BorgWarner Inc. (BWA) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Nicole, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2012 First 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.

Thanks, Nicole. 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 call will be available through May 3. The dial-in number for the replay is (800) 642-1687. You'll need the conference ID, which is 59474210. The replay will also be available on our website. With regards to our IR calendar, we will be attending several conferences over the next few months. May 9, we'll be at the Wells Fargo Industrial and Construction Conference in New York. May 16, we'll be at the Barclay's Americas Select Conference in London. May 22, we'll be at the Wolfe Trahan Global Transportation Conference in New York. May 30, we'll be at the KeyBanc Automotive Industrial and Transportation Conference in Boston. And on June 13, we'll be at the Deutsche Bank Industrials Conference in Chicago. 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 on our 10-K. Our actual results may differ significantly from the matters discussed here today. Now moving on to our results. Ken Manganello, Chairman and CEO, will comment on the first quarter and current industry trends; and then Ron Hundzinski, our CFO, will discuss the details of our operating results and also our outlook for the remainder of 2012. Also on the call, we have James Verrier, President and Chief Operating Officer; and Robin Adams, Vice Chairman and Chief Administrative Officer. With that, I'll turn it over to Tim.

Thank you, Ken, and good day, everyone. Today, I am very pleased to review our strong first quarter results as well as our first quarter accomplishments. But before I begin, I would first like to congratulate members of my senior staff on their recent promotions. Robin Adams has been promoted to Vice Chairman of the Board and remains Chief Administrative Officer. Ron Hundzinski has been promoted to Chief Financial Officer and James Verrier has been promoted to President and Chief Operating Officer. Ron has been with BorgWarner for nearly 10 years. And during that time, he was Vice President of Finance at Turbo Systems, our largest business unit. His leadership was essential to its profitable growth. In his more recent role as Corporate Treasurer and Controller, he worked very closely with Robin. And I am confident that their relationship will ensure a seamless transition for the CFO position. James joined BorgWarner 22 years ago. He has delivered important operational improvements in every BorgWarner business he has led. At Morse TEC and earlier at Passenger Car, Turbo Systems, he successfully directed these businesses through rapid growth, geographic expansion, new technology launches and an economic downturn. I consider James a critical component of our senior management team and I look forward to working more closely with him in the future. Now in his new role as Vice Chairman, Robin will continue to focus on financial matters. And of course, he will work closely with Ron, our new CFO. He will also continue to provide input on strategy and growth for our company. And I would like to say that I am very appreciative and I want to thank Robin for his many years that we have worked together and his many years as our most successful and very successful CFO. Robin and I have the utmost confidence in Ron and James and we are excited to be working with them in their new positions. So now, let's go on to the first quarter results. Sales were $1.9 billion, up 11% from the same period last year. U.S. GAAP earnings were at $1.28 per share, up 28% from 2011. Our reported operating income margin was 11.8%, a great start toward the 11.5% or better that we expect for the full year. And 3 key factors drove our results: increased global demands for our products, higher volumes on our base business and well-executed operational efficiency. In the Engine Group, first quarter sales were about $1.3 billion, up 5% from a year ago. The Engine Group continues to perform well and results were led by accelerating turbocharger growth around the world, increased sales in engine timing systems, including variable cam timing, and greater sales of emissions products. In the Drivetrain Group, sales were about $600 million, up 26% from the first quarter last year. Drivetrain's results were driven by increased sales of DCT modules in Europe, expanded sales of traditional automatic transmission components in North America and Korea and higher sales of all-wheel-drive systems in North America and Europe. In addition, the Drivetrain Group continues to make progress with their margins. In the quarter, the Drivetrain margin was 10%, up from the first quarter 2011 and from the previous quarter. Drivetrain's outstanding performance in the first quarter is a solid foundation for achieving the 9% or better margin that we expect for the full year. We are going to also continue to reinvest in our business. Our near-term capital