to that 20 to 25% range.

Brian Johnson - Barclays Capital

And second, kind of relate to that. If we are stuck at 12 to 13 million which, gradually (ph) and say Europe that's more like 18 million instead of 20 million production. Could you get back to your old level of profitability in each business unit? And if so, what's the timeframe for getting that?

Timothy Manganello

I don't know whether we will get exactly up to that level. But I think we'll have a really good shot at it. When we have really leaned up this company, and like I said, Brian, we are going to be staffed right now roughly by starting with the beginning of February, we'll staff close to 9.3 production build in North America and about 16.6 in total Europe for productions schedules.

And if we get those volumes, we should be in pretty good shape in terms of having pretty good operating margins. We are going to be really tight on bringing anybody back, I'll tell you that. It's hard to get them out, once I get them out, it's going to be very difficult in my mind for me to allow them to come back. But we'll bring back what we'd need to make those, to meet those kind of volumes. I would hope that we get those volumes soon. You're going to see those operating margins at historical 8.5 to 9% operating margins reasonably small.

Brian Johnson - Barclays Capital

Planning assumptions which you are making more conservative in you expenses, is that your planning assumption? Does that mean you'll shoot for breakeven at that level? Or does it mean you should be making a profit or loss in that one?

Robin Adams

Brian, as we've said based on those assumptions, we expect to generate positive earnings and positive cash flow in 2009 at those levels.

Timothy Manganello

I'll be happy with $1 positive cash flow at those levels.

Brian Johnson - Barclays Capital

One longer term question, the 1.7 or 1.4 million you had for Chinese DCT. Was that included in your investor presentation slides in your projection of the DCT market... is that incremental to that?

Timothy Manganello

Almost none of it was included. If there was any included it was just a tip... a touch of it, at the end of the third year or something like that. But there is really almost none of it. And that's a longer term projection because that's the full market number, not a ramp-up number.

Mary Brevard

And Brian, I think if you are talking about the charts that's in there, it's 2009 to 2014 that has the full market for transmission. So there is some of it in there but not in the backlog.

Timothy Manganello

Yeah I was talking about the backlog. I thought when you're talking about the chart, I was talking about the backlog, Brian.

Brian Johnson - Barclays Capital

So, it wasn't what's in the backlog, some of it might have been in the market projection?

Mary Brevard

Yes.

Timothy Manganello

Right.

Brian Johnson - Barclays Capital

So the bottom line gives us more comfort in the overall market projection and then we'll see where it takes the backlog when it rolls back.

Timothy Manganello

Yeah I'm glad you brought that question up because I actually think that the market has somewhat underestimated the importance of that joint venture project in China. This is a big deal by the Chinese OEM standards. And it's actually a big deal by in terms of the opportunity for BorgWarner. We actually have positioned BorgWarner as the major supplier of... almost the preferred and major transmission product for a whole region or the whole market, like China.

Brian Johnson - Barclays Capital

When do we get a sense, when do we expect to see those go into the backlog? Is that a tough part before 2011 where you get projections...

Timothy Manganello

I think that someone starts to ramp up in 2011, so you'll start to see it in 2012, 13 and 14. But I think we have a touch... we started doing a little bit of ramp up towards the end of 2011.

Brian Johnson - Barclays Capital

Okay. And when do you know if the programs are actually in place?

Timothy Manganello

Well.

Brian Johnson - Barclays Capital

DCT in various programs?

Timothy Manganello

We haven't announced any programs. But there are definitely programs in China that will be the purchaser of these products come out of this joint venture. This is a module joint venture for clutch modules and control modules which means in order for the 12 OEMs to put into money to support this joint venture, they plan to have one transmission manufacturing. So what we haven't announced is the transmission programs that this product will sell too.

Brian Johnson - Barclays Capital

And roughly what timeframe could we expect those announcements?

Timothy Manganello

I can't tell you that. And not that I wouldn't like to, it's just that we're still in negotiations.

Brian Johnson - Barclays Capital

Okay, thanks.

Robin Adams

Thanks Brian.

Operator

The next question is from Himanshu Patel with JP Morgan.

Himanshu Patel - JP Morgan

Hi, good morning guys.

Robin Adams

Good morning, Himanshu.

Himanshu Patel - JP Morgan

I just wanted to go back to the question on decremental margins. The 20 to 25% number that you threw out there, Robin, should we think of that as sort of an average for '09 but maybe the first half could be higher and the second half sort to gets to below that level? Or do you think you can actually get there as early as Q1?

Robin Adams

No, that's a great point. We are still... although we announced 4400 people... some of those people were not out the door by December 31st. We took the charge for them and now work their way out of the system within the next few months. It will be more of an average for the year. And a way to help you think about that is 4400 people at an average of $50,000 of cost is about $220 million.

And again depending on your revenue assumption decline that would cover about $900 million decline in sales 2009 versus 2008. And then you need to factor in the four-day work week process versus five-day work week in our European operations for the rest of the sales. And maybe that'll help you visualize how you can get the savings on the labor side, you need to get to maintain 20 to 25% decremental margin.

