Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BorgWarner Inc. (NYSE:BWA)

Q1 2008 Earnings Call

May 2, 2008 9:30 am ET

Executives

Mary Brevard – Vice President of Investor Relations

Timothy Manganello – Chairman, Chief Executive Officer

Robin Adams –Chief Financial Officer, Chief Administrative Officer

Analysts

Rich Kwas - Wachovia Capital Markets

Brett Hoselton - Keybanc Capital

Rod Lache - Deutsche Bank Securities

Christopher Ceraso - Credit Suisse

Joseph Amaturo - Buckingham Research

Patrick Archambault - Goldman Sachs

Itay Michaeli - Citigroup

Ravi Shankar - Morgan Stanley

Operator

I would like to welcome everyone to the BorgWarner 2008 first quarter results conference call. (Operator Instructions) I would now like to turn the call over to Ms. Mary Brevard, Vice President, Investor Relations. Ms. Brevard, you may begin your conference.

Mary Brevard

Thank you Dennis and thanks to all of you for joining us today. Copies of our release went out today before the market opened and hopefully you have all received them. We have also posted financial talking points that should help you to follow the financial discussion. They are located at borgwarner.com, Investor Information under webcast first quarter 2008.

These notes will be helpful to you as we review the financials and operations as I said. Our conference call today is also being replayed through May 9. The call-in number is 800-642-1687. The call ID is 41792620, there’s also replay available on our website. Just for your information we will be participating in a number of investor conferences in the next few months. The KeyBanc Automotive and Industrial Conference in Boston on June 5 and the Wachovia conference in Massachusetts on June 25.

Before we begin our call today I need to inform you that during this call, we may have make forward-looking statements, which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters we discussed today as well. Moving onto our results, Tim Manganello, our Chairman and CEO will be providing comments on the quarter and industry trends and Robin Adams, CFO will discuss our operating results for the rest of the year.

With that I will turn it over to Tim.

Timothy Manganello

Thank you Mary and good day everyone. Once again we delivered record sales and record profits that outpaced the industry despite week auto sales in North America. The year is off to a strong start for us with excellent results in Europe and Asia and despite recession worries, we are seeing stable growth driven by our products that improve fuel economy, reduce emissions and provide better performance.

Now, let’s take a look at first quarter highlights. We had record sales of $1.5 billion up 17% from the first quarter of 2007, up 8% if we exclude currency. Our earnings were at $0.75 per share, up 50% from the first quarter of ’07, adjusted for our two-for-one stock split. Operating income margin was 8.5%. Now, moving onto our group highlights, the Engine Group’s first quarter results include strong global demand for our turbochargers, which boosted the engine group sales 23% to $1.1 billion.

Demand outside of the U.S. for our engine timing, ignition, emissions and thermal products helped to offset lower domestic sales of these same products. In the Drivetrain Group, 2008 sales were up 5% to $410 million and sales outside of the U.S. were up 12% excluding the impact of foreign currency. Sales in the U.S. were down 10%, primarily due to lower vehicle or domestic vehicle production and the group continues to benefit from increased global demand for dual-clutch transmission technology.

However, the Drivetrain Group struggled in the quarter from a cost prospective and I can assure you that actions are being taken to improve their performance. Comments on our outlook include the following. We expect 2008 to be another record year for BorgWarner and today we reaffirmed our 2008 earnings guidance in the range of $2.85 to $3 per share. The strength of the platforms, which we are on, has allowed us to more than offset schedule declines and we will enable our future growth to outpace that of the industry.

Consumers want better fuel economy and reduced emission in every region of the world and these needs are driving demands for BorgWarner's leading power train technologies like turbo-charging and dual-clutch transmission modules for which we are launching new programs and expanding capacity. Two recent events make the future in brighter for us; first, the U.S. is considering even stricter fuel economy standards. In a proposal to reform corporate average fuel economy or CAFE rules, The National Highway Traffic Safety Administration laid out guidelines for a 3% fuel economy improvement in both passenger car and light trucks for model years 2011 to 2015.

In its published materials mix it highlights fuel savings technologies such as dual-clutch transmissions, gasoline direct-injection engines, turbo-charging combined with engine downsizing, diesel engines and hybrids. All great fits for BorgWarner expertise. The mixer predicts a significant increase in the penetration of these technologies in the U.S. by mile year 2015. For example use of transmission technology like dual-clutch automatics by the seven largest OEM’s in the U.S. could increase to 39% for cars and 55% for light trucks, which is up from the current OEM plans of 10% penetration across the fleets.

By mile year 2015 the use of turbochargers plus engine downsizing could increase from 5% to 17% for cars and 9% to 31% for light trucks if the utilities are adopted. Whether the rules are adopted as is and whether the industry can fast-track the implementation of power train changes needed in this timeframe still remains to be same, but even a conservative view of the situation is a very positive development for BorgWarner. The second event of note is exciting new turbocharger business for BorgWarner in North America. This program is for an important gasoline direct-injected engine for Ford as outlined in our recent press release that I think went out last night.