spending plan includes increased capacity for dual-clutch transmission modules in Europe, engine timing systems in Asia, transfer case systems in North America and turbochargers all over the world. For the quarter, we also spent about 5% of sales on capital and we continue to invest for the long term. We spent about 3.5% of sales on R&D in the quarter, and we continue to trend toward our targeted level of 4% for R&D spending. I'm also proud to review some exciting announcements that we made during the quarter. BorgWarner's regulated 2-stage turbochargers have launched on Hyundai's new 5.9-liter diesel engine and this is the first commercial vehicle engine in Asia equipped with 2-stage turbocharging. The R2S system provides outstanding performance, boost fuel economy and helps the engine comply with Euro 5 emission standards. We're going to also supply the first 2-speed active transfer case for the Ford F-150. BorgWarner's TOD active all-wheel-drive technology automatically redistributes torque from the rear wheels to the front wheels without driver intervention. It delivers improved traction, stability and vehicle dynamics. BorgWarner also produces advanced technologies for the 2012 European Car of the Year, the Opel Ampera or Chevy Volt and, in fact, we supply components for 6 of the 7 finalists for the European Car of the Year. Our majority-owned DCT module joint venture in Dalian, China will supply modules for 3 first automotive or FAW transmission programs in China. And earlier this week, BorgWarner received a 2012 automatic or Automotive News PACE Award for its turbocharger with low-pressure exhaust gas recirculation technology. So now, let's take a look at our current outlook for 2012 late vehicle production. In Europe, we now expect 19.1 million units of production, down 200,000 units from our previous outlook. In China, 18.2 million units, down 200,000 units. In Japan, 9.2 million units, down 100,000 units. And however, there is good news. In North America, we now expect 14.6 million units of production, up 700,000 units from our previous outlook, and this will offset some of the softness in the other regions. In Europe, the change in outlook is due to production cuts at the French OEMs and weaker schedules or weaker sales in France and Italy for smaller cars. We expect midsize and large cars to be more stable than they have been -- than they have -- just like they have been in the past. And this is due in part to exports to China and North America for the larger vehicles. In North America, recent strength in monthly sales is driving production schedules higher. Consumer sentiment, credit availability and increased fleet demand are also positive developments. In summary, there have been regional changes but our recent outlook for total global production volume is in line with our previous outlook. Now on the commercial truck market, our 2012 outlook is trending positive. Commercial truck production in North America and China looks to be stronger than expected. We expect low double-digit growth in North America in 2012, and a slight rebound in China for the commercial truck market. BorgWarner's commercial truck business in China is growing faster than the market with turbochargers, cooling systems and emission systems, and this is due to increased penetration rates by BorgWarner. Brazil now looks weaker than expected as new Euro 5 type emission standards were introduced in 2000 -- in January of this year. And this led to a strong pre-buy toward the end of 2011. Also we expect the CV market or commercial vehicle market in Europe to remain relatively flat year-over-year. And finally, our sales and earnings guidance for 2012 remains unchanged. Sales growth in 2012 is expected to be 10% to 12%, or 14% to 16% if you exclude currency. Our business outlook for the rest of 2012 is generally stable although we are keeping a watchful eye on Europe. In Europe, we expect BorgWarner sales growth to outperform vehicle production in 2012, and our performance in the first quarter supports this outlook. In the quarter, European production is down 7%. But our sales, excluding currency, were up 8%. Our 2012 earnings guidance remains at $5.35 to $5.65 per share and our operating margin is expected to be better than 11.5% for the year, as I said earlier. And as I said before, the 11.8% operating margin posted in the first quarter provides great momentum towards achieving that target. So in conclusion, the outlook for our business remains stable for the year. And in 2012, we expect to grow sales and profits in every major region of the world. No company in the auto sector is better positioned for short-term and long-term profitable growth than BorgWarner. The industry's adoption of our leading-edge powertrain technology for fuel efficiency will continue for years, and because of this, I feel very good about our company's future and so should our shareholders. With that, I'd now like to turn the call over to my good friend, Robin Adams.