As we said before, about 52% of a sales dollar is purchase component, raw material and we expect that when you don't have a sale to not have to make the purchase, not incur the costs and the wages and benefits of about 25%. So again if you look at on average 50,000 for the 4400 people, that's $220 million in savings, which would support about $900 million decline in sales to maintain that decremental margin and then you have to look at our European operations which is currently about 60% of our sales and look at that workforce and look at about a 20% decline in costs year-over-year because of the four-day work week versus the five and align that up with the overall sales decline on the company. But that should help you kind of get in line with the efforts we've made and the expectations we have to... have those impact on our financials.

Himanshu Patel - JP Morgan

And then just on the Europe four-day work week, I understand the working hours goes down by 20% but would the actual leverage savings be 20% because you'd still retain some of the benefit costs, wouldn't you?

Timothy Manganello

Well, the government supports a lot, most of that 20% that the employees that we don't have to pay the government back of that, with the government subsidies. We have to pick up a little bit of the benefits cost but it varies from country to country. But we pick up a small percentage of this compared to what they pick up. So, we may be picking up 15% of it, I don't know, within that range plus or minus, while they are picking up the other 85% of that gap.

Robin Adams

The other thing, Himanshu, is in many of our European operations, the employees first worked off accrued over time. They worked, didn't get paid for it, sat on the balance sheet is a liability. And some of those early work week reductions were actually from an accounting perspective paid for by liabilities on the balance sheet.

Himanshu Patel - JP Morgan

Okay and then the CapEx decline, could you just repeat that again what was the guidance for '09?

Robin Adams

We are looking at capital spending close to $200 million.

Himanshu Patel - JP Morgan

And the big drivers of the decline there?

Robin Adams

Significant decline in demand for product in the current year and the ability to delay some capacities, we have obviously more excess capacity than we intended to have in 2009. Therefore, we can delay some of the capital spending for these programs. Some examples Tim...

Timothy Manganello

Example, there are some capacity in North America and Europe that we're using now to fulfill schedules in China, whereas originally we had some plan to put the capacity in China. We are going to delay the capacity in China, because we can now fill orders out of Europe and North America. And there is a lot of little examples like that all over the company where we are utilizing excess capacity.

We were going to put transfer cases onto Mexico when we shut down the Muncie operation. We've now put a small annex onto our transfer case plant in Seneca. We basically have not... we have stopped as much of the equipment as we could for Mexico and slowdown in CapEx and the building is now sitting empty. Although the building's built it's now sitting empty because we're using... we shifted all our production into Seneca, and we are just going to have one transfer case plant.

Himanshu Patel - JP Morgan

Okay and then two last questions, could you give us some commentary on just what's happening with incoming schedules you're getting from European OEMs? Any sign of relative stability I guess sequentially or does it still feel like it's a falling knife?

Timothy Manganello

It's a falling knife. I think the Europeans have been in the Nile and I don't mean the river. They've been in the Nile in terms of schedules. They've been too optimistic. Now they basically are cutting schedules. We're seeing one week... one and two week shutdowns in February, another one and two week shutdowns in March and they basically... Volkswagen is a good example, I think.

They said that the European market was going to be down 20%. They said this about a month ago. European market is going to be down about 20% but they're only going to be down about 10%. Well in January, Volkswagen came down minus 20%. So they're now correcting schedules. We've seen a lot of that in Europe and the schedules aren't as stable in Europe as we need them to be in order to run a smooth business.

Himanshu Patel - JP Morgan

Okay, and then last housekeeping question for you, Robin. On the revolver, how do you think of that as you go into extended or replace it... amendment fees and repricing. I think that would be normal in this environment. But would you feel, what... is it unreasonable to think that the actual commitment size could be shrunk as well?

Robin Adams

Debt facility was $350 million for like 10 years. And the last time we extended up we upped it to 600. And frankly we've never used any of it. And at the pricing we're seeing for commitment fees you got to think twice about whether you want to pay a commitment fee for $250 million of debt that you have never used and probably won't continue to use. So that will be part of the whole process. You are right in this market, the costs for these facilities are quite a bit more than they were a few years ago. So, there will be some trade-offs there for costs relative to size.

And the other thing that we should point out, some of the European banks, if you look at our bank group we have a pretty international group that supports us. Because of our international nature from a business perspective, some of the European banks that are getting government funding, may have some issues with respect to providing loans in the U.S. market. But I'm more than happy to continue to provide the type of commitment to companies like ourselves in Europe.

Timothy Manganello

It's okay for us with our growth that's in Europe and Asia.

Robin Adams

Yeah. So we may end up with a couple of different pieces here rather than what we have today.

Himanshu Patel - JP Morgan

Okay, great. Thank you.

Operator

The next question is from Rich Kwas with Wachovia.

Richard Kwas - Wachovia Capital Markets

Hi, good morning.

Timothy Manganello

Hi Rich.

Richard Kwas - Wachovia Capital Markets

So it seems like on the restructuring front, you've done for now Robin, that you've got a fair amount of your stats at current levels were 9.3 and 16.6 of total Europe. What kind of level would you... what kind of stair step down would you need to see before you ask to commence another program?

Robin Adams

Rich, we're managing this business almost weekly with respect to adjusting our cost structure. And so what you'll see right now, what we expect to see right now is a little bit of tinkering. I think that at the levels that Tim has laid out for us is, to use as an assumption for manning our operations and planning our business for 2009. We feel comfortable that we're not off 20%. To the extent there... again any need to adjust the cost structure, we think it'll be more week-to-week plus or minus adjustments rather than a requirement so for a big reduction in workforce here.