To meet these demands of growth we have been expanding capacity. In the engine segment BorgWarner thermal systems opened a new facility in Ningbo, China and broke ground for a new facility near Chennai, India. In Europe we just broke ground for a new production facility in Poland and are already planning and have announced an expansion. On Wednesday, our Board of Directors approved spending $125 million to increase our global passenger car turbocharger capacity by more than 3 million units. The increased capacity will support important new business awards in North America for Florida as I just mentioned and those in Europe and Asia.

The continued growth of diesel engines around the world and the move to gasoline direct injected engines in North America provide opportunities to leverage our turbocharger expertise as never before. The demand for the light-vehicles, turbochargers is expected to grow over 40% in the next five years from $19 million to $27 million units, as more engine are downsized with turbochargers and as more sophisticated engines incorporate multiple turbochargers. The additional capacity includes new facilities in Mexico for Ford and in Thailand for a major Japanese OEM and expansion of facilities in Hungary and Poland, because of European growth.

On the Drivetrain side we opened our second manufacturing facility in Arnstadt, Germany to serve the growing market for dual-clutch transmission technology. As I mentioned earlier construction is also underway for our new facility in Ramos, Mexico. The facility will produce dual-clutch transmission modules to serve the North American market in addition to all drivetrain products and we will serve in manufactured turbochargers from North America. Dual-clutch transmission and turbochargers were hot topic here in Detroit recently. They’re mentioned repeatedly as important technologies at the 2008 Society of Automotive Engineers World Congress in April. BorgWarner was the supplier partner of the event along with our OEM partner Chrysler.

Our Executive and engineers participated a numerous panel discussions and technical presentations during the week. For me, the major takeaway for the meeting was this it’s a great time to be in the power trend business. The rate of change is accelerating and there is a great need for technology to reduce fuel consumption and CO2 emissions and talk is now turning into action.

BorgWarner is totally prepared to meet our customer's needs. As you can tell, the SAE show was a real highlight for us, because it reaffirms the strength of power-train technology strategy. As I have stated numerous times in the past, I believe that first technology leadership and customer diversity can succeed in tough times and we’ll proving that.

Also we provide the technology our customers need and want such as products to improve fuel economy and emissions and lastly and probably the most importantly employee pride can create value for our customers and our shareholders. I also believe that 2008 will be a year in which we continue to separate ourselves from other suppliers as a solid steady global performer in the auto sector.

With that and I will turn the meeting over to Robin for the financials

Robin Adams

Thank you Tim and good morning to everyone; as Tim said, we had great quarter and it’s look even stronger relative to what’s going on the industry. So, lets take a look at the industry environment to the first quarter. Global production as Tim said was up about 2% and not a very robust growth for the industry around the world and it’s typically as the case, the picture varied by regions. Production in the U.S. was down 8%, with the Detroit Three light trucks in SUV’s down about 16%. European production was flat, while production in Asia was up about 8% in the quarter. Our growth continues to outpace the markets, our sales grew a little over 17% as Tim said, we are little over 8% excluding the impact of currency and that’s compared to the global production environment to 2%.

Looking at our regional performance, sales in the U.S. were down 4% compared to the 8% decline in the market and outside of the U.S. we posted solid growth of 50% excluding the impact of currency compared to 4% market growth outside the U.S. Then geographic diversions has put our U.S. operation sales and 30% of our total down form 36% in the first quarter of last year and 42% in the first quarter of 2006 and that’s a 12 percentage points shift in geographic share in just the past 24 months within BorgWarner.

In the quarter, our gross margin was 18.9% versus 16.9 in first quarter of 2007 and our operating income margin was 8.5% versus 7%. Now some of you have adjusted our first quarter 2007 numbers to exclude a $14 million warranty charge. So, throughout this call I will also give you numbers for 2007 that exclude that charge to help you do your year-over-year comparisons.

So, excluding the warranty charge 2007 gross margin and operating income margin would have been 18% and 8.1% respectively and either way you look at it with the warranty charge or without it 2008 was a stronger quarter compared to 2007 and if you look that 8.5% operating margin in the quarter it’s consistent with the 2004, 2005 first quarter levels and those are the years in which we operated within our historical 8.5% to 9% operating income margin range for the year.

Sales in the U.S. are really the story of two different situations. Our base U.S. operations declined approximately $45 million in the quarter and the decline in those sales were due to continuing reduced production volumes in the U.S. particularly the three light trucks and SUV’s. The last operating income margin on those sales was about $0.28 on the dollar and as we have said before this is a little bit higher than what we would like. We would like to be more $0.20 to $0.25 on the dollar and this $0.28 on the dollar was primarily initiative in the Drivetrain segment; I will talk a little bit more about Drivetrain margins in a few minutes.