Thanks, Tim. As Tim said, a little less than a month ago, on March 27 we made an announcement regarding a well-thought-out transitional succession plan for BorgWarner, which included the naming of Ron Hundzinski as the new CFO of the company. Ron originally joined BorgWarner in the mid-'90s, so he's been around here a long time. As Tim mentioned, his career includes working in both the Drivetrain and Engine operating segments of BorgWarner. And more importantly, he spent 5 years as a VP of Finance for our largest product area, Turbochargers, from 2005 to 2010, providing financial leadership and discipline for that business through an emerging growth period, an economic downturn and a strong reemergence. For the last 2 years, Ron has been my right-hand person at the corporate financial organization: first as a Corporate Controller; and then as a Corporate Treasurer. He's been part of the executive leadership team for the past few years, helping to drive our company's technology focused growth strategy, and has helped develop the policies and the strategies underlying our company's financial strength and financial discipline. I have a lot of pride and passion about BorgWarner, and it's with that pride and passion that I am pleased and honored to introduce Ron to lead the financial portion of this call. Ron, it's all yours.

Thank you, Robin, and good day to everyone. Before I review the financials, I'd like to review the macro industry environment for the first quarter to help put our performance in perspective. First quarter global production was about 20.4 million units, up about 4% from the first quarter of last year. Our sales in the quarter were up 11% on a reported basis. When the impact of foreign currencies and acquisition divestitures activity in 2011 are excluded, the year-over-year sales was 13%. That is 9 percentage points better than the 4% year-over-year growth in global vehicle production and another quarter where our sales growth significantly outperformed the market. Working down the income statement, gross profit as a percent of sales was 20.7% in the quarter, up from 19.8% a year ago and 20.3% in the fourth quarter of 2011. The year-over-year improvement in the quarter was realized despite approximately $5 million to $6 million impact of higher raw material prices. Moving further down. SG&A expenses were 8.8% of sales in the quarter versus 9.5% of sales in the fourth quarter of last year. R&D as a percent of sales was 3.5%, flat from the same period a year ago. But I should note that on an absent spending basis, R&D expenditures increased by nearly $8 million. Again, that's our investment in R&D and technology in this business. Reported operating income in the quarter was $226 million or 11.8% of sales compared with $179 million or 10.4% of sales a year ago. This 140 basis point improvement on our operating margin reflects outstanding cost controls while growing our sales. From an incremental margin perspective, after excluding the impact of foreign currency and an acquisition divestiture of the activities in 2011, our incremental margin was 23% in the quarter. As you look farther down the income statement, equity and affiliate earnings was $9.2 million, up from the $8.4 million a year ago. This is our affiliate earning primarily reflects the performance of our Drivetrain Systems 50-50 joint venture in Japan, NSK-Warner, that services our Japanese customers for transmission products in Japan and China. And our turbocharger joint venture in India, which we call TDI or TEL [ph]. Interest expense and finance charges were $15 million in the quarter, down about from the $18 million a year ago. This is primarily due to several items, including lower interest rates, lower foreign debt, capitalized interest from our capital expenditures and some interest rate swap differences as well. It's a hodgepodge of items. Provisions for income taxes was $58 million in the quarter. This equates to an effective tax rate of 26%, which is now our estimate for the full year. Net earnings, attributable to noncontrolling interest, formally known as minority interest were $5.5 million in the quarter, up from $4.9 million a year ago. This line item reflects our minority partners sharing the earnings performance in our Korean and Chinese consolidated joint ventures. That's the year-over-year increase reflects the growth in those businesses. That brings us back to net earnings, which were $164 million or $1.28 per share earnings up from $1, which is a 28% earnings growth on 11% sales growth. Strong performance for the company. I'm going to switch gears now to the performance of the operating segments. The Engine segment group sales were $1.3 million in the quarter. On a comparable basis, or excluding foreign currency and divestitures made in 2011, the Engine segment sales were up 8% compared with the first quarter 2011. We're seeing good growth across parts of the Engine segment portfolio, most notably engine timing systems including DCT, emission systems and turbochargers. However, the Engine segment's growth was impacted by the slowdown in vehicle production in Southern Europe, as Tim mentioned earlier, and in commercial vehicle markets in Europe, China and Brazil. The adjusted EBIT for the Engine Group was $210 million in the quarter or 16% of sales and significantly higher than the 14.9% adjusted EBIT margin reported a year ago. The year-over-year incremental margin, excluding the currency divestitures in '11, was 27%. On a sequential basis, or when you're comparing in the first quarter 2012 to the fourth quarter of 2011, Engine sales, excluding FX, was up about 10%. The segment's incremental margin on a sequential basis was about 12%. And I'll get back to that in a second after Drivetrain. In the Drivetrain segment, sales were 11 -- $611 million for the quarter. On a comparable basis or excluding currency and Haldex Traction Systems acquisition, Drivetrain segment sales were up 24% to the fourth quarter -- year-over-year 2011. Strong all-wheel-drive sales in North America and Europe, growth in traditional transmission component sales in North America and Korea and higher -- substantially higher dual-clutch transmission modules sales in Europe were key growth drivers. On a reported basis, adjusted EBIT was $61 million or 10% of sales, double digit, sharply higher than the 6.6% reported in the first quarter 2011. If you look at the progression of the Drivetrain's adjusted EBIT margin performance over the last year, the business has shown remarkable improvement: 6.6% in Q1 of 2011, 7.4% in Q2, 8.1% in Q3 and finishing up, 10% in Q1 of 2012. Last year, Tim and Robin commented to a heightened focus on improving Drivetrain's operating performance. That focus has paid off. As Tim said earlier, the first quarter performance is solid foundation for the Drivetrain segment to achieve EBIT margins of 9% or better as we said last year. And we've already met that in the first quarter. The year-over-year incremental margin for Drivetrain segment, excluding currency and acquisition of Traction Systems division, Haldex, was 25%, excellent performance around the Drivetrain segment. On a sequential basis in Drivetrain, when you're comparing the first quarter 2012 to the fourth quarter 2011, Drivetrain sales excluding FX was up 18%, tremendous growth. The segment's incremental margin on its sequential sales was about 17%. I'd like