Timothy Manganello

I'll give you a couple of thoughts. Of the 4400 people approximately that we've laid off about 55% of that was in North America. So we're pretty good shape in terms of being sized right for North America. And actually schedules I think are... the U.S. OEMs have actually taken their schedules down on a point where they're starting... I think they're going to be a little bit more stable than we've seen for last two months. So, that should help and we should be sized right.

In Europe, I can't remember, I think we took somewhere like... it was about 35% as a reduction in Europe. We have some plants in Europe that are on the verge of going to three day... from a four-day work week to three-day work week. There will be some hit and miss. And right now every plant in Europe is on a four-day work week. But we have a couple of BERU plants that are on three-day work weeks. We have some other plants that are tipping into a three day zone right now. But the good news is, Rich, we can react very quickly. We actually have the ability to go down to one-day work week or zero work week in lot of our German plants.

Richard Kwas - Wachovia Capital Markets

Okay, that's really helpful. And just for housekeeping question, 60.6 of total European production, what is the Western European assumption?

Timothy Manganello

I'll give you that. It's 11.7.

Richard Kwas - Wachovia Capital Markets

Okay. So that's pretty much unchanged from when you spoke into trade (ph) months ago.

Timothy Manganello

Yeah. What I think has come down as... everybody was higher than that. Everybody seems to be coming down closer to our number. I wish our number was going up instead of their number coming down.

Richard Kwas - Wachovia Capital Markets

Okay. On the warranty issue, have you replaced the suppliers that... should we expect anything further on that front?

Timothy Manganello

I hope not. I don't know of any warranty issues as we speak right now. There was a supplier that caused us a problem, their part ended up in sub... we had to take their parts and build them into our sub-assemblies. We shifted in to our customer. The customer is something that what you don't find until you get miles on the vehicle. We were able to capture the time period, and now we're in negotiations with that supplier to us.

Richard Kwas - Wachovia Capital Markets

Okay. And then on the '09 contribution from the backlog. Robin, I think you mentioned 600 million, originally it should be 20% lighter. How do we think about 10 and 11? I know that you're not going to update that until later this year. But is it reasonable to assume that 10 and 11 contribution would come down that much or is that just too aggressive that you expect volumes to kind of gravitate backup?

Robin Adams

Our expectation, Rich, is by the time we get to 2011, most of these programs will get much closer to what our expectation was for a field perspective. I mean when we put that backlog together in the fall, we already had kind of an expectation of a tough environment for the next few years. Obviously not as tough as what we have here in 2009 but our expectation is looking at these programs that... again this is a three-year ramp that by the time you get to 2011, we'd still be pretty close to that gross number.

Richard Kwas - Wachovia Capital Markets

Okay, that's helpful.

Timothy Manganello

Let me add to something there, Rich. We actually have, I'm looking at kind of what have... the business that was awarded to us in the fourth quarter. And it was a pretty high rate of award. So I think some of the stuff may backfill. Some of the losses you've seen may backfill, some of the volume losses may back. Some of the new awards may backfill some of that, and when you get out in the outer years.

Richard Kwas - Wachovia Capital Markets

Okay, great. Thank you.

Robin Adams

Thanks Rich.

Operator

The next question is from Itay Michaeli with Citi.

Itay Michaeli - Citigroup

Thank you. Good morning. Robin, wanted to hear a couple of points on your '09 cash flow assumption. I know you mentioned CapEx of around 200 million. Can you share what you're thinking about working capital? Does that become more of a tailwind for you as you clear some inventory and also anything you can share on cash restructuring and maybe the pension as well?

Robin Adams

Yeah, we expect significant improvement in working capital in 2009. As I said earlier, sales were down year-over-year substantially, and our inventory is relatively flat. So we do have some work to do on the inventory side. As I said capital spending will be closer to 200 this year, not 200 but closer to 200. So capital spending should be a significant reduction. We should see some improvement in working capital versus the outlay we had in 2008. We do have some pension funding outside the U.S. which is minimal and pretty much consistent with the funding levels we've had last year. And I forget what your other question was.

Itay Michaeli - Citigroup

On the cash restructuring?

Robin Adams

Cash restructuring, there's about 44 million left at year-end 2008 that needs to be passed out or paid out. And as I said that will be paid out kind of fairly, evenly over a period of time in 2009 with a piece coming due in mid 2010.

Itay Michaeli - Citigroup

Yeah, that's helpful. And then just on the bond maturity, Robin, I think you mentioned a dividend from NSK. Can you quantify that? I think last year was maybe 16 million. So was that... was it quite a bit higher than this quarter?

Robin Adams

It was a nice healthy dividend.

Itay Michaeli - Citigroup

Okay. And I think you have mentioned cash from foreign subsidiaries. Is that, was that cash extract or was that borrowing in foreign subsidiaries that you brought back to use to underpin it?

Robin Adams

Some of that was just cash extracted. As we said, we had $100 million of cash on the balance sheet at year end.

Itay Michaeli - Citigroup

Right.

Robin Adams

Some of that was overseas, but most of them was overseas. So it was a matter of bringing that cash back home plus some cash generated by some of our foreign operations and a little bit of foreign borrowings.