The base U.S. operation sales decline of $45 million was offset by turbocharger program growth in the U.S. and that’s how we net it to a 4% decline. The U.S. sales decline was also offset by more than 15% growth in our operations outside the U.S. totaling about a $150 million in sales and that generated about $0.17 on the dollar incremental contribution margin. The impact of foreign currency added approximately $115 million in sales in the quarter versus last year at about $0.10 of a dollar operating income again pretty much line with our average operating income year-over-year.

Within those incremental income numbers there is a $29 million increase in SG&A cost versus 2007 and as a percentage of sales SG&A was 10.4% this year versus 9.9% last year. $10 million of that SG&A increase year-over-year was currency related, $7 million of it was R&D related, with the reminder being higher incentive compensation and higher levels to support business growth around the world. R&D cost as I said increased $7 million in the quarter to $58 million from $51 million in the first quarter of last year and that R&D increase is primarily driven by our continued investments at a number of cost business unit R&D programs as well as support for key customer power train technology initiatives driven by the demand for improving fuel economy and reduced emissions around the globe.

As a percentage of sales, R&D was 3.8% versus 4% in the first quarter of last year. The other expense line item on our income statement includes $2.5 million disposal loss to the first quarter in 2008. Below the operating income line, equity and affiliates earnings were relatively flat prior year. First quarter interest expense of $6.5 million up was $2.5 million lower than the first quarter of last year and that’s primarily due to -- and I am going to speak slowly here; to an end of quarter favorable measurement of the ineffectiveness of a cross currency interest rate swap and I hope you all understood that; hedge accounting. The tax rate in the quarter was 26% inline with our full year guidance versus 27% in the first quarter 2007. Basically on the interest expenses currency driven we expect some of that to comeback in the second quarter of 2008.

Net income was $88.7 million for the first quarter or $0.75 per share; this is an increase of $0.25 or 50% over the previous year’s first quarter. Again for those of you that adjusted our quarter for the warranty related charge of last year, the $8.5 per share, EPS would be up 28% year-over-year; a very strong quarter. Currency provided $0.06 per share in earnings versus last year; compared to our full year earnings guidance currency assumption that Euro140, Yen112 assumption, currency provided about $0.02 in the quarter.

Moving to our operating segment performance first let me say that we had growth in every one of our product areas of BorgWarner in the quarter except our truck transfer products. In the Drivetrain Group sales increased almost $18 million or 4.5% from the first quarter of last year. Excluding the impact of stronger foreign currencies however, sales were flat. In the U.S. our Drivetrain sales were down 10%, offset by about 12% growth excluding currency in Europe and Asia and those European and Asian sales growth were driven primarily by higher sales of DualTronic transmission modules.

Drivetrain earnings before interest and taxes decreased $9.4 million in the quarter or 34%, which was disappointing as Tim mentioned. The decline was related to first challenge new product launches outside of the U.S. and those challenges are particularly focused on supply base quality and supply based capacity issues and second lower North American sales of light trucks SUV’s equipped with our products, which was exacerbated in the quarter by some product rearrangement between a number of our North American manufacturing facilities.

There are action plans in place to improve both of those situations and we expect Drivetrain margins to improve in the second quarter versus the first quarter and trend back to the plus 7% historical levels by year-end. Engine Group first quarter 2008 sales increased to $200 million over $200 million up 23% versus the first quarter last year up 12% excluding the impact of foreign currency and again compared that to a 2% global growth in the world market. In the U.S. Engine Group sales were relatively flat as growth in turbocharger sales offset declines in our other product areas which are tied again primarily to light truck SUV vehicle production.

Outside of the U.S. sales were up 16% excluding currency, driven by a continued strong demand from turbochargers around the globe and demand for the product’s engine -- the Group’s Engine timing systems, ignition products, emissions products and thermal products. First quarter earnings before interest and taxes for the Engine Group increased $53 million from that first quarter of 2007 or $39 million excluding that $14 million first quarter 2007 warranty charge and that translates the incremental margin on sales of 26% or 19% respectively whether we include or exclude the year warranty, either way good strong contribution margin from the Engine Group.

Now, let’s talk about the balance sheet and cash flow. Our investment grade capital structure continues to be strong. Our debt-to-capital plus debt-to-capital ratio was about 23% in the quarter, up slightly from 22% at the end of December and balance sheet debt increased a little over $90 million due to seasonality stock repurchases and currency.

Net cash provided by operating activities was $8 million lower versus the first quarter of last year was $75 million versus $83 million and it’s primarily related to higher working capital levels to support the significantly higher sales levels we saw in the first quarter. Investments and capital expenditures including tooling outlays totaled $75 million to the quarter compared with $58 million in the same period last year so if you look at net cash provided by operating activities less cash used in the investing activities that was basically flat in the quarter and that’s not bad performance for a traditionally, seasonally weak quarter from a cash flow prospective.

