Good morning. My name is Rebecca, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2011 Second Quarter Results Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ken Lamb, Director, Investor Relations. Mr. Lamb, you may begin your conference.

Thank you, Rebecca. Good morning, and thank you all for joining us. We issued our earnings release this morning at approximately 8 a.m. Eastern Time. It's posted on our website, borgwarner.com, on our homepage. A replay of today's conference call will be available through August 4. The dial-in number for the replay is (800) 642-1687. You'll need the conference ID which is 79909349. The replay will also be available on our website. With regard to our Investor Relations calendar, we will be attending a number of conferences over the next few months. August 11, we'll be at the J.P. Morgan Conference in Detroit; September 7, we'll be at the Crédit Suisse Conference in New York; September 13, we'll be at the Frankfurt Auto Show Investor Conference in Frankfurt; and on November 1, we will be at the Gabelli Automotive Symposium in Las Vegas. Also, as we do reach fall, we will be announcing our 3-year backlog of net new business in early November. Now before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now moving on to our results. Tim Manganello, Chairman and CEO, will comment on the second quarter and current industry trends; and then Robin Adams, our CFO, will discuss the details of our operating results and also our outlook for the rest of the year. With that, I'll turn it over to Tim.

Thank you, Ken, and good day, everyone. I'm very pleased to review our second quarter results, our accomplishments, some comments on the industry and our revised guidance. But first, I'd like to thank all of BorgWarner employees, worldwide, for another record quarter. In addition, we recently recognized over 70 BorgWarner employees with awards for innovation and product development, customer excellence, operational excellence and collaboration. I'm very proud of our employees and their dedication, teamwork and creativity that drives BorgWarner's success. So now I'll begin by highlighting our strong second quarter results. Sales were $1.8 billion, up 28% from the same period last year. Our operating income margin, excluding a nonrecurring item was 11%. U.S. GAAP earnings were $1.31 per share and excluding nonrecurring items, earnings were $1.12 per share. Four key factors drove our results: increased global demand for our products; higher volumes on our base business; well executed cost controls by all BorgWarner locations; and better than expected results from our Japanese operations. Now let's take a look at second quarter results at the group level. In the Engine Group, first quarter sales were about $1.3 billion, up 28% from a year ago. Higher sales in the Engine Group were the result of growth in 3 key areas: Engine timing system sales were up in North America and China; fee-in and fan drive sales were sharply higher as the commercial vehicle market continues its strong recovery; and the rapid adoption of turbocharger technology continued around the world. The turbocharger market continues to be a major driver for BorgWarner. It is a growing market that is attracting new competitors, but despite this, we expect to maintain or increase our global market share of the rapidly growing global turbocharger market during the next 5 years. In the Drivetrain Group, sales were…

Thanks, Tim. That's pretty good, I'll watch out to say, I guess. Good day, everyone. Before I begin review the financials, again, I'd like to quickly review the macroenvironment for the industry in the second quarter to help put our record performance in the quarter in perspective. As Tim mentioned, second quarter global production was about 17.6 million units, down about 2% from the second quarter last year and actually down 7% from the first quarter. Our sales moved opposite of the market and were up in the quarter both year-over-year and also sequentially. On a year-over-year basis, as Tim mentioned, our reported sales were up 28%. Excluding currency in the Haldex acquisition, which were made in the first quarter of this year, the year-over-year increase was 15% and that's about 17 percentage points stronger than the 2% year-over-year decline in the global vehicle market. In another quarter where our sales growth significantly outperformed the market. Sequentially, excluding currency in the Haldex acquisition, our sales were up about 3%, which is 10 percentage points better than the 7% sequential decline in the marketplace. When you look at our sales from a regional perspective, our sales growth from the second quarter outpaced the market in every major region of the world. In the U.S., with our sales up 16% versus last year, the market was up only 3%. In Europe, again, on a comparable basis excluding currency at Haldex, our sales were up 13%. And as Tim said, the market was up 1%. Our sales in Asia, excluding currency, were up 11% while the market was down 6%, again, primarily related to the tragedy in Japan. Clearly, the growth of our leading-edge technology products continues to penetrate all the markets around the world and continues to differentiate BorgWarner from the rest…

Thank you, Robin. We will now turn to the Q&A portion of the call. I'd like to ask the call coordinator to please announce the Q&A procedure.