Itay Michaeli - Citigroup

So would it be safe to assume that between now and the July maturity of the revolver you do not expect to be... I mean to tap significantly into that?

Robin Adams

It's hard to forecast liquidity day by day. But we've not used the facility. And it's there to be used obviously. It's hard to say if we'll ever tap into it. My crystal ball is not that good on a daily basis. There are so many potential events here that could swing cash on a daily basis. But you have a customer that pays late at the end of the month or something but we don't anticipate, to the extent it's used, it's an overnight use. And we don't expect to draw on that meaningfully.

Timothy Manganello

If somebody can guarantee, none of customers or suppliers are going to go into bankruptcy. And all orders will stay stable, we could probably make those... have those kind of discussions. But I don't think anybody can guarantee... people are going to stay out of bankruptcy as we look forward in the next two to three months.

Itay Michaeli - Citigroup

Absolutely. And just a final one for you, Tim. Could you weigh in on the whole EPA situation, as I guess California's momentum to get the waiver is increasing, how do you think that ultimate outcome affects your business longer term, kind of what are you hoping is going to happen here with some of your particularly European customers, how they're weighing in when you talk to them about the situation?

Timothy Manganello

Well I think the situation can best be described... and I think it's a good question Itay. It can best be described as everything... all indications are that we're going to have tighter fuel economy standards and tighter emission standards. And I won't say anything about emissions but I'll just say in terms... we all want clean air, so I think that's a good thing. We all want better fuel economy. Anything that drives an improvement in clean air or drives an increase in fuel economy requirements is a big plus for BorgWarner. So if everybody deals (ph) on the California standards, and that goes to all 50 states, it's probably going to be beneficial to BorgWarner. We would just assume not have... as an industry every state has the ability to set their own ambitions, regulations or fuel economy regulations.

Itay Michaeli - Citigroup

Great. Thank you so much.

Operator

The next question is from Chris Ceraso with Credit Suisse.

Unidentified Analyst

Hi, this is Joe Dorman (ph) for Chris.

Mary Brevard

Hi Joe.

Timothy Manganello

Hi Joe.

Robin Adams

Hi Joe.

Unidentified Analyst

Hi. So looking at the EBIT breakout with the segments in the corporate buckets, the corporate bucket has been lower for a couple of quarters now. Can you detail some of the savings that you are having in that segment and what do you expect that corporate line to look like for 2009?

Robin Adams

That's a painful discussion for me because most of that so called savings has incentive compensations. The vast majority of employees of BorgWarner will not receive in 2008.

Timothy Manganello

Let's just say this. We are not receiving any annual bonus in 2008. And there is only one business in the whole company that actually is going to get a bonus so.

Unidentified Analyst

Okay. So, what are you thinking about that for 2009? Do you expect it to be more consistent with the run rate that you saw coming out of 2008?

Robin Adams

Well...

Timothy Manganello

We expect at least... on the bonus portion of it we do expect they have a bonus. For no other reason, we are going to... people, really we're going to have to make 2009 a year that's worthwhile.

Robin Adams

We'll provide you the names and addresses of our contact numbers and you could...

Timothy Manganello

Just allowing for us (ph).

Unidentified Analyst

All right.

Timothy Manganello

This is very truthful... it is a very interesting discussion here on the last couple of days.

Unidentified Analyst

Okay, so, on the backlog, I am thinking about the 600 million taking down about 20%, is that... I know that's largely driven by declining industry assumptions, volume assumptions globally. But is there any component of that, that's due to delayed launches or launches that have been canceled because of CapEx cuts at the OEs?

Robin Adams

No, they're basically the same. If we look at our top programs, those are about the top 12 programs, they are still already in production or going to be in production on schedule, just a lower volume.

Unidentified Analyst

Clearly volume. And then when we think about the effect of this lower volume, what kind of contribution margin can we think about that, Robin for the operating lines?

Robin Adams

Well as we look at new business whether it's 600 million or 480 million that's sizable and we would expect to generate at least 15% incremental margin on that business. Given the capacity that we talked about earlier that we haven't placed and will not have to put in place this year, that could get closer to the $0.20 on the dollar range.

Unidentified Analyst

All right. Thanks guys.

Timothy Manganello

Thank you.

Operator

The next question is from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc

Good morning.

Timothy Manganello

Hi Brett.

Brett Hoselton - KeyBanc

How are you guys doing?

Timothy Manganello

Doing great.

Brett Hoselton - KeyBanc

Just looking at your notes payables in the current portion of your long term debt, I assume the current portion is the bonds 137 million, the notes payable of 184 million. Can you just... what makes or what does that comprise?

Robin Adams

Those are primarily bank facilities in different geographies around the world. The way we fund our operations and we have talked about this before to hedge our currency risk as we invest in new geographies rather than put in equity, we tend to raise local, local debt. And in most of the markets the predominant vehicle is bank facilities.

Brett Hoselton - KeyBanc

Okay. And given the current credit markets, I mean do you see any challenges there in terms of renewing those facilities?

Robin Adams

No. As I said earlier I think that many of the institutions that are home based in a different geographies are looking to do more business in their home geography as opposed to the U.S. banks who... now they don't want to do business internationally but they don't want to do business in the U.S. either.