We also purchased $13.5 million of our common stock in the quarter and as you saw we issued a press release recently increasing the authorization from our Board to continue to purchase stock. Our after-tax return on invested capital at the end of the quarter with 13.8% on a rolling four quarter basis versus 11.8% a year ago, so dramatic improvement in ROIC. As Tim said despite a continually challenged U.S. economy a continuing mix shift away from light trucks and SUVs and intense raw material price pressure, we have not changed our views on BorgWarner having another record financial performance in 2008.

We have reconfirmed our guidance of 285 to $3 per share for the year, but the operating income margins back to our historical 8.5% to 9% range. Our guidance is still based on a 26% tax rate and currency assumptions of $1.40 to the euro and Yen 112 to the dollar average for the year. Now, I know that in the first quarter the dollar was weaker than our full-year assumptions that we had the euro at -- $1.50 to the euro and Yen $1.05 in the first quarter but from our perspective it’s a little too early and year to be regressing on exchange rates for the rest of the year.

We know we are wrong at 140 we just don't know how wrong. We will probably recast our full year estimates based on currency as required at the end of the second quarter. Like everyone else, we are seeing pressure on raw material prices primarily steel and are now expecting increases in raw material in the $30 million to $35 million range for 2008 versus the $20 million to $25 million we originally thought we’d see when we first gave our guidance and there is a potential for more steel rated increases in the back half of the year, but as we did with the significant increases in nickel prices in 2007, we expect to manage through any steel price increases without a material negative impact on our earnings.

Again we were off to a strong start for 2008 and as Tim said we anticipate another record year for BorgWarner. We intend to stand on top of our cost structure to ensure that we provide solid incremental earnings growth on our strong incremental sales and you can tell from our recently announced expansion plans driven by a number of new business awards that we expect to continue to deliver incremental sales growth that significantly outpace the industry far into the future and with that I will turn the call back over to Mary.

Mary Brevard

Thanks Robin and we will ask Dennis to initiate the question-and-answer session. Dennis?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Rich Kwas with Wachovia.

Rich Kwas - Wachovia Capital Markets

Question on the launch cost issue Robin; I know it’s an emerging market, but how do we think about it from a product prospective given that you are being pretty aggressive with the new product launches overseas right now?

Robin Adams

Yeah, Rich actually a good portion of that was in Europe and an inside to our dual-clutch transmission product area and as I said it’s predominantly supply chain issues both from a capacity prospective and a quality prospective. As you point out we have got a number of new launches, VCT is growing quite rapidly for us and our supply chain is struggling to keep up those.

Timothy Manganello

Rich, it was an issue with a relatively new supplier. We have a sense -- we are working to improve the things at that supplier and we made progress there and they’re coming out of the words. We are also capacitating ourselves to do the same thing, so we don’t have to rely on this suppliers much and with the growth we have we’re actually bringing on other suppliers, so this issues is going to be fade away reasonably soon.

Rich Kwas - Wachovia Capital Markets

Okay, thank you for that and then, in terms on the guidance relatively to where we were three months ago, you maintained it for the year and I know, you talked about currency be conservative at least right now, but what’s changed in last three or four months in terms of puts and takes relative to initial expectation?

Timothy Manganello

Well, as I mentioned raw material prices -- we are at this point in time looking at least $10 million increase where we thought we were three months ago. The second, I think, if we look at the U.S. markets, as we expected about $50 million a quarter decline in our sales in the U.S. in our base operations and the first quarter was about 45, so pretty close. The second quarter, we are looking more like 75. So, as we look at the year right now we are seeing more deterioration in the U.S. market than we actually had expected three months ago and again it’s primarily on the light truck and SUV side. We are not sure how much it is this Industry labor, disruption related or a real decline in demand for these products. When you think actually most of it is the latter, the real decline in demand for these types of products, but certainly the U.S. looks weaker than we thought. It look three months ago -- raw material prices again our inching up that -- and those are the two major factors that we are looking at right now.

Rich Kwas - Wachovia Capital Markets

Anything on the plus side in terms what’s better than expected?

Timothy Manganello

Yes, we have got much higher demand for turbo-chargers particularly in Europe as they downsize from larger engines to smaller engines both on diesel and gas. We are seeing a lot of interest in twin turbos now with -- we are generating a two stage turbochargers as our guys call it and so there is a lot of plus there and we are starting to see -- you saw that in terms of our numbers and so things are actually really positive for us in almost every parts of the world, in every part of the world with the exception of North America and like you and Robin have both discussed, I think it’s going to be more structural in North America than we originally anticipated.

Rich Kwas - Wachovia Capital Markets

Okay and then final question, Tim in terms of the quoting activity and the changes to that over the last 3 or 6 months, what's different relative to 3 or 6 months ago given the news coming out with government changes to fuel economy?

Tim Manganello

A couple of things Rich; Rich there is a lot of activity going on in the development side and the quoting side for turbocharged gas engines with direct-injection in North America. I have said all along for two or three years now; you are going to see turbocharged gas engines in North America first and with higher volumes and then followed by turbocharged diesel engines in North America. We are seeing a lot of activity on both the gases first as you saw by the Ford announcement; there is other programs and projects we are working on; there is a tremendous amount of dual-clutch actively going on in the world right now and actually in addition your questions was related to quotes but I will tell you in terms of awards we’re staring to see an increase in the pace of our awards too.