[Operator Instructions] And your first question comes from Rich Kwas with Wells Fargo Securities.

On Drivetrain, Tim or Robin, can you give us some color on what's happening in Europe? It sounds like you still -- some of these issues that were -- that occurred earlier in the year are sticky. What's the update there? And then, I know you're spending some dollars in China for the DCT program, the DCT launch, where are you with that? And then just to confirm, it sounds like you expect margins to be up year-over-year for Drivetrain for the second half of the year, any color around magnitude would be helpful.

Well, we are continuing to see some issues in Europe both on capacity constraints because they're trying to get more capacity in. We've had some operational issues in a couple of plants that are improving, but then, that's where I want them to be yet. I don't want to give any the details. But in China we are -- well, I'm going to China actually, next month or I guess early September, to do the dedication ceremony in the opening ceremony for that Drivetrain plant in Dalian. We will be in production later at the end of this year, ramping up in the first quarter next year, which is still on schedule. We ask for -- continuing to invest our money on R&D, we have more and more projects that we are involved with from the Chinese OEMs. This has already been public, but we're launching with Shanghai and then we're going to have significant amount of business with First Auto. We're continuing to grow with other -- with those 2 main players and we're getting more and more projects and more and more involved in development programs. Our transmission, the new BorgWarner transmission design that we worked on our low-cost transmission is moved into the next phase of development program, which is one state -- basically one phase before a production contract. So we're in the preproduction contract phase with one major Chinese OEM and one major Japanese OEM, but I can't announce them yet. And so we're spending money on engineering costs and the Drivetrain that's going to be well spent for the future. That's got a little bit of a drag on us right now. We've got some operational issues in Europe that are improving. They would -- the third quarter and the fourth quarter projections are better on margins for Drivetrain than the first of the second quarter, and we're just continuing to run our plan, Rich.

Okay. But the magnitude. It sounds like the magnitude is -- we should expect some modest expansion from here given the...

Okay. I forgot to talk about the magnitude. Robin gave you some historical ramp-ups and we're going to get -- we're going to restart moving up in those ranges.

Let me help you there, Rich. As I said, third quarter, fourth quarter last year was 7.8% to 7.6%. In the second quarter this year, we're at 7.4%, and again, we expect improvements through the remainder of the year so we'll be north of 7.8%, in the back half of the year, if you look at it without Haldex where they belong in the second quarter. So we will see sequential improvement beyond second quarter levels that will put us in a better position from a margin perspective than we want in the back half of last year and continue to improve, as Tim said, working on a gradual improvements in that business in Europe.

Okay, that's helpful. And then, just final one for me. Tim, a bigger picture question. Cummins, it looks like is going to be -- is investing in a light-duty diesel for light-truck applications. How do you think that affects the overall competitive landscape going forward? It seems like it's a ways out but I just want to get your thoughts.

No, that's a ways out. I mean, they're a player in the market. And as far as -- we're tracking turbocharger growth in both the commercial markets and in pass car. We are growing in that segment of the market that Cummins' new engine will play in. Our turbocharger volume is growing in that segment in the next 5 to 6 years and they're going to have -- we already know that the Chinese are targeting that market, and that there is tremendous growth for us in China. We also know that the Chinese are preparing to go into global competition and they're going to be using turbochargers like the kind that BorgWarner makes.

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

This is Dan Galves in for Rod. So SG&A looked quite low in the quarter. You know it's down $7.5 million and it sounds, from what you're saying at R&D, R&D expenses were actually up about $5 million. So what caused the decline in SG&A outside of the R&D line?

Well, the macro answer is we're leveraging our resources as we grow our sales. But we are continuing to grow our R&D spending from last year to this year, there is tremendous growth in actual dollars. As far as the rest of SA, we're basically managing our hiring, and we're managing our travel cost, and we're basically managing all the lessons that we learned during the recession. We're trying to continue on as we go forward in this company. But we're still not doing anything that would harm our growth. So we're just investing wisely.