Timothy Manganello

And they like the auto sector.

Brett Hoselton - KeyBanc

Yeah, the Chinese DCT announced 8 million cars being produced in China give or take and 90% of them apparently are, these companies that you're doing business with here. My question is, can you give us a sense of what you think or anticipate the breakdown between some of the different transmission styles might be, what portion of it specifically might be DCT's of that 8 million?

Timothy Manganello

I think I said that the pass car market for automatic transmissions will probably have about 80% market share of the automatic transmission market or DCTs will have about 80% of the market share. Right now that we tie pretty close to that percentage. There will be some CVTs over there. There's going to be some automated manuals. Automated manuals I think when people see the difference between the dual clutch and automated manual does not gravitate to the dual clutch.

So you'll see some CVTs, you'll see some traditional automatics and you'll probably see some AMTs. But I can tell you right now the Chinese government and their technical experts surveyed the world for leading technology for automatic transmissions. They basically concluded the DCT was the transmission of the future and that's why they are investing their money in DCT.

Brett Hoselton - KeyBanc

And I apologize. I guess I don't necessarily fully understand. So you're saying that you think 80% of the cars produced in China are going to have automatic transmissions and the majority of those are going to be DCTs today. Am I saying correctly or...

Timothy Manganello

80% of the automatic transmission market will be DCT. And we think that's about 1.7 million units. The breakdown of... in China, how much each technology will be used or what percentage of total transmission market, you're not talking about the total transmission market, how much of it's manual, how much of it's DCT, how much of it's I don't have that for the future.

Only I'll tell you right now is today it's predominantly manual transmissions and manual transmission technology is easily convertible to dual clutch transmission in terms of utilizing existing CapEx.

Brett Hoselton - KeyBanc

And when you think about the 1.7 million of DCTs, is that the manual transmissions that are being converted to the DCTs which I think are more expensive? I am taking around the $400 in content per vehicle or is it more of the fully... the new DCT that you just recently designed?

Timothy Manganello

Well there's going to be some of the traditional DCTs which have a fair amount of BorgWarner content. And I won't reference your number, I'll just say it's a large BorgWarner content. And then some of it will be the new technology for DCT what we call DCT Flex, DCT Light or whatever we've used over the years what I mean.

So there will be a combination of both technology, some will be the DCT flexible version or lower cost modules (ph) on the smaller scale vehicles and the more traditional larger DCT or larger vehicles we use the traditional DCTs. Both of those products, the modules, clutch modules, control modules will be supplied out of that joint venture we have with our Chinese partner.

Brett Hoselton - KeyBanc

Right, thank you Tim and Robin, just a couple of quick ones here, automarker accounts receivables, any changes there at all?

Robin Adams

No, no, our customers continue to pay on standard terms. We did have one non-U.S. customer who used our balance sheet to free up theirs at year end... it was not acceptable but our U.S. customers continue to pay us in time.

Brett Hoselton - KeyBanc

And then from a supplier level, have you seen any alteration or changes in accounts payable demands or terms?

Robin Adams

I'll take this.

Timothy Manganello

Go ahead.

Robin Adams

You know from time to time as we've seen over the past 5-7 years, we get a supplier that gets in a situation where there is a request to provide some assistance and every once in a while unfortunately we end up providing a little assistance.

Timothy Manganello

We have done a couple where we've done with some quick pays. We haven't provided on anything that's within our realm and we just paid them little bit quicker.

Brett Hoselton - KeyBanc

Yeah, that doesn't sound necessarily unusual. And is that correct?

Robin Adams

Right.

Brett Hoselton - KeyBanc

Okay. Thank you very much gentlemen.

Robin Adams

Thanks Brett.

Timothy Manganello

On that transmission thing, we have the analysis on the transmission market for China, Brett. I really don't have it at my disposal. But at one of our next presentations, we'll give you, we'll put together... we'll present a breakdown of the China transmission market.

Brett Hoselton - KeyBanc

Great, thank you, Tim.

Timothy Manganello

Sure.

Operator

Your next question is from John Murphy with Merrill Lynch.

John Murphy - Merrill Lynch

Good morning guys. Believe it or not I still have a few questions for you. It's just a follow-up on the revolver and Robin, I'm sorry to beat a dead horse. But I'm just looking cash balance at the end of 2008 was 103.4, you had 137 million that's due on Tuesday. So that leaves roughly 34 million or some million that you at least pulled in from foreign subs somehow.

I mean how much more capacity is there overseas to repatriate money and really what kind of cash balance do you need to run the business sort of on a going basis, because it doesn't look like there's a lot of cash in the coffers right now?

Robin Adams

Historically, I've never liked to have a cash balance on the balance sheet. I'd rather be a net borrower, but we're in such a position that we've got -- had nothing to repay basically and that's why we had cash on our balance sheet.

I forget, what else the question was. I don't again -- we had excess cash on the balance sheet that's been sitting there. And we use to -- we tend to not have cash sitting around. We tend to be a net borrower, it's basically our position.

John Murphy - Merrill Lynch

Is there more capacity overseas to borrow and maybe repatriate cash if necessary?

Robin Adams

We repatriate cash a number of different ways from our foreign operations. There's dividend, there's royalty and technical agreements, there's corporate service charges. So there's a number of means throughout the year where our foreign operations are required to send cash to the U.S. At the same time, we do expect to generate a little cash here in the U.S. as well.