to talk about that a little bit more about the sequential performance before I talk about the cap, the balance sheet and the cash flow. If you look at the total segment performance on a sequential basis, the sales are up 12% if you exclude currency. Global production from Q4 to Q1 was up 4%. Again, we outperformed the market. If you take a look at the adjusted EBIT margins, the combined margin was 14.1% in Q4 2011 and were slightly up, 14.2% in Q1 of 2012. Basically, we had margin expansion. Engine margins were slightly down but they came off the records of 16.3% in Q4 down to 16% in Q1. While Drivetrain though achieved record highs, or as far as I can go back in recent history, in Q1 up 10% versus 8.8% in Q4. I think that's solid performance. So I'm going to move on to the balance sheet and cash flow. If you look at the balance sheet and the cash flow statement, we generated about $31 million of net cash from operating activities in the first quarter, up $72 million from the first quarter of 2011. Capital spending was up about, was $95 million in the quarter, up $25 million from the same period a year ago. The year-over-year increase is indicative of the growth in capital spending required to meet the increased level of program launches that we have around the world, particularly in markets like Asia, South America, Eastern Europe and Mexico. Free cash flow, which we define as net cash from operating activities less capital spending, including [indiscernible] -- was an outflow of $64 million, which is typical of seasonal occurrence for Q1. Our investment in working capital is substantial in the first quarter as business activity picks up from the end of the fourth quarter of last year. Looking at the balance sheet. The balance sheet debt increased by $81 million compared with the end of 2011, while cash increased by $37 million during the same period. This is a net difference of $44 million increase in debt, which was primarily to fund the working capital investments I just discussed. As you look at the capital structure, our net-debt-to-capital ratio was 27% at the end of the first quarter compared to 28% at the end of 2011. Net debt to EBITDA at the end of the first quarter 2012 on a trailing 12-month basis was point 0.9x. However, earlier this month, we settled all conversions of our convertible notes by delivering approximately 11.4 million shares to note holders, reducing debt by approximately $374 million and increasing stockholders' equity by the same amount. Because this occurred in April, you will not see the impact of this activity until our release of the second quarter financial statements. The 11.4 million shares were in treasury and were in the dilutive impact on the calculation, so there's no impact. Therefore, we settled everything on the convert. However, there is some activity that I should note in a few seconds here. Our balance sheet and capital structure at the end of the first quarter should be viewed on an if-converted basis. From that perspective, the net debt to capital was about 17% at the end of the first quarter and net debt to EBITDA was approximately 0.6x. Our capital structure is excellent and in shape. We also have this -- concurrent to the notes, we had a, an overlay -- a bond hedge overlay that I'm going to discuss. We settled the call option portion of this bond hedge overlay. Through this settlement activity, we received approximately 6.5 million shares of common stock. These shares will be held in treasury and used to settle the warrants portion of the bond hedge overlay that matures over a 60-day trading period beginning in mid-July. The settlement of the call options has reduced the diluted share count by 6.5 million shares as of mid-April, which you will see in our second quarter financial statements. We will settle the warrants-related obligation with treasury shares, which will begin, like I said, in mid-July and expect it to have negligible amount on the diluted share count. Maybe I should explain what's happening in just a little bit. First, 2 portions of this bond hedge overlay. There is a call option, which we settled, and we received 6.5 million shares, and there's a warrant that's going to be unwound over a 60-day period. The call option portion of the bond hedge overlay was considered anti-dilutive by accounting standards, which basically meant we were not able to reduce the dilutive share count fold until we took possession of the shares. We did that on April 16, so today, we have additional 6.5 million shares in treasury, which is a permanent reduction in our prior diluted share count pool calculation. The warrant portion was always included in the dilutive portion of the calculation. So in effect, we simply just kind of matched the transactions. So going forward, as the warrant unwinds, the shares will come out of treasury and move from dilutive to basic, and therefore, no impact on us, or relatively no impact. I hope that clears that up and maybe we won't get any more questions. I don't know. Back to guidance. I'm going to move to the guidance of 2012. As Tim mentioned earlier, our sales growth and earnings guidance remains unchanged. We expect sales growth, 8% to 12% compared with 2011, 14% to 16% excluding currency. Although we are watching Europe closely, earnings are expected to be in the range of $5.35 a share to $5.65 per diluted share. From a margin perspective, we expect to achieve operating margins of better than 11.5% for the full year. Our first quarter operating margin was 11.8%. That's a great start to the year. Year-over-year incremental margin should be around 20%. Again, our incremental margin the first quarter, excluding the impact of foreign currency acquisition and divestitures was 23%. We believe the impact of higher raw material cost will be in the range of $25 million to $30 million this year. We had said at our last earnings call, we absorbed the managed inflationary cost, including raw materials, and do not expect them to have any negative impact on earnings expectations for the year. The one change to our guidance is the full year estimated effective tax rate, which is now 26% versus our original estimate of 25%. So to summarize, we achieved a record first quarter earnings due to strong conversion of our industry-leading sales growth and income. The Drivetrain segment had a very strong quarter. The Engine segment margin remained near record levels and it was a strong start to the year, should provide a good momentum going forward. Our guidance for 2012 implies another year of solid growth, record margins, record profits. And as we observe these trends in the market, we see more growth and more record profits beyond 2012. Our confidence stems from the regulatory environment that continues to be very stringent, fuel cost that continues to trend higher and as a result, OEMs in the end consumers' favor an advanced powertrain technology. Our product portfolio is focused on improving fuel economy, lowering emissions, which is precisely what the market is focused on today. And we expect this strong demand for our products to continue for years to come. Our technology leadership, strong global presence, financial discipline and focus on attracting and maintaining a talented workforce has been the key to this company's success. And will continue to drive our success in the future. With that, I'd like to turn the call back over to Ken.