Operator

Your next question will comes from the line of Brett Hoselton with Keybanc Capital.

Brett Hoselton - Keybanc Capital

Steel price, Robin I wondered what’s your factor and into your thinking regarding higher steel prices and the impact in the year?

Robin Adams

Well, we’re certainly looking at price levels that are in the market today and we’re not expecting significant increases from those levels, but at the same time we’re not expecting those prices to fall off dramatically as well. So, the current thought process is pretty much steel levels at about the current state extending through the rest of the year.

Brett Hoselton - Keybanc Capital

Okay and given that, its sounds like you feel quite confident in your margin expectations for the year. The -- as you look at your sales and earnings expectations for the remainder of the year, I think what you clearly state and I just want to make sure I understand that; is that the FX stays or the Euro stays were exact versus the dollar that you are more than likely going to be raising our earnings guidance coming to second quarter?

Robin Adams

Yes, we’d have to Brett, we have to. I mean, we -- again right now, we believe that we are now at 140 euro to the share or 140 dollar to the euro and Yen 1.12, we are going to earn $2.85 to $3 and then if you put a different currency assumption on that obviously it’s going to be higher earnings.

Timothy Manganello

And I think, what you are going to see there is upside based on currency Brett and there is downside based on material and steel is not the only materials on quite the bad line I think by the end of this year.

Brett Hoselton - Keybanc Capital

And then as you think about -- Tim as you kind of think about upside or downside to your current book of business in terms of products, which ones would you say you are particularly more bullish on, which products would you say particularly any you are more bearish on?

Timothy Manganello

Well, as you can tell by my report and Robins report and all of our press releases, I can't answer that question without saying we are bearish on -- I’m sorry we are bullish on turbocharges and bullish on dual-clutch transmissions. We haven’t said much lately about variable cam timing, but we are still cranking long on variable cam timing or cranking along very well on-demand cooling systems for off-road highway vehicles and actually turbocharger for off highway vehicles also. We are getting some dual-clutch transmissions, we are getting a tremendous amount of growth in transmission solenoids as they relate to dual-clutch transmissions, traditional automatic transmissions and transmission control modules even for automated manual transmissions in other parts of the world. So, we are really, really increasing our penetration on all types of transmissions even though we are really driving a tremendous amount of growth on dual-clutch. On the down side or the bearer side, I would have to say that we are taking the hits on the four-wheel drive side because of the truck business in North America, because of the fuel economy -- push for more fuel economy. People are moving towards cars. Some of these cars we have auto wheel drive or they will go to crossovers with auto wheel drive which helps our -- toward coupling business, but as you -- we have answered this question many times and as you know the revenue on our transfer case is better than the revenue on a double coupling, so that's an area where we kind of getting a hit a little bit and that's probably the real soft spot we have. Beru is doing well doing well. In terms of growth we’re tackling some profitability issues in Beru, but all in all they are doing well in growth.

Operator

Your next question comes from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank Securities

A couple of things, first of all, was the raw material costs impact in the quarter roughly one forth of that $30 million to $35 million impact or are you thinking that it ramps up more later in the year?

Timothy Manganello

No, that’s a great question Rod. Now in the first quarter it was more or like $5 million, it will ramp up later in the year.

Rod Lache - Deutsche Bank Securities

Okay and can you quantify the supplier launch issue for us and just diving a little bit that segment a little bit more, was there any benefit from the monthly restructuring?

Timothy Manganello

We didn’t quantify this supplier issue.

Rod Lache - Deutsche Bank Securities

Well you said that there were some launch issues, qualities issues related to the supplier, so is there some kind of number that you can put around that that you think it hurt you in the quarter?

Timothy Manganello

Well, I have not got the number in front me I think Robin's got it and he is picking it up, but it was enough to get noticed I will tell you that and I made an impact, but the issue really, there is a couple of things that was one issue and Robin said that -- and I will go back and repeat it. We are doing within the truck transfer business and then the transmission business -- let's just take the transmission business. In North America, we’re rearranging product lines in three different plants to become more efficient. So, there is some inefficiency there that we are struggling to as we rearrange products within three different plants and that's causing a little bit of a headwind for us. The issues and quality that we talked about on dual-clutch in Europe is mostly the highness but that caused a little -- some issue and then on the truck transfer side, as you know we are closing the monthly plan down in April next year and we are going through a tremendous amount of rearranging. We are going to be shipped -- we are staffing and we are under construction, but we are also in the process of moving product towards Mexico moving product to our Longview plant and moving product to our Seneca plant, so we have three plants in the truck transfer business that are also rearranging product at the same time which is causing some level of disruption and inefficiency. I don't see these as excuses, just only as factors to what's kind of hit, what hit the Drivetrain Group and then on top of all that you put the schedule cuts in on North America and it just makes things a little bit more difficult. I don’t know if you found the ….