Okay, great. So I just wanted to check if there were any kind of specific expenses related to Japan outside of any -- in your core business in terms of premium freight anything like that? Was there anything material in the quarter?

No, not really. It was just normal. The guys did a great job of cutting costs, keeping their decremental margins as low as possible. Some of the things that we did in Japan to keep our plants running was we were tight at capacity in Korea and some products in the timing chain area. So we started making -- we made similar products between Korea and Japan. So we, basically, cranked up our Japanese plant to ship products to Korea to relieve some of the capacity challenges in our Korean operations. So we kept our chain plant in Japan running as best as we could even though we we're making product that wasn't necessarily being used and shipped and consumed inside Japan.

Okay, great. And just one housekeeping thing. Can you remind us on what the dollar impact on revenue from Haldex was in the quarter and what you expect for the full year?

As we said before, Haldex is about $200 million in revenue on annual basis. So divided by 4, its about $50 million.

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

Just a first question on the Engine business and the Commercial exposure in aggregate. And Tim, you've mentioned that the Commercial business was a really good positive in the quarter for the fan and fan drive business in the Engine business. I'm just wondering if you could remind us how big Commercial is in your aggregate portfolio right now. And also, it looks like it's going to be, I mean, the outlook is a lot brighter there than it is on the light vehicle side particularly, as we go through the second half of the year. Just curious, how you was thinking about that business really ramping up and how big a contributor it will be in the second half?

Well, it's about 15% of our sales when you consider medium-duty, heavy-duty, vessels and some of the ags that we'll call off-highway. If you define that for us, that's what we defined as Commercial. That's about 15% of our sales. And our sales are growing so significantly and we're still maintaining that 15% to 16% range. So you've seen really good actual growth in the Commercial side. The turbocharger business is increasing penetrations on the Commercial side, pretty much worldwide but particularly China. The fan and fan drives have seen tremendous growth in China, India and so forth. Although as we look forward, the Turbocharger business is penetrating business in China and holding strong in North America and Europe. But the Fan and Fan Drive is growing and doing very well and holding strong in North America and Europe, where I think we have, in now, roughly 60% of the fan drive market in North America now at least for the last month or 2, which is a very high penetration rate for us. But the fan drive market has seen a little bit of a softness in the Chinese market basically, because the Chinese market, they've lost somewhat heat incentives, the fuel prices are going up and the same things that we are seeing on pass car. They hit that commercial side of the market a lot heavier. The other thing is we're seeing tremendous growth in penetration rates for the fan and fan drive and the turbocharger business in South America in particularly brazil and Argentina.

So it's fair to say that in the second half there might be a little bit faster growth in light vehicle because of the bounce there, but in aggregate, it's growing in line with your portfolio of businesses?

May I'd say -- and I don't have the numbers in front of me, but we just gone through and I can tell you this. Both commercial and light vehicle is growing well in the second half of the year. Light vehicle may pull ahead a little bit more than usual in the second half for no other reason that the fan drives on the commercial side in China may just be a little bit of a headwind. But yet, that's going to be offset by stronger tailwinds in Brazil. So we'll have to wait and the see how it plays out. Did I help with your question or not?

Got you. Kind of yes, it getting me there. Second question just on the adoption curve of turbos in the U.S., I mean, do you get this sense there's a greater sense of urgency among the automakers to really downsize and turbocharge their engines since there is this increasing pressure on CAFE both in the near term, more importantly in the long-term and that we might see a faster adoption curve than we might have thought 6 months ago?

Yes. There is a tremendous amount of interest in turbochargers and a tremendous amount of interest in the U.S. on all of our other technologies. Variable cam timing is going to turn out to be a huge growth platform for BorgWarner because we've got the latest and greatest technology that the people finally discovered how potent and how beneficial this technology is, in terms of improving fuel economy. Chain systems are growing strong. As I said, variable cam timing, turbochargers. We got a really strong portfolio, dual-clutch transmission is still strong around the world and growing rapidly in the country. The parts of the world that have manual transmissions and want to convert automatic but they want fuel efficiency out of their automatics, they're focused on that dual-clutch. We're getting the wet-clutch business real solid and we're getting a good portion of the dry-clutch business now, on the control modules. So -- but to note to, specifically, to your question, the Detroit Three have finally and really discovered fuel economy and it's a major focus for them.

And then just lastly, Robin, you mentioned as you got the new revolver in place, you have this option to toggle it up to $1 billion. You also mentioned that acquisitions might be a reason that you would toggle it up and you seemed a little but more enthusiastic there about making acquisitions. At least, it sounded like you were a little bit more enthusiastic, but anything changed on the landscape where you see anything that might be larger out there than what you've done more recently that would really be a good fit for BorgWarner?

I don't see a thing out there that's a lot larger than what we've done historically. I'm just overall excited about the company: Operations, acquisitions, cash flow, you name it.

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

Just on the competitive situation on the Turbo side. Can you give us an update in terms of what you're hearing and where, I think, Carndi [ph] and Bosch are high to the store fare, most prominent in margin competitors. Where they are in terms of development and contract and such?

Well, I think at some programs in Europe, they are mainly focused in Europe but they're strong alliance partners over there typically, are the Germans. I don't think they're really into any major, any big launch phases yet. But they're going to launch anything they're -- I mean they're creeping up on the SOP dates. There's a big difference between actually being in production and talking about being in production. We'll sort of see how things work out for them. Like I said in my speech, though, in my presentation, we, or as we see the next 5- to 6-year horizon, we see ourselves either gaining -- or maintaining or gaining market share, globally, on turbochargers. And there may be a little bit of redistribution of what part of the world our turbocharger growth comes from and -- because up to now, it's been fairly European centric. Now our turbocharger footprint is becoming more balanced all over the world between Asia and now soon-to-be North America with all the penetration rates programs that we're gaining in North America. So you're going to see strong growth in turbochargers for everybody. There's huge opportunities for all of us and there's plenty of room for all the competitors in the turbocharger side of the business.

All right, thanks for that. And on the --we're hearing, almost everyday, a new investigation into suppliers for price-fixing in different regions of the world. So, a, can you confirm if any of your units are being investigated globally and, b, would you just care to comment on what's causing this and how you see this ending?

Let's just say this. None of that has anything to do with BorgWarner. And we've heard nothing, we've seen nothing, we do nothing. It has nothing to do with BorgWarner, totally and unequivocally. That's it.

Got it, that's pretty emphatic. Then finally, Robin, I may have missed this in the numbers you gave out, but are you updating your raw mats guidance for the year, given that it's running ahead of the first half?

No, we're staying the same on raw materials.

Your next question comes the line of Himanshu Patel with J.P. Morgan. Himanshu Patel - JP Morgan Chase & Co: Thanks for the anti-trust answer, very clear. I guess my bigger question on that is do you have any -- is there any historical context you can provide us on this issue? For example, have there ever been any prior investigations over the last 10 to 15 years or so that you guys know about in some of the product segments that you're in? Or even that has never happened?

No. Nothing has been -- we've never been involved in anything like that and I would expect that our salespeople and anybody else in our company is smarter than to get involved in anything like that. Himanshu Patel - JP Morgan Chase & Co: Okay. I had a question about operating margins. You guys said 11%. I know you have kind of an open-ended target on margins being better than a certain level. But I'm just curious how we should think about this new record margin. Is this a figure that could still have some upside potential from here? Is it -- should we think about this more as kind of a ceiling or is this kind of a new norm, if you will?

It -- as I said earlier, we set a lot of records this quarter and they're not going to stand for very long, including that operating income margin level. Himanshu Patel - JP Morgan Chase & Co: I guess, Robin, there's been a couple of suppliers, not all, that have reported so far that have had some fairly material, intra-year, increases that they've had to do on their CapEx guidance, engineering cost, et cetera. And it's been various issues whether its emerging market investments or greater launch velocity. I'm just curious is there -- are you guys seeing any of that? And I guess the heart of the questions, are there any of those pressures building in your business such that maybe we could have a situation towards the end of this year or early next year where we see some step change increases in cost pressures for you guys?