John Murphy - Merrill Lynch

Okay and Tim, if we think about your capacity utilization right now, clearly you're not running 100% in a lot of facilities. And you've done... I think you did a great job of moving tooling around to shrink your plant footprint. When we look at the CapEx this year at 2009, 200 million, I mean does that support the backlog that we're going to see in 2010 and 2011? Or when we get into 2010 and 2011 is there going be a bit of a ramp up in CapEx back to the 300 million unit level to support your backlog?

Timothy Manganello

Well I think the answer is kind of yes in both quick cases. It will support the backlog as we start up. And so we are not... none of our backlog is at risk due to insufficient capital investment. We have... probably have... we're probably sitting there right now worldwide with 30 to 40% capacity, on the utilization of capacity 30 or 40% right now. And we're taking... while we've shrunk the workforce, we haven't necessarily shrunk the capacity. So, we can handle the initial stages of the ramp up of all these... of this backlog that's coming at us.

Yeah some business will be new that doesn't fit any of our existing capacity and we'll continue to make those investments. And that's not falling in that $200 million number that Robin referenced. But as we continue to score new business and we go back to more traditional rates, you'll see our CapEx investments will probably fall on that 250 to 350 range which is, 300 plus or minus is our traditional range. But let's face it. For now we're smaller company. We're not the... in the first half of the year we were running about $6 billion run rate, and we're not running that way now.

John Murphy - Merrill Lynch

Okay. And then lastly I mean clearly your customers had some recourse to you on these warranty charges you had to take in the quarter. Do you have any recourse down to this supplier that potentially... you could have some of that?

Timothy Manganello

We're in negotiations as we speak. Now there's always a difference of opinion as to who is responsible. But we are in negotiations. And I do expect a settlement one way or the other. But I hope it's amicable.

Robin Adams

John, unfortunately the accounting rules won't let us book a receivable from a supplier on a warrantee issue. But they certainly will make sure we book the liability to our customer.

John Murphy - Merrill Lynch

Got you, that's very helpful. Thank you, guys.

Robin Adams

Thanks.

Operator

The next question is from Joe Amaturo with Buckingham Research.

Joseph Amaturo - Buckingham Research

Hello.

Timothy Manganello

Hi Joe.

Joseph Amaturo - Buckingham Research

How are you? I was wondering if you could just give us some granular detail what the Volkswagen production assumption is in the 16.6 million European assumption?

Timothy Manganello

I don't have that breakdown. I don't have that granularity Joe. But if you want, we can follow up.

Joseph Amaturo - Buckingham Research

Okay. Is there anyway you could give us what your current cash balance is?

Robin Adams

I'm sorry I didn't hear your second question?

Joseph Amaturo - Buckingham Research

What the current cash balance is?

Timothy Manganello

What's the current cash balance?

Robin Adams

Current cash balance? It's positive; I don't know what it is. But we still have... there's cash still on the balance sheet.

Joseph Amaturo - Buckingham Research

Okay.

Robin Adams

It's more than one and less than 100. That's what I can tell you. So I just want to remind you, I can guarantee that 16.6 is going to be wrong. So it's an assumption, it's an expectation but if you are looking for granularity down to how much is Volkswagen already, how much is Fiat, how much is GM. I don't think the level of accuracy really reflects what that 16.6 represents for us.

Joseph Amaturo - Buckingham Research

Okay. And I don't know if you stated this but I'll ask you again anyhow. Could you just tell us what your pension funding status was at the end of the year, and if you have any additional contributions in '09?

Robin Adams

No, we didn't mention it. Our pensions are unfunded in the U.S. to the tune of what, 70... between 70 and $80 million.

Joseph Amaturo - Buckingham Research

Okay.

Robin Adams

They were over funded last year in that we got two plans. They were over funded last year on that basis, under-funded this year obviously as a result of the equity market.

Joseph Amaturo - Buckingham Research

Now, is that going to cause any future cash contribution or?

Robin Adams

We fund our pension plans globally to the tune of somewhere around 5 to 10 million a year. We expect to continue to fund at those levels.

Joseph Amaturo - Buckingham Research

Okay. Then just a last one. I mean is there any... could you give us a sense of, if the European production environment falls to 15.5 instead of 16.5, what kind of impact that would have on your cash flow, not earnings cash flow?

Robin Adams

That's about 7% decline and take our European sales which is about 60% and multiply by 6% and take the decremental margin of $0.25 on a dollar and that should be pretty much...

Joseph Amaturo - Buckingham Research

So, it's the same exercise.

Robin Adams

Yeah. You might get a little bit of relief on receivables hopefully. You get a little relief on inventory but predominantly it's operating income.

Joseph Amaturo - Buckingham Research

Okay.

Robin Adams

One more thing, Joe, about our pension plans, just so you understand. Those liabilities basically have been kept a long time ago. There have been no new hires in BorgWarner since about 1995 that have been hired under a defined benefit plan. So that liability represents a known population that is not growing and therefore the only real variable on that is movement in asset returns year-to-year.

Joseph Amaturo - Buckingham Research

All right, thank you.

Timothy Manganello

Thanks Joe.

Operator

The next question is from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank

Good morning guys.