Robin Adams

Yeah Rod let me quantify that. Our launch related issues our challenges outside the U.S. including supplier issues costs us about $5 million in EBIT in the quarter in the Drivetrain Group

Rod Lache - Deutsche Bank Securities

Alright and can you quantify roughly the size of your U.S. transfer case business now I know it's been declining?

Robin Adams

You know it's less than 10% of the company, I can tell you that....

Rod Lache - Deutsche Bank Securities

Lastly, pretty substantial premium for diesel versus gas right now; at least here it offsets some of the fuel economy advantage are you hearing anything from customers about you know expectations for growth being affected by that or do you have any thoughts on how that kind of place out for your business?

Timothy Manganello

Well, a couple things. We are not hearing any direct answer to your question, we are not hearing anything from our customers about them not bringing diesels or slowing down their plans to bring diesels to North America. I think that the difference in the fuel price gap between diesels and gasoline fuel fluctuates up and down. So, a year ago diesel was cheaper than gas, now diesel is higher than gas. Things will change, gas is creping up, so the gap is between diesel fuel and gasoline is not as great as I think as it was I think a month or two ago and you hit 30% to 40% better fuel economy and diesel, on a diesel engine than a gas. So, you can afford to pay let's say on a $3 gallon of gas, which was cheap now, but $3 gallon of gas you can pay up to a buck more for diesel fuel and still save breakeven and your total expense for fuel for a year. I know that people talk about the up-charge on diesel engines but that data is starting to role in now that you pay a little bit more at the purchase price for diesel, but on the resale price you get all your diesel, all your up-charge back when you resell a diesel vehicle. So, I’m not too worried about -- I think what’s going to happen is that the gap will close between that diesel fuel prices and the gasoline prices and some day you might find diesel cheaper than gas even.

Operator

Your next question comes from Chris Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

Let see a couple of things, can you tell us a little bit more about the award with Ford. Are these some of your advanced technology turbochargers or are they some of the basic turbos and what do you expect in terms of -- I know I don’t like to talk about specifics profitability on a customer program basis, but how do you think it would be relative for your overall turbo business, better or worse?

Timothy Manganello

Well, it will be typical of our overall turbo business. All of our business when we take, it has to at least return 15% cost of capital or so it will meet that threshold, it’s on the higher-tech turbo-charging, it’s going to be used on their rear-wheel drive EcoBoost to applications and it’s -- I don’t know -- I don’t remember exactly, hold on a second, Okay it’s two per engine and its normal turbocharger technology…

Christopher Ceraso - Credit Suisse

Okay. You’ve had a lot of announcements over the past few months about adding capacity and you probably have these numbers handy? Can you just quickly sum up for us, how much capacity you’re adding in terms of you know X number of millions of turbos and how do that compared to your current capacity?

Timothy Manganello

Well, we’re adding 3 million units of capacity and that takes us up to over 11 million units of capacity and so that tells you -- it takes us up to a 11, a little over of 11. This is all on -- what I’m talking about is, pass car or light vehicle capacity, I am not talking about commercial truck, I am talking light vehicle. It takes us up to a little over a 11 million units and it’s 3 million, so obviously you can tell that we add capacity. Today at for about 8 million units or between what we herein production less, plus the capacity we are already putting in based on last year’s and this year’s expansion.

Christopher Ceraso - Credit Suisse

Is that 3 million just the North America, are there other turbos…

Timothy Manganello

No that’s global. That’s 3 million in total and it spread out between Thailand, Mexico, Poland and Oroszlany plant in Hungary.

Christopher Ceraso - Credit Suisse

Okay and the -- what do you expect the SG&A level to be for the balance of the year in terms of a percent of sales?

Robin Adams

We are focused on trying to bring that below 10%.

Christopher Ceraso - Credit Suisse

Is that your full-year target or is that where you are going to run in Q3?

Robin Adams

Full-year target

Operator

Your next question comes form Joe Amaturo with the Buckingham Research.

Joseph Amaturo – Buckingham Research

How are you? Robin. Are you considering hedging the euro by any chance giving that you have a lot of visibility with the backlog predominately in Europe over the couple of years?

Robin Adams

As we look at our business Joe, we has -- where we sell in Europe, we actually also pretty much manufacture in Europe. So, our day-to-date transactions have not a lot exposure there. The only exposure is investment exposure and we typically as we grow in those regions of the world, we typically borrow local currency. So, as we grow and in Europe and we are borrowing or financing that growth in Europe, so the cash flow future cash flow stream turn off by that businesses is repaying Europe denominated liabilities. As far as income statement hedging now, we don't hedge our income statement basically, but that currency gets translated at whatever the effective rate is and what we try to make sure is we explain to our investors, the impact of currencies on our operations and try and strip that out of the equation so they understand fundamentally how strong our business is doing in those regions of the world excluding currency, but we don’t have a lot of cross order transactions that require day-to-date transactional hedging and obviously we don’t hedge for speculation either.