On the capital side, as we said, we are increasing our capital investments. Previously, we were a little bit below $3.50, now we're looking at $3.50 and $3.75. On the same side, as we said, we're going to generally release $50 million more of cash from operating activities than we thought before. So from a cash perspective for the year, we're still looking at the same number, maybe a little bit stronger. We've had challenges from a capacity perspective. Since late last year, we continue to have those challenges. We're working like crazy, consistently, to try and continue to get more capacity in place for ourselves and also to make sure that our suppliers are there. At this point in time, that's one of our challenges in Europe, in the Drivetrain business, but we're slowly working our way out of that. And from my perspective, if you think about the industry today, we feel much better about struggling to provide additional product to our customers and putting in capacity than we were in 2008 and 2009, when we had so much excess capacity and we couldn't get a customer to take product from us. So we'll take this pressure at any day of the week and we're going to manage through it and it's not a concern for us. In fact, we're looking forward to any more pressure from increased volume. Himanshu Patel - JP Morgan Chase & Co: I guess if you could touch a little bit on China specifically. I think you and I have spoken about this before but are you -- is that investment phase linear? Or is it maybe that you invested a lot several years ago in the business and was just being drowned in fixed growth, and now we're kind of hitting our -- you're hitting your stride maybe on the emerging markets where the incremental investment needs in that region is really just not that much and you're seeing some operating leverage out there for the first time?

I'm not sure I would take that one. Basically, we are seeing operating leverage on some of the initial investments. But the investment going forward will continue to be, I'll use your word, probably, roughly linear because we were just -- we're continuing to gain programs and programs, and we have a compound annual growth rate, as I look forward, and it's going to be somewhere probably around 35% compound annual growth rate and it's not a lumpy growth rate. It's fairly -- it looks like a 45 degree straight line almost. So you're going to see us -- right now, for example, in Ningbo, we've pretty much maxed out on our initial large building and maxed out on our joint venture building across the street. We're putting expansions into the wholly-owned part of that Ningbo campus. We're building a new building for, basically, for Morse chain. We have turbo growth there, Morse chain growth and emissions growth. And we're basically putting in new buildings on the second half of that site as we speak. But it's actually just built into our run rate. The engineering expense is built into that 4% annual expense that we spend in R&D, the CapEx as we typically run 6% plus or minus annually on CapEx, and it's all kind of built into our business model. And so far, those kind of investments, which are somewhat linear investments, can continue to drive our current compound annual growth rate that is significantly greater than the industry. Himanshu Patel - JP Morgan Chase & Co: Okay. And then last question on contribution or incremental margins. You've -- it sounds like the date when incremental is kind of converged to your operating margin keeps getting pushed back of it. Are you kind of thinking about that now as being more kind of middle of '12 is when we should think about that or could that start happening even at the end of this year?

As we said before, one of the biggest drivers for that is the top line sales growth numbers. And if we continue to increase our sales growth projections for the year, we're going to continue to push out the leveling off of operating income margins. So we'll see what 2012 looks like, but given where we're running right now and running into the back half of the year, I have a feeling that our growth rate next year is going to be higher than we would have thought maybe a year ago, which means the leveling off of margins will take a little bit longer.

We have time for one final question and that question comes from Chris Ceraso with Crédit Suisse. Christopher Ceraso - Crédit Suisse AG: A couple of questions for you. First, this kind of gets back to the incremental margin question. I know you keep talking about things ex-Haldex, Robin, but that amortization is going to stay with you. But my question is when we lap the acquisition, will we start to see more normal incrementals in the Driveline business maybe in the high-teens or even 20?

Oh, yes. There is no doubt about it. I mean, we said before, on an incremental margin basis, there should be no difference between the Engine and Drivetrain in those product areas. We've been pretty clear that in the first -- that this business is struggling in Europe and it has struggled. And you see the margin declined from the first half of last year at the 9% level down to, it's called, 7.7% average for the last half of the year, it's starting to come back for us. But they're still -- they're not where they need to be. We expect that business to generate 20% incremental margins just like the Engine side of the business. There is no expectation of any lower performance in that business. They just -- they need to work a little bit harder to get where they're supposed to be. Christopher Ceraso - Crédit Suisse AG: Okay. And then, bigger picture question maybe for Tim. Can you give us your view on the proposed 54-mile per gallon new standard for 2025? A few things on this. Do you think it's realistic, first of all? Can the car companies get there largely with internal combustion engines? And what do you think the mix of electric and hybrid vehicles might have to be in that world at 54 miles per gallon? And what's Borg's role in that world?

Well, as far as the 54, I think it’s going to be very challenging. Is there a technology that will work to get the car companies towards that goal? Yes, and we have a significant number of those. If you look at a list of like 10 Drivetrain technologies or Powertrain Technologies that can improve fuel economy, we're on probably 7 out of the 10, which is based off an EPA list. And we're one of the market leaders in probably 7 out of the 10 key technologies. All I can tell you is, it's going to be very challenging. But every day -- we just finished the R&D reviews on new technologies in our advanced engineering area for both Drivetrain and Engine. And each product we're looking at, it's got a 1%, 2%, 5%, 7% improvement in fuel economy. And yes, they're going to be -- there is no doubt about it. To get that higher fuel economy there, people have to pay higher prices. Now, that being said, the higher prices that they pay will probably still be cheaper than and more beneficial than the higher prices you pay for an electric vehicle. Regarding your electric vehicle, I don't see that as being -- unless there is some major change in battery technology, major change in distribution of charging stations and a major change in the pricing of electric vehicles, combined with the range anxiety issues that go with the range -- with the electric vehicles, I don't see a major penetration rate of electric vehicles other than for certain applications like commercial trucks that run a certain route every day and go back to their home base and get charged up at the end of the day. Maybe taxi fleets in New York and some of the other places. But there's a lot of technical challenges on electric vehicles. And it's in terms of -- everything you do for air conditioning in summertime or heating in the wintertime or up a hill or down a hill, these all influence what your range is on electric vehicle. But just to be, kind of to wrap it up is, I think that 54 -- if the car companies and the federal government agree on it, which it sounds like they're working towards an agreement, then it's going to be doable. The question is how much are people willing to pay for the technology? I think companies like BorgWarner have the technology to get them there or get them very close over time. And we will continue to invent technologies that will get them, maybe, all the way there by 2025. Christopher Ceraso - Crédit Suisse AG: So it sounds like you're still saying that the industry can get there without a big increase in hybrid penetration, is that fair?

No. I said electric vehicles. Hybrids are different story. Hybrids are basically traditional passenger cars that have a supplemental electric powertrain that go with it, okay? So basically, and a lot of hybrids are going to be considered stop-start technology, which is basically a traditional automotive with an IC engine or traditional automatic transmission or dual-clutch transmission, and it will have a stop-start. That's going to be the major proportion of the major volume of what people will, in the future, call hybrids. Yes, there will be more for full hybrids which will have electronic assist for the first 40 miles or something like that on a battery and -- or maybe 25 miles on a battery and then you can go the rest of the time on a gas -- traditional gas engine. But hybrids is a very broad term for a lot of different types of technology. So most of the hybrids will have traditional engine and the traditional transmissions to improve fuel economy. Christopher Ceraso - Crédit Suisse AG: Right. And in that world, is it the traditional engine in that setup, they're going to want to be as fuel efficient as possible, so you're still in the game?

No, we're in the game, we're helping to create the game. We're going to be driving turbochargers on 2-cylinder and 3-cylinder engines and we're going to be driving low-cost, fuel-efficient dual-clutch transmissions and those kinds of things.

I'd like to thank you all again for joining us. As Robin said, we expect to file our 10-Q before the end of the day. We'll provide details of our results. If you have any follow-up questions about our earnings release and matters discussed in the call or the Q, please direct them to me. Rebecca, please close out the call.

That does conclude the BorgWarner's 2011 Second Quarter Results Earnings Conference Call. Thank you for joining. You may now disconnect.