Thanks, Ron. We'll now turn to the Q&A portion of the call. Nicole, please announce the Q&A procedure.

[Operator Instructions] Your first question comes from the line of Rich Kwas with Wells Fargo.

On Drivetrain. So the 10% number for margin was pretty good. Tim, do you, is that sustainable or is that going to be lumpy as we go through the year? I know the formal guidance is 9-plus%, but just some more color on how we should think about that going forward.

Well, I think it's probably closer to sustainable than the 9%. I would -- now that we've hit 10%, I think we'll probably going to stay close to that. We made flex a little bit, plus or minus from 9.5% to 10%. Maybe we may even creep a little bit higher than 10%, but it's going to be at the high end of that 9% to 10% range.

And then just longer term on that segment, in terms of margin performance out -- looking out, what's the potential in that segment? I know structurally speaking, it's going to be always lower than Engine. But is there a lot more potential for that to go above 10% if you look out given DCT volumes and then some of the business that you have in the backlog?

Well, all of our businesses basically taken up 15% or better return on invested capital. So it's not so much margins that drive our business' return on invested capital. But that being said, we're trying to take business at good margins. Now that the issue is, historically, the Drivetrain Group has more historical costs. So we've got legacy costs, pensions and so forth and so on. So the Drivetrain Group carries more historical cost that the Engine group doesn't have, because the Engine group is actually seen -- has grown to be the size of it is in the last 10 to 15 years.

Right, okay. And then just if you look at the announcement yesterday with the China JV, was that -- I assume that was part of the $100 million or so business that was pushed out beyond the '14 timeframe. And then, what's the potential? Are those basically the first 3 programs for the joint venture? I can't remember. I know you did launch something last year, but if you could just give us an update for the China JV for the DCT.

Yes, they were product rollouts that were pushed out. The part that was comped, they were initially in as part of the original ramp-up stage of that -- of those programs. So you're going to start to see more of that now being picked up, I think, in the next year. While the new business backlog that we announced this November 2012, we'll pick up some of that business now. But the full tranche of that business won't be seen until like '15, maybe '16 because of there's -- those 3 transition programs are stepped up. What was the other part of your question again?

Just on the quoting activity I guess, as a follow-up to that, now you got that booked and what are you seeing?

The quoting activity in terms of the amount of new business we scored in the first quarter of this year, was we track new business wins by [indiscernible] or purchase orders that we've been awarded quarter by quarter. And this was the best quarter we've had -- the best first quarter we've ever had in our history. And it was probably the second best quarter we've ever had, period. So the fourth quarter tends to be the strongest quarter because purchase orders tend to ramp up as you go out through the year and the fourth quarters tends to be the highest. And the first quarter actually tends to be one of the lower quarters, but this is a first quarter of this year was a really strong quarter.

Is that turbo driven, or is there other stuff in there?

Even distribution of all the product. Yes, we're winning Turbo business. We're winning dual clutch business, we're winning Morse TEC variable cam timing business. It's a total cross-section of the company. emissions, BERU starting to kick in now also.

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

Just a question on the swing factors that we would see in 2012 relative to your guidance. I mean it sounds like in the first quarter, you're seeing a little bit more weakness in Europe than you thought [ph] but also, a lot more strength in North America that really are offsetting, allowing you to keep your guidance about where it is. But if we think about the other big swing factors other than just volume risk in Europe, on the downside and buyer risk to North America on the upside. What are the big swing factors you're thinking about? Is it capacity bottlenecks or mix or raw material cost or is this just an issue? Just trying to understand what other factors you're thinking about as you're working through this guidance other than just the volumes?

In actuality, there aren't that many big swing factors that haven't already been accounted for. Material costs are roughly under control. They're going to be in the $25 million range as the historic -- kind of towards the historical low portion of the range. So it will be $25 million plus or minus. We have capacity. We're putting in capacity. We're putting in capacity at accelerated rates for us -- to handle the growth for the future. But that's normal for us. We -- that's accounted for in our 4% -- our 6%, roughly 6% CapEx investment every year, and our 3.5% to 4% R&D expense every year. I -- you are right, though, in the beginning of that part, we've seen some softness in the -- well, let's just say the French, Italians and some of the North American, German OEMs. The German OEMs that are owned by the North Americans have seen some softness, okay? And yes, we're seeing increased pickups in North America, both in the truck market. We're strong with Ford on four-wheel-drive. And timing drive systems. And EcoBoost across the board, with 4 cylinder and the EcoBoost 6 cylinder truck. And Ford was strong in -- at Chrysler on four-wheel-drive and Pentastar engines. And that's part of the reason why you're seeing the increase in our tax rate, because we getting more business and more profits out of North America. And it's kind of putting a pump door and kind of jacking up our tax rate a little bit.

The capacity you don't see as a short-term issue at all?

No. We constantly are putting in new capacity and I -- James is sitting right here. He knows. I've been -- for the last 2 to 3 years I've been hitting these guys hard on doing 2-year forecasts on capacity plans and getting the capacity in before our customers actually need it. We don't want to put in too early, but we darn well don't want to put in late.

And then just a follow-up question on some of the stuff that Rich was getting at on the margin side. And I'm just curious that as you are filling up this, this capacity and you are hitting these nice, better-than-expected margins, like North of 11.5% operating margins. Is there real potential for these margins to increase through the course of the year? Are you thinking sort of this very robust level we saw in the first quarter is where we might travel at through the rest of the year? And there's maybe not upside to North of 12%. So there's a lot of speculation that there is more room for your margin, a lot of speculation that there's not. I'm just trying to understand if you think you might be able to exceed this first quarter number for the rest of the year.

Let's just say this. There's a lot of pressure on pricing, a lot of pressure on margins. We try to do it -- we obviously do a pretty good job. These margins are coming, these improved margins are coming from mainly from operational efficiencies and improvements. Our guys are, as you can see by our SG&A, and you can see by our margins, we're running, we're a well-oiled machine right now, and we're running really strong in terms of operating efficiencies. So a lot of this margin stuff is coming from internal actions. And at the same time on the pricing side, we go out and quote business and we win business. And I don't -- I think we're winning business for 2 reasons. One, we have leading technology. And 2, we were competitive on price. Competitive doesn't necessarily mean low or lowest, that just means we're, provide a fair value.