Joseph Amaturo – Buckingham Research

Okay. Next could you just give us -- you said truck transfer was the only business that was down, could you tell us to what extent it was down year-over-year in the first quarter?

Robin Adams

I don’t have that right in front of me Joe, but we will keep talking and I’ll get you the number, okay. All right.

Joseph Amaturo – Buckingham Research

Last one how many shares did you repurchased?

Robin Adams

About 300,000 give or take.

Joseph Amaturo – Buckingham Research

Okay. All right, that's all I have good quarter thank you.

Robin Adams

Joe, truck transfer was down a little bit less than 10%.

Operator

Your next question will come from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs

Can you just -- I wanted to get a little bit more sense of the kinds of contracts that you have, not only for steel, but for nickel as well, which I think probably in order well is maybe as big if not bigger in terms of size of purchase, just how those things cadence out? How much is locked in over the next year and where we might see some of those things reset?

Robin Adams

Well, let met start with nickel and then we will go to steel. Yeah, and nickel over the past -- the early part of 2007 we spent a lot of time with our customers ensuring that they shared in the movement in basic nickel prices, so we have a majority of our nickel purchase which is -- we don’t nickel per se we buy it in castings and as one of the raw materials in the blend. We have passed through this with the majority of our contracts with respect to nickel. So, nickel is much less an issue for us right now as it was over a year ago and also nickel prices are down which are good. On the steel side we have virtually no pass-through whatsoever on steel. Steel is our responsibility to manage and we do have contracts with our suppliers from contracts or prices with our suppliers. The majority of the buy in the U.S. and the majority to buy in Europe is covered under contracts for this year. However, when you get into a situation were raw material prices strike significantly, we get into a situation sometimes where there are surcharges and that’s the unpredictability with respect to the steel buy that we have, although we do have contracts, it gets to a point in time where our suppliers can pay the cost of the basic commodity increase and someone's got to help them pay for it. Does that answer your question?

Patrick Archambault - Goldman Sachs

Yeah. That’s very helpful. Actually have you been approached already by some of your suppliers asking for surcharges just cover higher input costs?

Timothy Manganello

Yeah we’ve been. This is Tim, we’ve been approached by the steel guys and we’re in middle of let’s just say very deep negotiations regarding steel pricing. We’re seeing -- they are coming to us with surcharges. They’re being very aggressive with the whole industry and they are being aggressive with the OEMs themselves so -- and we certainly don't buy as much steel as the OEMs and the OEMs are back and are starting to get hit on steel so, we are fighting it the best we can, but we will see where we end up, but we do not use material cost as an excuse. We still plan and figure another way to make our numbers and meet our guidance for the year in spite of what happens on material, but it just means we have to work a whole lot more harder to figure out ways to offset either directly with negations or indirectly through better ways of doing business inside our company.

Operator

Your next question comes from Itay Michaeli with Citi

Itay Michaeli - Citigroup

Hi, good morning. Just as the follow-up on that question. Does your new steel cost guidance assume some assumptions for what the surcharge negotiations will look like, or could that be an incremental hit later on the year?

Robin Adams

No, we have assumed some increased raw material prices in the back half for the year, yes.

Itay Michaeli - Citigroup

Okay, great. And then Robin just remind us again where you are assuming now for North American production level. I think we were at 14-3 back in January, has that come down to let say 14-1, 14-2?

Timothy Manganello

We will pretty much assuming the current levels or maybe a slight downtick from here. As the April numbers were pretty atrocious in the 14s, but we are not assuming anything very rosy for the rest of this year in North America.

Robin Adams

I don’t have the exact number, but as I said earlier I think we are looking about $50 million decline in our U.S. sales first and second quarters to start the year of and as I said first quarter was about 45, so pretty close, second quarter is looking like 75 right now. So, we are -- and some of that is mix as well, so we are looking at overall lower production levels in the U.S. and that 14-3 number. I don’t know exactly what I translate to as Tim said, but, certainly it’s lower than 143.

Timothy Manganello

We tend to be much more conservative, and we tend to anticipate these lower schedules much more than the OEMs do, so we have already accounted for it. A significant amount of the downturn that we are seeing in North America, but, we are now getting into the point were we are going to have to go back and re-look at what were doing because things are starting to get a lot deeper than we originally anticipated and we anticipated for some fairly deep schedule cuts.

Robin Adams

No, on the flip side the good thing as Tim mentioned earlier, our sales outside the U.S. are stronger than we expected as well so that, from a sales perspective, we are still looking at excluding the $150 to the euro currency but it’s back to our original assumption for guidance for the year that 140 in the dollar. We are still looking at you know 8% to 10% growth in the year for the year from the sales perspective and close to the 10% level. Despite the decline in the U.S. we are still look for good solid growth outside the U.S.

Itay Michaeli - Citigroup

That’s terrific and just one final question may be for you Tim. It’s a report that I thought was very favorable for a lot of your technologies. Any customer reaction to that reports so far, maybe any signs of change in long-term plans or what are you hearing in terms of reactions so far to those job numbers?