Timothy Manganello

Hi Rod.

Rod Lache - Deutsche Bank

I had a couple of things. Your sales outside the U.S. being down 22% versus production being down 17%, I assume that excludes FX and the difference was mix. Could you just pass along some thoughts on how you think mix sort of progresses looking forward into 2009?

Robin Adams

Rod, actually that decline if you... I know I went through it fast. We actually did better in Europe. So the decline relative to the production was in Asia. And remember, if you look at production, China was still up a little bit. I mean there were regions of the world where frankly that we don't have the penetration we would like today. So I wouldn't call it mix, I call it geographies. Yes. Regions that had a little bit more growth is that where we're not as represented as we are in Europe and North America.

Rod Lache - Deutsche Bank

Okay, that's helpful. And of the 220 million of savings that you were talking about, how much did you recognize in 2008?

Robin Adams

First Rod, those are theoretical at 50,000 per employee.

Rod Lache - Deutsche Bank

Right.

Robin Adams

Could be higher, could be little bit lower. But as you know most of that activity took place late in the year. So a vast portion of that benefit we'll be seeing in 2009, not much in 2008. We did see some benefit but certainly close to 80% of that we would expect to see in 2009.

Rod Lache - Deutsche Bank

Right and can you tell us a little bit about how much of that might be in SG&A versus your other costs? You commented earlier about bonuses and there is big decline in corporate overhead. But how should we be thinking about SG&A going forward?

Robin Adams

You know that's a good...

Timothy Manganello

I don't have the breakdown what's in the... how much was salary, and how much was hourly. But I am trying to remember now what that salary breakdown was, one second (ph)?

Robin Adams

The way we think of that is we've tried to maintain our SG&A at about 10% of sales and that's kind of what we're trying to target this year. As Tim said, I don't have the actual details on how much was SG&A related or how much was cost of goods sold related?

Timothy Manganello

Certainly my desk has the breakdown between hourly and salary, I just haven't read, I think...

Rod Lache - Deutsche Bank

Okay, so we can get later...

Timothy Manganello

But it is a fair balance. It was roughly in the range of 24 and 23%, somewhere between 22 and 25% salary.

Rod Lache - Deutsche Bank

Okay

Timothy Manganello

On that 4400.

Rod Lache - Deutsche Bank

But my last one is just to clarify something you said very early on in the call. I heard you say, you'd be in the black at this level of production. But did you say that you could get back up to historical levels of margins even if this low level of production was sustained? Or were you saying that look, this is where we are at this level of production, but the recovery could bring us up to historically 9.5% kind of margins?

Timothy Manganello

Well, let me... if you go back... If you remember the question, I don't know if you read that original question. They said if volumes were at the higher levels, would we be able to get back to those higher... normal levels of operating margins. And I said we would hope so. But I don't remember the numbers but whoever asked the question throughout volumes that were in 12-13 million range and not to mark... I can't remember the numbers, it was 18 million in Europe. That's a lot different than where we are at right now.

Rod Lache - Deutsche Bank

Sure. Okay, so this where you are at for now and it's getting back up there, I guess it's a lot depends on where volumes are. Just last one, the ramp up in China, where does the capital come from and when do you expect that... what was the magnitude and when does that begin to kick in?

Timothy Manganello

We... it's already there, some of the capital will be spent as part of the 200 million and or whatever it is in 2010 and '11 but 2009. Robin said it's around 200 million, some of it's going to come out of there. Some will probably be shipped, we have some capacity and that was... we're planning on dual clutch transmissions in Mexico that for... was already previously announced for Chrysler. That's not going to happen now. So we're going to take that equipment. We're going to ship it to China, it's brand new, never been run. So we're going to basically... some of it has already been bought and paid for, some of it we're not going to have... we're going to delay and some of it we're going to put into 2009. I don't have exact breakdown, Rod, but it's going to come from all locations.

Robin Adams

As far as source of funds, again, we do have cash in China. And as our practice historically has been, we will borrow locally to fund as much of that as possible.

Rod Lache - Deutsche Bank

Okay. All right, thank you.

Timothy Manganello

Sure.

Operator

We have time for one final question and that question comes from David Leiker with Robert W. Baird.

David Leiker - Robert W. Baird & Co., Inc.

Good morning everyone.

Timothy Manganello

Hi David.

David Leiker - Robert W. Baird & Co., Inc.

Tim, on the this DCT in China, how much of that volume for you... do you think comes from duals to existing manuals transmission versus your emerging market transmission you have developed?

Timothy Manganello

You mean how much is going to be manual transmissions that are going to... when shall we convert it to automatics?

David Leiker - Robert W. Baird & Co., Inc.

Yeah, how much is your module, new versus the transmission that you have guys developed for emerging markets?

Timothy Manganello

Well, let me just back up little bit. All of dual clutch transmission that we are going to be involved with will come... will be new transmissions. But how much of it, I think the majority will be... I don't know, I probably estimate half and half between the traditional, the tradition dual clutch what we supply in Europe right now versus the new volume, the new designed dual clutch transmission that we've worked on for the last couple of years for low-cost countries. I'm just going to estimate at 50:50. We can give you a better breakdown but they are still testing, they're still developing; we're still negotiating the contracts.

David Leiker - Robert W. Baird & Co., Inc.

And you think that starts up is 2011?

Timothy Manganello

Yeah, that's roughly when production will ramp... will start to ramp up.

David Leiker - Robert W. Baird & Co., Inc.

And when do you think it ramps up to where it's meaningful volume? Is that a couple of years or does it ramp pretty quickly?

Timothy Manganello

2015, 2016.

David Leiker - Robert W. Baird & Co., Inc.

Great. Robin, on the depreciation number, what sort of number we should be looking at on a go-forward basis given the write-offs and charges and things like that?

Robin Adams

The benefit we expect from the restructuring charges that we took that were fixed asset related is about $11 million a year.

David Leiker - Robert W. Baird & Co., Inc.

So, with that... but some of that is reflected in your fourth quarter depreciation number, right?

Robin Adams

No, almost all that was done at year-end. That's a full year 2009 kind of run-rate benefit.

David Leiker - Robert W. Baird & Co., Inc.

So your... just depreciation in '09 could be 100 and less than 200 million?

Robin Adams

No, well, we have depreciation and amortization and I want to say it's 280 number, I've got a bad memory but...

David Leiker - Robert W. Baird & Co., Inc.

I am looking (ph) at the depreciation number?

Robin Adams

It's about 270, 280 number you will see declines. You will see the 260? 260, I am sorry. It's about 260. You will see decline of about again 11 million related to the restructuring activity. And also because of our assumption on the dollar versus the Euro, you'll see a decline in depreciation and just as a result of the currency as well.

David Leiker - Robert W. Baird & Co., Inc.

Okay. Taxes, this fourth quarter adjustment, does that $0.07... and that's really just chewing up for prior quarter accruals, correct? Is there something else there?

Robin Adams

No. What it is, David, if you took our nine months financials and looked at our kind of run rate business and recast it at a 22% tax rate, that $0.07 would be the benefit for the first nine months. We have a tax rate for the full year, unfortunately for nine months, we had guesstimate that we missed.

David Leiker - Robert W. Baird & Co., Inc.

Yeah, I understand, it's just really true and that upped at the end of the year.

Robin Adams

Yeah, you can't take that $0.07 a share benefit in the fourth quarter and say it ain't (ph) anything to do with the fourth quarter. That's... the first nine months of the year basically we... our estimated tax expense was too high.

David Leiker - Robert W. Baird & Co., Inc.

Okay. And what kind of tax rate do you think you'd look at for '09?

Robin Adams

Right now we're looking somewhere between 23 and 24%.

David Leiker - Robert W. Baird & Co., Inc.

Okay. And then two last things here, Tim, a couple of weeks ago, few weeks ago you talked about as it relates to Europe that on the context that they slowed to recognize that was happening in the market, you comment was that the second quarter production cuts would be greater than the first quarter given that they seem to be catching up a little bit, do you still feel that way?

Timothy Manganello

No, I think they'd probably pull in some of those cuts they had now. So, what I would say is that we're probably seeing cuts... we're going to see the cuts in the first quarter and maybe we'll have a chance of, some degree of stability in the second quarter albeit probably at a lower level than many of us would like.

David Leiker - Robert W. Baird & Co., Inc.

And then lastly, over the years you've continually done a great job of bringing out new technologies with DCT and ICM and things along those lines. What would be the timeline looking forward that we see something else new along those lines from you? Is there something in the near term horizon or it would be further out on... down the road?

Timothy Manganello

Well we've got some technology that's hybrid related and electric vehicle related. You have to do your own analysis and form your opinion on how big those markets are going to be. We think that... I still think that the global hybrid markets are going to be somewhere around 6 or 8% globally. The electric vehicle market is going to play into some of that. But we're working on technology for those... we're working on transmissions for electric vehicles.

As we said earlier, we've launched the transmission for the Tesla and I got to tell you, David that's getting a lot of attention. Anybody who is in the electric vehicle market or working on an electric vehicle development right now is talking to us about transmissions. And we're working on other types of technology besides transmissions for hybrids and electrics. So then we'll probably have more to talk about, with little bit more definitive product lines to talk about in the future.

David Leiker - Robert W. Baird & Co., Inc.

So that's something that we'll hear about that a year two from now or do you think during '09?

Timothy Manganello

Not just, I'll just stick with your timeframe a year to two. But I'd say it's probably closer to a year than two. But all depends on what kind of, how our customers react and what happens in the marketplace. Some... customers don't have the money, they use to have to invest in the technology. And if... that's I say that globally. So it's going to be interesting to see how fast some of those technologies evolve because the global auto industry doesn't have the cash to handle all this stuff.

David Leiker - Robert W. Baird & Co., Inc.

No, that's true. Okay, great. Thank you.

Timothy Manganello

One other thing, since there were so many questions, between your questions and Brett's questions and China transmission markets in general, well, our next presentation that I am involved with, I'll make sure we do a deep dive on China transmissions.

David Leiker - Robert W. Baird & Co., Inc.

Wonderful. Thank you.

Timothy Manganello

Sure.

Robin Adams

Thanks David.

Mary Brevard

Thank you all for joining us. That will conclude our call today. And if you have any follow-up questions you can just call me. Thank you.

Operator

That does conclude the BorgWarner 2008 fourth quarter and full year earnings conference call. Thank you for joining. You may now disconnect.

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