And John, this is Ron. I just have a little color to add. I think one way to look at it is to take a look at sequential revenue growth going forward. And then apply a 15% to 20% incremental margin. I think that's the way you should look at this from the first quarter, okay?

That's incredibly helpful. And then just lastly, Tim, one last product question. It sounds like the Drivetrain and the Transportation are doing really well here in North America. Just curious as you are getting inquiries, a lot of inquiries on turbochargers, are you getting a lot of inquiries on your Torque-On-Demand, and your efficient all-wheel-drive systems? Is that something that automakers are very focused on? And if you can remind us what general fuel savings you can deliver on your efficient transfer cases as well as all-wheel-drive systems?

Okay, yes, we're getting a lot of action with the traction system acquisition. We're going to be taking that technology to China. That's our expectation. We're getting on the -- let's just say in the active portion of the business, it doesn't necessarily increase on the four-wheel-drive side. It doesn't improve fuel economy. The best you can do and what we do technically is focus on not detracting from fuel economy. So if you can deliver a four-wheel-drive or an all-wheel-drive system, it doesn't -- parasitic loss neutral or fuel economy neutral. That's a good thing. On the transmission side, we are working on new technologies for traditional automatic transmissions to improve fuel economy through clutching materials and friction materials, huge increase in demand on dual-clutch transmissions in Europe. You're starting to see dual clutch. We just talked about China. But you're going to see dual clutch being spread more and more across the globe. And what you are seeing is that dual clutch has 2 competitors: the traditional automatic; and then it has that dual-drive clutch as a competitor. Yes, we take -- we supply the control modules on the dual-drive clutch. But the dual-drive clutch is having some technology problems out there, some shifting problems. So there's a lot more interest and a lot more people contacting us on where they initially were thinking about dual drive clutch, they're now thinking more about dual work [ph] clutch.

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

Tim, I may have missed this when you spoke about Europe earlier. But did you give your forecast for your own sales in Europe for 2012?

No, we didn't.

I think you'd said before that was going to be, I think, 12%x FX or something in Detroit?

What we said earlier in the previous meetings and conferences is I think we're, we said, it was going to be up and Europe was in a down market where we said Europe was going to be down 4% before. Now we're saying, it's down about 6%. We're going to be up about 6% to 8%, I think, in Europe without adjusted for FX or foreign currency. And higher than that, 8% or 10% or something like that, adjusted for foreign currency. We're seeing a little -- in all honesty, we're seeing a little bit more softness than we anticipated with some of the French and Italian and some of the other German OEMs in terms of their volumes. But yet, the traditional German OEMs, the BMWs, the Mercedes, the Audis, and Volkswagens, their volumes are strong. And so we have strong volumes with them, but and we have, we're starting to see some weaker volumes at some of the other small car players in Europe.

And yes Ravi, I just want to -- the first quarter performance, the market was down. Our differential in Europe was about 15 percentage points between the European market being down, what we achieved in sales in the first quarter. So I wasn't sure if your question was forward looking or just what the performance was in the first quarter.

I was asking about full year, but I think Tim addressed that, so thanks for that. And also Ron, a couple of questions for you. Your corporate expenses were probably the highest you've ever had. Was there anything going on there in terms of incentive comp or something?

Yes, there was. The year-over-year change was about $6 million, $7 million related to our stock-based compensation year-over-year. And actually on a sequential basis, it's up about $9 million. So both views there, that exactly what it was. The stock price at the end of the year was $63, roughly. We finished the first quarter about $84, I think it was. And then if you go year-over-year, it was, I think another $4 difference. I got to go back and get that number really quick. But that's what you're seeing. Last year, the first quarter was $80 finished. And we finished at $84. So there's $4 to $5 differential. And from the end of the year, you're up almost $20.

And we think that's all a good thing, too.

We'd agree. So going forward, that's going to be still in the mid to high 20s, or is that going to be more of an elevated number all on corporate cost?

Why -- are you talking about corporate costs or are you talking about impacts of...

I'm talking about overall corporate costs.

I think corporate cost will be about where it's at right now what you're seeing going forward. Probably some slight reductions as we go throughout the year.

The incentives will start to come down.

Yes, and the incentives will come down. So I think we probably peaked in the first quarter.

The compensation portion will come down.

Got it. And the final question is, Ron, thanks for all that color on when the share count comes on comes off, but can you make our life much easier and just give us a guidance for what share count's going to be in 2Q, 3Q and 4Q?

It'd be [ph] -- my life would easier, too.

He's asking for guidance for that, what it would be for the rest of the year?

For the impact of that, or...

Just what the share count's going to be.

I would basically take the 6 and 0.5 off the end of the quarter number, roughly, roughly.

Ravi, this is Ken, we talked about this a little bit a couple of months ago. We still think that average share count is going to be 1, 23, 1, 24, somewhere in that area.

It might 1, 27. It may be 5. Maybe 5 is a better number.

Your next question comes from Itay Michaeli with Citi.

I was hoping you can share the, what the backlog contribution to revenue was in Q1 and refresh us on what you're looking for there for 2012 on the revenue guidance?

I'm not so sure I can identify what the backlog contribution was. We just track -- we just track orders and shipments as they come in. I think what you're asking for, how much of it was attributed to new business and how much of it was attributed to carryover type business?

Exactly, yes.

I think one way to look at it, we don't track -- I think there's no way, maybe on your models, you can take a look at it. I would take base sales, plus maybe a market, where the market was, and take that differential from the market to where end of sales were. I think that might be a good indication of how much backlog came in. Because the market was about 4. Excluding FX, we were up 13, so it's 9. I would say maybe that 9 would be indicative of our backlog coming in. There might be a price in their noise but...

As you can see, we don't track it that way.

That's fair enough. And then, it looked that you're being a little bit more cautious on Europe. Tim, I was hoping you can just share what you're seeing thus far in Q2 in terms of production schedules and roughly what you think the region will be in terms of production year-over-year in Q2?

I'll let James grab that one.

Yes, sure, good morning. I think as Tim said, we've seen just a little bit of softening in particularly with the French automakers and basically the Southern European business. But we're seeing Q2 at a high level about where we were from a couple of months ago. So we're seeing some little shifts, customer to customer. As Tim said, from the German OEs are doing very, very well, both within Europe and for export. So those volumes continue to hold up. So I would say what we're seeing right now in the quarter is similar to how Tim portrayed it for the rest of the year in the quarterly outlook. So no big swings at this stage.

I think we may see the first and the second quarter track a little bit better than the first quarter. I think it'll be better than flat. It'll track upward. The second quarter is traditionally one of the strongest quarters of the year. And that was the strongest quarter we had in 2011, so the comps will be a little bit tougher in the second quarter when you compare 2012 to 2011. But I think you're going to see some spikes, some slight increase in sales from the first quarter to second quarter this year. And then I'd say, what we're seeing is, and what we're predicting, is a stronger second half to the year.

That's great and one last quick housekeeping. CapEx, we're still looking for about $450 million to $500 million for the year? Has that changed at all?

No, that's correct. Yes, it is.

Your next question comes from the line of Chris Ceraso with Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Just a couple of items. The big picture, what is the -- what are you seeing in terms of trends in the light vehicle diesel market globally? Is this still a growth driver for you? I know that Europe is kind of flattened out. Maybe you can talk about that a little bit.

It's holding strong at about 54% of the market penetration, and some people have thought -- had predicted it was going to go to -- start to go down a little bit, but we're not seeing it. It's holding strong in terms of the percentage, at about 54% of the market. And now the market, because of the Southern Europeans, the market's trending down a little bit in terms of volume, but the percent penetration's holding firm. Gas, the gas turbochargers are continuing to penetrate the market. So we're seeing growth in gas, in the face of a declining market, we're still seeing growth in gas. Christopher J. Ceraso - Crédit Suisse AG, Research Division: What about in markets outside of Europe, are you seeing any growth in diesel light vehicle?

Well, we're going to start to see some growth in diesel, I think in North America. You got -- the Europeans are coming over with more availability. GM's going to start, in 2013 GM's going to start launching the Cruze with the diesel. And I think that they -- they're planning a low-penetration rate. But I think their penetration rate's going to be much higher than they expect. And I hope it is. You're seeing increased use in diesels. We're seeing increases in, I think, in Korea and a little bit in India. We're seeing good increases in India. But now the India, in India, we sell through a joint venture. And unfortunately, we're a minority owner of the joint venture instead of being a majority owner of the joint venture, which was set up like 25 years ago, long before we actually owned the company.

So I don't know if that helps you, Chris? Christopher J. Ceraso - Crédit Suisse AG, Research Division: So for the time being, maybe a little bit of help from diesel in the light vehicle market?

Yes, diesels are growing. And I don't have the charts in front of me, but diesels are growing for 2012 globally. And gas is growing, gas turbocharged engines are growing much stronger globally in 2012. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Right. Okay. Then just a quick one. On -- you mentioned a few times some of the softness that you're seeing in Southern Europe. Can you just help us frame the size of that for you? So roughly what percent of your business in Europe is with Peugeot, Renault, Fiat and Opel?

No, I'll get that. Hold on. I don't break it down, but I can give you some indication. The general softness amongst those schedules is like probably in the 2% to 3% range. But we -- let's just say this, that when you get into Renault and PSA, although Renault is the highest, they're their fifth largest customer. But that's so in this [ph] combination, and they're -- what's happening is they're growing and we are growing our penetration rates with Renault, PSA and actually some of Fiat. But so we're increasing our penetration rates but their volumes are declining. And what's happening is -- so it came -- it's coming out netting a little bit lower than we originally forecasted when we put together our forecast in January for this year. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Right, but big picture. If your business is roughly, I don't know, 50% Europe, is 10 points of that with these customers that are under pressure, or is it more or less than that?

I wouldn't say it's that much.

That was the last question.

You're just thinking turbochargers and we supply all sorts of product to a whole lot of European OEMs. So and we can get back to you. I can have Ken get back to you on a more specific answer.

Your next question comes from Brett Hoselton with KeyBanc.

A couple of quick questions here. First of all, just kind of, I guess I would consider it to be housekeeping, the nylon issue. You guys have a lot of engine products, I thought you might have some insights there, most of what we're hearing is that not going to be that material. Do you have any insights that suggest this could turn into a material issue in the short term for the automakers, particularly in Europe or even North America or Asia?

Well, let me start with BorgWarner. It's not an issue for BorgWarner at all. There maybe 1 or 2 part numbers. And one of the part numbers, we don't use that supplier. Our Tier 2 or Tier 3 supplier to us doesn't use that supplier. And the other part number, there's a years -- we have a supply in the pipeline between what's us and our sub-suppliers. We got enough material to cover us for the rest of this year. So this will be long solved by then. As far as the industry is concerned, I think you're going to see -- firstly hit in Europe, possibly. And I think that's where you'll see the initial impact, if there is an impact. This industry is very flexible and knows how to react very quickly. You saw it with the Japanese earthquake and you've seen it on some of these other things like where there's been plant fires and so forth. I think that there'll be substitutions and I think there'll be workarounds. And I don't think this is going to be an issue for the industry at all. That's my opinion. But I am pretty optimistic about this industry working with the resin people that they'll be able to come up with substitutions and workarounds. There may be some short-term delays here or there in one plant or another, but I think that, that's going to be, that's not going to be that much of an issue.

And then as I look out into 2013, I know that you're not interested in providing guidance here. But in the past, Robin, I've heard you talk about being able to sustain margins when revenue growth is, call it 10%, 15% or something like that, improving revenues when it's in excess, revenue growth is in excess of 20%, let's say, and so on and so forth. My question is, as we look on to 2013, it's a 5% production growth, 10% new business revenue growth so forth. You're kind of in that 15% range. Is there any reason to believe -- is there any unusual items or anything along those lines that you would look at 2013 and say, "Look, this is going to be a particular impediment or benefit, margin-wise into 2013 that would cause us to do something different than what we would normally experience in the 10% to 15% revenue growth environment?"

This is Ron. I don't see any run debt [ph] would go against us. I mean the incrementals of 15% to 20% is pretty much the way you should model that.

And then finally, can you provide us with a quick update on acquisitions? And my question here is as you kind of look out over the next 12 months or so, and would you be particularly disappointed if you weren't making an acquisition or 2? Or do you think that it's unlikely that you're going to make an acquisition or 2? Do you think that might be material, that sort of thing?

I'll take that one. As we've said, we have a list of ideas, we have a list of companies that we track, monitor and it's difficult to predict someone finally saying uncle and giving up and trying to sell their business to us. But I think, given our focus, I think if we couldn't find one of these guys to relent it and be willing to let us buy one of these prized assets in the next 18 months, I think we would be a little disappointed. There's some technology out there we'd like to own. We've made it known we'd like to own it, not publicly, but to the owners. And we've had some discussions. We continue to have some discussions. And so I think that yes, you're right. If 18 months from now, we haven't done anything in the acquisition area, we'd be a little disappointed -- just remember, we've -- in the prior 24 months, we've made 2 decent acquisitions. So it's not like we've been sitting on our hands for a few years. But we are anxious as always, to bring new technology in the company. And again, I think that we're focused pretty hard on it. And we'd hope to be able to bring something home in the next 18 months.

We have time for one final question and that question comes from the line of Joseph Spak with RBC Capital Markets.

Most of my questions have been answered. Maybe if I could just ask one on the margin. And appreciate that the 11.8% to start the year gives you a good base to meet your full year target of greater than 11.5%. But over the past 2 years, we've sort of seen sequential improvement every single quarter. Now that drive line is back up to double-digit margins, should we expect a little bit more seasonality in the margins for the rest of the year?

Well, I think it's the top line that you have to look at. So you have to look at what the sales growth is going to be sequentially on the top line. And then you can model a 15% to 20% incremental margin on that sales growth. So that's the top line that's going to be the most important thing. Now with that said, we always have seasonality in this business. Third quarter, typically with summer breaks in Europe and changeovers in the U.S. is typically a lower sales quarter for us and it picks up in the fourth. Historically, that's what we've seen. We have seen changes historically, but I think that's the historical perspective there.

I think you're going to see things, as well, the rate of change will start to slow down. We've made some pretty dramatic progress over the last 1.5 years in terms of step-by-step, quarter by quarter, and I think we have the ability to improve but you're just not going to see the same large steps from one quarter to another.

Okay and then just one quick last housekeeping. I appreciate the color on the share count and the color coming out. Is it -- on the interest on the convert that you add back as well, it sounds like just assume one month of that in the second quarter?

You can actually assume 0.5 month, I believe, because 5 [ph] of April is when it was converted on the 16, 0.5 month. And you're right, going forward, you won't see it any longer. At least in the later part of the quarter.

I'd like to thank you all again for joining us. We expect to file our Q before the end of the day, if you're looking for -- find details of our results. If you have any follow-up questions about our earnings release, the matters discussed here on the call or the Q, please direct them to me. Nicole, please close out the call.

That does conclude the BorgWarner 2012 First Quarter Results Earnings Conference Call. Thank you for joining. You may now disconnect.