Tim Manganello

If I answered some of the -- one of the earlier questions and they are all the customers are very aggressive now to improve fuel economy and lower emissions. So, I don’t think to report caused them too much more effort because they are already working at extremely high efforts on technology to lower fuel economy and I can tell you we are seeing it. We are in -- we are actively engaged with every major OEM in the world and fuel economy because every market’s got the changing regulations, the Euro market, the American market, so I can’t say that their efforts any and greater now than it was a month ago, or two months ago before the report, because everybody was really on high levels of aggressiveness in terms of lowering fuel economy. So, I think that we -- like I said many we times before we are in the sweet spot and the sweet spot just seems to be getting sweeter.

Operator

We have time for one final question and that question comes from Jonathan Steinmetz with Morgan Stanley.

Ravi Shankar - Morgan Stanley

Hi guys. This is Ravi Shankar in for Jonathan. I had a couple of questions on the Ford EcoBoost. It seems like your release only mentions the rear-wheel drive and pick up applications, so can you help us to understand what’s going on there with the front-wheel drive applications; are you on that program is it different kind of turbo involved there?

Timothy Manganello

Well, lets put it this way. The Ford uses the EcoBoost as a -- to describe a family of fuel-efficient engines. We will probably not be the supplier of all the volume for all the EcoBoost families, but so far we have been chosen for the rear-wheel drive. I don’t know all the specifics on the front-wheel drive, but we haven’t been chosen for that and I don’t know if it’s been placed, but -- I would have to check with my people, but, I will tell you this. At this point in time, as far as we know at Ford, this is the highest application, turbo charger application, now helping their EcoBoost families so far.

Ravi Shankar - Morgan Stanley

Okay and Ford has spoken about 500,000 units over the next five years or EcoBoost, do you know what proportion of that is real wheel drive and pickup only and what are you looking at in terms of volumes?

Timothy Manganello

I think that the best question is best to the answer by Ford. All I can tell you as we are very pleased to have Ford as a customer for turbochargers, we are very pleased to be on the EcoBoost family and I have heard from a number of people and that are all friends within Ford that we have got a significant volume and there is so far from their EcoBoost awards.

Ravi Shankar - Morgan Stanley

Great, and is this already part of your backlog?

Timothy Manganello

No.

Ravi Shankar - Morgan Stanley

Okay, so this is incremental to your backlog. Do you have a new backlog number?

Timothy Manganello

This is not part of our 3 -- the 3 year backlog of $1.95 billion that we have announced last fall.

Robin Adams

Now we -- this is Robin. We update that backlog number once in a year. So, we don’t have a revisit right now, as Tim said quoting activities have been pretty, pretty strong.

Ravi Shankar - Morgan Stanley

Very good and finally are you looking at some kind of long-term structural reduction in production that was in North America and are you doing anything at your end to adjust for that and improve the contribution margin here? Will there be another level of restructuring required to adjust for that?

Timothy Manganello

I am sure you asked that question knowing that we did restructure in the second half of 2006. 2006, third and fourth quarter, we restructured mainly due to the sale and downsizing of our monthly plan and downsize -- that’s the sale and the downsizing has to do with other parts of BorgWarner in North America. As things continue to go the way they are we will continue and we are looking at plans to see what we have to do to meet the future needs of North American schedules. I think I agree with you, the schedules are probably going to be more permanent than we’d like and we tend to be on the -- we are in the early stages or we tend to be one of the early suppliers to restructure and when we say we restructure we do it right away and all I can tell you at this point in time we are looking at it.

Robin Adams

You know as just Tim point he had to remember we are in the midst right now of our restructuring, although we took the charge at late 2006, the actions a part to complete that aren’t finished yet. That requires relocating to a new facility in Mexico and rearranging some manufacturing capacities and closing down of facilities in Muncie, Indiana and none of that has been completed yet. It won’t be completed until 2009, so we are adjusting our capacity in the North America; we have taken some actions to adjust for what we think is a permanent lower level of activity for those product areas, but we’re in the midst to that yet; it hasn’t been completed and frankly we haven’t seen all the benefits so that. We expect to see more benefits in 2009 as we complete that restructuring.

Timothy Manganello

And I will add one more thing; we are carrying some extra costs, because of that -- what we are doing now between now and April of next year in terms and I think I’ve said this before, but I will repeat it. We are carrying extra cost because of the Muncie plant closure, because of rearranging five different plants, all to be ready and able to handle the lower schedules both now and in the future, but the schedules are actually get a little bit lower than we anticipated, and that they go another 5% or 10% we are going to really have to look at this rate again.

Mary Brevard

Thank you for joining us today. That concludes our call. You can direct any follow-up questions to me and we’ll talk to you next quarter.

Operator

That does concludes the BorgWarner 2008 first quarter results conference call. Thank you for joining. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BorgWarner Incorporation Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts