BorgWarner Inc. (BWA) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Michelle and I will be your conference facilitator. At this time, I would like to welcome everyone to BorgWarner 2013 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.

Thank you, Michelle. 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 May 2. The dial-in number for the replay is (800) 585-8367. You'll need the confidence ID, which is 29703435. 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. May 8, we'll be at the Wells Fargo Industrials Conference in New York; May 22, we will be at the Barclays Americas Select Conference in London; May 30, we'll be at the KeyBanc Conference in Boston; and on June 12, we'll be at the Deutsche Bank Industrial 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 in our 10-Q. Our actual results may differ significantly from the matters discussed today. Now moving onto our results. James Verrier, President and CEO, will comment on first quarter results and current industry trends; and then Ron Hundzinski, our CFO, will discuss the details of our operating results and also our outlook for 2013. With that, I'll turn the call over to James.

Thank you, Ken, and good day, everyone. Today, I'm really pleased to review our first quarter results, as well as our first quarter accomplishments. First of all, I'd like to congratulate all of the BorgWarner employees on an excellent first quarter. Your efforts drove outstanding results in a very challenging environment. Now let me talk about our results. Reported sales were $1.9 billion, which is down 1% from a year ago, excluding the impact of foreign currencies and dispositions made in the last 12 months. U.S. GAAP earnings were $1.22 per share, but excluding noncomparable items, earnings were $1.30 per share. Our reported operating income margin was 10.7%, but again, excluding noncomparable items, our operating income margin was an impressive 11.7% in the quarter. And Ron will discuss the noncomparable items later. Two key factors drove our strong results. Sales were impacted by a weak production environment, most notably light vehicles in Europe and commercial vehicle in Europe and North America. Operational efficiency and cost controls enabled us to post a strong operating margin, despite these challenging market conditions. Let me talk about the Engine Group. In the first quarter, sales were over $1.2 billion, that's down less than 1% from a year ago after excluding the impact of foreign currencies and dispositions made during the last 12 months. These results were led by higher sales of variable cam timing systems in Japan and emission systems in Asia and the Americas. These positive results were more than offset by the lower production volumes we saw in Europe. In the Drivetrain Group, sales were about $610 (sic)  million, that's down about 2% from the first quarter of 2012 when we exclude foreign currencies. Drivetrain results were driven by increased overall drive system sales in North America and Korea and growth in traditional AT component sales in Korea. Again, these positives were offset by lower production volumes in Europe. So our earnings of $1.30 per share, when we exclude the noncomparable items, was a new first quarter record. It's a tremendous accomplishment considering the weak conditions in which it was achieved. Let me look at a little bit to the future and BorgWarner continues to invest for the long term. Capital spending continues to grow. In the quarter, we spent about 5% of sales and we remain committed to supporting our future growth and productivity improvements. Spending for R&D was about 3.9% of sales in the quarter, that's just under the 4% that we target for R&D spending. I'd also like to review some of the exciting announcements we made during the quarter. BorgWarner's regulated 3-stage turbocharging system won 2 2013 Automotive News PACE Awards at a ceremony held in Detroit, Michigan earlier this month. We're very proud once again to be recognized as innovators and game changers in the industry. BorgWarner supplies its latest turbocharging technology for a new generation of medium-duty engines from Mercedes-Benz, the first commercial vehicle manufacturer to achieve Euro VI compliance of all its medium and heavy-duty engines. We also opened 2 new production facilities -- a new production facility in Itatiba City in Brazil, which is twice the size of our former facility in Campinas. And we'll be producing several technologies at the facility for passenger cars and commercial vehicles, such as turbochargers, thermal systems, engine timing systems and emissions technologies. BorgWarner advanced technologies are on the 2013 North American Car and Truck of the Year winners, the Cadillac ATS and the Ram 1500. For the Cadillac ATS, BorgWarner supplies friction plates and one-way clutches for the 6-speed automatic transmission and transfer case systems for the all-wheel drive models. And on the Ram 1500, BorgWarner produces viscous fan drives for the V8 engines, timing systems for models equipped with the Pentastar engine, friction plates for the 8-speed automatic transmission and transfer case system for 4-wheel drive models. We're very proud to contribute our technologies to these outstanding vehicles. Also, BorgWarner Turbo Systems received a Daimler Supplier Award in 2012 in recognition of outstanding performance in quality, cost and delivery and reliability. Also 2 BorgWarner facilities received 2012 Supplier Quality Excellence Awards from General Motors. These awards recognize supplier manufacturing locations for consistently exceeding defined quality performance criteria. Now let me shift and talk a little bit about the current outlook for 2013 light vehicle production, which is unchanged from our previous view. We expect global production volumes to be up approximately 1% from 2012. In North America, we expect production volumes to be up 3% for 2012. Europe down 3%. China up 10%. And Japan, down 10%. In the commercial vehicle markets, generally, we expect stability in 2013, but not much growth. In Europe and North America, we expect production to be pretty much flat with 2012. In China, we now expect to see a double-digit decline in commercial vehicle production in 2013 compared to 2012. Our original expectation was flat; however, we've seen some weakened demand that has caused to lower our expectations. In Brazil, however, we do still see the potential for low, double-digit growth. Finally, our sales and earnings guidance for 2013 also remains unchanged. Sales growth in 2013 is expected to be between 2% and 6%, or 3% to 7% when you exclude the 2012 dispositions. Our 2013 earnings guidance remains at $5.15 to $5.45 per share, and our operating margin is expected to be 11.5% or better for the year. So with 1 quarter behind us, I remain confident that 2013 will be another strong year for BorgWarner. In conclusion, the macroenvironment, it certainly has challenges, especially in Europe. However, BorgWarner's financial results underscored our operational proficiency and our ability to manage costs during challenging times. And as we look ahead, we see that outlook for our business remains strong. In 2013, we expect to grow sales and profits for the fourth year in a row with more growth to come in 2014 and beyond. No company in the auto sector is better positioned for long-term profitable growth than BorgWarner. The industry's adoption of our leading edge powertrain technology will continue for years. And because of this, I feel very, very good about the company's future. And with that, I'd like to turn the call over to Ron.

Thanks, James, and good day, everyone. Before I begin reviewing the financials, I'd like to put BorgWarner's performance into perspective relative to the industry. Global light vehicle production was down 1% in the quarter compared with the same quarter last year. BorgWarner's reported sales were down 3% from a year ago. As James explained earlier, if we exclude impact of foreign currencies and M&A activity in 2012, our sales in the quarter were down 1%. To get a clear picture of performance relative to our markets, we need to review the light vehicle and commercial vehicle markets separately. First, let's take a closer look at the light vehicle market from a regional perspective. In Asia, which I'm defining as China, Korea and Japan, light vehicle production was up 2%. Our light vehicle sales in Asia, excluding currency, were up 11%. In Europe, light vehicle production was down around 9%. Our light vehicle sales, excluding currency in 2012 disposals, were down 5%. In North America, light vehicle production was down 1%, our light vehicle sales growth in North America was about 1% positive, slightly better than the market. Now let's review the commercial vehicle market. Commercial vehicle production was up in Brazil, but was lower in China and North America. Europe was basically flat. As a result, our commercial vehicle sales were down nearly 10% in the quarter. Our typical outperformance of the light vehicle market by 8 to 10 percentage points was impacting[ph] Asia in the first quarter. We also outperformed the market in Europe, but less than typical, which is primarily due to unfavorable mix. While the entire light vehicle market was down 9% in Europe, the high end of the market, where BorgWarner has most of the content, was down more relative to 2012. Weak commercial vehicle markets resulted in a near 10% sales decline for us in a segment representing nearly 20% of our business. Working down the income statement. Gross profit, as a percentage of sales, was 20.2% for the quarter, that's down slightly from 20.7% a year ago and includes about $3 million of higher raw material prices. SG&A were -- was 8.6% of sales in the quarter versus 8.8% of sales in the first quarter 2012. R&D spending, which is included in SG&A, was 3.9% of sales in the first quarter, up 40 basis points from a year ago. This implies a 60 basis point decline in other SG&A spending. We attribute the lower SG&A spending to good execution of our cost control plan and lower stock-based compensation expense. Reported operating income in the quarter was $199 million. However, this includes 2 noncomparable items. First, there was $6 million of retirement-related obligations. This is the final charge related to the company's decision to waive the forfeiture provisions of existing stock grants to certain retiring executive officers. Second, there was $11 million charge related to a program termination agreement. A program was terminated after investments and commitments to invest have been made by a customer, BorgWarner and our supply chain. This is the impact of BorgWarner of the agreement payments. Excluding these charges, operating income was $216 million or 11.7% of sales, compared with $226 million or 11.8% of sales on a comparable basis a year ago. Excluding the 40% -- the 40 basis points increase in R&D spending, our operational spending was down 30 basis points on lower sales. After excluding the impact of foreign currency and noncomparable items in both this quarter and the first quarter of 2012, our decremental margin was around 19%, in line with our targeted 20%. This is outstanding performance. We are on track to achieve our operating margin target of 11.5% or better for the year. As you look further down the income statement, equity in affiliate earnings was $10 million in the quarter, up from $9 million last year. This represents the performance of NSK-Warner, our 50-50 joint venture in Japan which sells transmission components to our Japanese customers in Japan and China, as well as TEL, our turbocharger joint venture in India. Interest expense and finance charges were $10 million in the quarter, down from $15 million a year ago. This was primarily due to the maturity of our convertible debt settled with treasury shares in April of last year. Provision for income taxes was $51 million in the quarter, which is a 25.5% effective tax rate. However, the provision includes: a $2 million tax benefit associated with retirement-related obligations, I mentioned earlier; a $4 million tax benefit associated with the program termination settlement; and a $2 million of net favorable tax adjustments, which was primarily due to R&D credits resulting from the retroactive impact of U.S. legislation enacted in January of 2013. Excluding these items, our tax expense was 55 -- $59 million in the quarter or a run rate, effective tax rate of 27%, which, I'll note, is in line with our 2013 guidance. Net earnings attributable to noncontrolling interests were $6.5 million in the quarter, up from $5.7 million a year ago. This line reflects our minority partner's share in the earnings performance of our Korean and Japanese consolidated joint ventures. That brings us back to net earnings, which were $142 million in the quarter or $1.22 per share on a reported basis. On a comparable basis, net earnings were $152 million in the quarter or $1.30% per share, up 2% from $1.28 per share a year ago. That's a 2% increase in earnings per share on a - on lower sales. Outstanding performance for a company considering the challenging market conditions. Now let's take a closer look at our operating groups. Engine Group sales were $1.26 billion in the quarter. Excluding currency and 2012 dispositions, Engine Group sales were down 1% compared with the first quarter in 2012. Adjusted EBIT for the Engine Group was $202 million in the quarter or 16.1% of sales, that's up slightly from 16% reported a year ago. Excluding currency and 2012 dispositions, our year-over-year decremental margin was 19%. Great performance for the Engine Group. In the Drivetrain Group, sales were $600 million in the quarter. Excluding currency, Drivetrain sales were down 2% compared with the first quarter of 2012. On a reported basis, adjusted EBIT was $56 million or 9.3% of sales, down from 10% a year ago. The year-over-year decremental margin for Drivetrain, excluding currency, was about 35%. The year-over-year comparison was challenging, considering the first quarter 2012 was a peak quarter for the -- for profitability for Drivetrain. Tough comparison aside, we view this that there is room for improvement in Drivetrain and we are focusing our attention on improving the group's performance. If you look at the balance sheet and cash flow, we generated $16 million of net cash from operating activities in the first quarter, down $15 million from the first quarter 2012. Capital spending was $87 million in the quarter, down $8 million from the same period a year ago. This is primarily really due to foreign currency. Our capital spending is required to support our program launches around the world, particularly in Asia, South America, Eastern Europe and Mexico. Free cash flow during that period, which we define as net cash from operating activities, less capital spending, including tooling, was an outflow of $71 million, which is a typical seasonal occurrence. Our investment in working capital is typically substantial in the first quarter as business activity picks up from the end of the fourth quarter levels. Looking at the balance sheet. Balance sheet debt increased by $134 million compared with the end of 2012. Cash decreased by $20 million during the same period. This $154 million increase in net debt was primarily due to seasonal working capital funding requirements I mentioned earlier and share repurchases. We spent $15 million repurchasing about 650,000 shares in the first quarter, leaving 2.5 million shares on the previous authorization. Yesterday, our board authorized the purchase of an additional 5 million shares of the company's common stock on the open market, bringing the total number of shares authorized for repurchase up to 7.5 million shares. At the end of the quarter, our net debt-capital ratio was 13.8%, just outside of our targeted range of 15% to 30%. But up from 10% at the end of 2012. Net debt-to-EBITDA at the end of the quarter on a trailing 12-month basis was 0.4x. Our capital structure remains in excellent shape. Now I'd like to discuss our guidance for 2013, which is unchanged from what was provided in January and reiterated in February. James reviewed our guidance at a high level. I'll discuss more of the finer points here. Our sales growth expectations of 2% to 6%, or 3% to 7% excluding 2012 dispositions, still assumes no currency impact. We recognize that the euro is trending stronger than our original guidance of $1.28. But conversely, the Japanese yen and the Brazilian real are trending weaker than expected. This net impact of foreign currencies in the first quarter was minimal as the weakening yen and the real offset the strength in euro. We will continue to monitor foreign currencies and provide updates as needed. We expect raw material inflation of $15 million to $20 million in 2013, down from just under $30 million in 2012. As James mentioned earlier, our operating margin -- operating income margin is expected to be 11.5% or better in 2013. In other words, despite lower sales growth, we expect to come very close to maintaining margins this year compared with 2012. Slower sales growth will mean less incremental income to offset the inflationary cost pressures. But we expect to supplement our incremental income with increased productivity gains and spending controls as seen in the first quarter. Our diluted share count at the end of 2012 was approximately 117 million shares. This is the proximate share count on which our guidance is based. Any dilution from equity-based compensation in 2013 is assumed to be offset by share repurchases. Any additional share repurchases that we may execute over the course of the year are not factored into our guidance. We continue to be very confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost controls since the 2009 recession. This focus resulted in highly efficient growth and record margins in each of the last 3 years. Weak market conditions, particularly in Europe, will likely result in sales growth below[ph] our long-term trend in 2013. Despite this, 2013 should be another year of record sales and record profits for BorgWarner. Over the long term, we intend to execute our growth strategy. And over the short term, remain focused on efficiency, regardless of the direction of the market. With that, I'd like to turn the call back over to Ken.

Thanks, Ron. Now let's move to the Q&A portion of the call. Michelle, could you please reannounce the Q&A procedure?

[Operator Instructions] Your first question comes from Rich Kwas from Wells Fargo.

James, could you discuss how backlog contribution's trending so far in the year relative to the $450 million of contribution you talked about last year? Just given we're 1 quarter into the year, and you have some schedules that probably are going out 8 or 12 weeks. Just -- I know that was bit of a headwind last year for you, I'm curious to see how that's tracking now?

Yes. Good morning, Rich. We took a look at that, and so far, as we've looked at the year, it's about on track to where we would be expected to be at. You make get a few programs that may move a little up, a little down. But in a general level, the overall amount in the quarter that we would have been looking for to keep it on track was pretty much in line. And as we look out, we still feel pretty comfortable about how the backlog is tracking thus far. But to your point with the quarter behind us, it was good to say and pretty much confirm what we would want to say, Rich.

So the weaker mix was in line with expectation, the weaker mix in Europe?

Yes, it was. And if you remember when we did it -- last year when we set the backlog back in November, one of the things that we talked through and bridged from the prior view was there would be some mix adjustments, as well as the overall market conditions, that's what we talked about, I think, last November. And it's pretty much what we saw come through and play out in the first quarter. So on track, Rich, is kind of where we see it so far.

Okay. And then, Ron, could you address Drivetrain. You kind of alluded to trying to improve margins there from the current level. And what -- are there any actions that you're taking that are going to be noticeable to us or what other productivity measures are you doing to get the margins increasing from here?

Well, I'd say, Rich, right now, we had a target of 9% and we're there. But when we look at the business -- we just want to be more focused in the fact that we feel we could probably get better performance out of that segment. And I would just leave it that James and I have been spending a lot of time focusing in that segment of late. That's why I made a comment in my remarks. We are not 100% pleased, I guess. We're going to spend more focus in that area.

Okay. And then the last one for me on -- would this reload of the share repurchases seemed like any chance of a dividend's off the table, at least at this juncture, is that a fair statement?

I wouldn't draw that conclusion, Rich. Is probably the way I would phrase it. I think the way I would look at it is, our CapEx spend is very consistent with what we've typically done over time. I think this share authorization is somewhat typical of what we've done, and so I think we're continuing on that. And what we've said over the recent months is we continue to, very openly, look at a dividend. So I wouldn't conclude, Rich, based on the today's news on the share repurchase that the dividend is off the table that remains very much on the table for discussion within the company, very much so.

Your next question comes from Ravi Shanker from Morgan Stanley.

Can you give us a little more detail on this program termination? What product was it? Which region? What caused that to happen? And did that come out of your backlog?

Yes, Ravi, this is James. The issue with the agreement is we've signed some confidentiality agreements, both with our supply base and with our customers. It doesn't allow us to share any detail around the program itself. So unfortunately, I can't offer color on that. I will say, it was not in the backlog. I can confirm that it was not in the backlog. But the details, Ravi, in terms of program, region, group, segment, I'm just not allowed to do that. So...

That's totally fair. Also, very pleased to see the margin you delivered in this quarter, despite the year being down so much and also above your full year guidance. I think most people expect macro and conditions to basically improve from here. So any reason why you shouldn't be topping these margins in the remaining quarters?

Ravi, all I'm going to say is that our guidance at 11.5%, or better, and we achieved over that in the first quarter. And we kept our guidance intact on the top line and the margin line. And I think our perspective from this point is that guidance is appropriate.

Got it. And just finally, Volkswagen had this recall in China with the DCT program, which I think you are on. I think you'd said at the time that it didn't affect you. Any update there regarding that program?

Yes, just to clarify, Ravi, BorgWarner was not impacted by that. We were not on that particular program. What we talked about on the last call is we want to respect Volkswagen's perspective. It's really their issue, obviously, for them to comment on publicly. But we did want to clarify the technology they used on those applications is not BorgWarner product or BorgWarner technology, so we're not involved.

Right. Lastly, apologies if I missed this, but did you change any of your end market or FX assumptions for your guidance?

No, we have not.

Ravi, the only -- from a light vehicle perspective, they were all the same region by region. The commercial vehicle globally stayed the same. We just had a little bit of a down -- a little bit of a lesser view on China. And we felt a bit more comfortable about the upside this year in Brazil. So those were little bit of nuances underneath the macro level. And then on light vehicle, it was the same as our prior guidance.

Your next question comes from Itay Michaeli from Citigroup.

First question just on the European production outlook for the year, it looks like you've kept it down 3% year-over-year. If you talk about what gives you the comfort that, that still is the right level after a tough Q1? Maybe, James, talk about the visibility currently in the production schedules in Europe?

Yes, Itay, it's a great question and we -- let me just talk a little bit about how the first quarter itself played out from our view. As the quarter started running, we -- it was pretty good and we felt, I'd say, incrementally more comfortable about our view of the market for the year in Europe on light vehicle. And as the quarter came to an end and we started turning into April, it was little less exciting, I'll put it that way. So as we look out, we look at schedules, which are pretty decent through at least 45 to 60 days, that gives us comfort of what we'd see. And we feel pretty comfortable with the 3% down. The only thing I would say is, could that get incrementally a little worse? We're always paying a lot of attention to that. Could it be 4% down? Could it be 5% down? I think those are possible. It's possible. And the only thing that -- I think I've said in the past, Itay, is if it drifts to 4% or it drifts to 5%, we're ready for it and we've got the levers necessary to pull, and we will, to deliver the type of financial performance that you've become accustomed to with global NSO. It's a long answer, Itay. It's still a little shaky. It's still not as settled as any of us would like it to be. But we feel as good as we can about the 3%, but we're always paying a lot of attention. It could be 4% or 5%. And if that happens, we're ready.

Itay, this is Ken. I'm going to make the answer that's a little bit long and make it a little bit longer, and talk about some of the numbers. We looked at this and -- if you take Q1 and multiply it by 4 and then adjust Q3 for normal seasonality, that still gets you down someplace between 3% and 4%. So we're not actually looking for or expecting a recovery in Europe in the second half and we still feel comfortable with our guidance despite that.

That's very reassuring. And then James, can you talk about the booking activity in the quarter? Are you pleased with the request for proposals and just the overall level of bookings for some of your programs?

Yes. It was -- in a nutshell, Itay, it was good. It was a strong quarter for us in terms of booking. And I would say pretty much in line with our historical performance, both in the ratio of the programs we won and we didn't win and from a dollars[ph] point of view. It was another, another solid, solid, solid quarter for us in terms of the booking. It was good.

Great. And then just a quick last question for Ron. CapEx $87 million, a little bit lighter than we thought. Is it fair to say you're running, perhaps, at the lower end of the $450 million to $500 million full year range or is that just sort of a timing issue?

No. I would say at this point, it's a timing issue, Itay. And also, I mentioned in there it had a little bit of currency that brought that number down, that's exaggerated it as well. So you can't take it for the face value. We probably were actually a little bit above last year. And then at the rate -- and at the run rate from that point, I would say, that seasonality being a little bit low in the first quarter, which you typically see.

Next question comes from John Murphy from Bank of America.

Just a first question on Europe, to follow-up on sort of the downside risk here. Can you remind us what percent of your workforce in Europe are temp workers now? And maybe sort of benchmark that against year end 2012 and beginning of 2012 levels?

Yes. Yes, I can, John. If you think of this as European direct workforce -- and I'll talk to you about the percentage of those workers that were temporary versus not temporary. If I go back about a year ago, so early part of 2012, to your point, we were running probably mid-20s percentage of direct worker -- temps. As we went through the year, we ended up roughly around 15-ish percent as we closed out 2013. And where we're sitting right now is a little north of that. So we're somewhere between 15% and 20% of our workers in Europe, direct to temps. And part of that is that move from the end of the year to where we are is, sequentially, our sales went up from 4 to 1 and we did that by adding more temporary workers as we did that. So it kind of gets to the point earlier, we feel good about the flexibility that we've got if there is a little bit of drift down beyond where we are in Europe.

So the cushion right now is probably is at least as big as where it was or about the same level as it was in the beginning of 2012 for temp workers?

A little less, John. A little less. But still healthy in our view. That 15% to 20% range is good for us.

Okay. Then second question, just to follow-up. I understand you can't disclose where the product termination was and any details around it. But how often do you run into that kind of an issue? It sounds like it's fairly unique and not something I've really heard a lot about in the past. Just curious how often something like that happens?

It's pretty unusual, for us, John. And certainly of this magnitude, it's very unusual for us. So, yes, it's unusual, especially at this size.

Okay. And then just lastly, Ron, just to follow up on this dividend question and to beat a dead horse a little bit here. What's the trigger that you're waiting for? I mean, right now you guys are incredibly well capitalized, your full year numbers look like they're coming through pretty well, you got cushion on the downside in Europe. What do you guys waiting for on getting this dividend out there? I mean, do you have to be at 0x net debt-to-EBITDA? Or -- I mean, what's the trigger?

0 is not the trigger.

Yes, but what is?

No. There's-- if you recall some time ago, we were discussing things about repatriation activities. And we spent a lot of work in the last 9 months about doing a repatriation activity of sustaining that dividend. Remember, this gets in the discussion of where cash is generated. And I've mentioned in the past that 75% of our sales are offshore. You could probably make the logical conclusion that 75% of my cash is offshore. I got to make sure working with the tax people. We have a tax efficient structure to repatriate it back into the United States. And I will say, we've done a lot of work in that area. So that's one triggering event. Also, I just -- right in the process of going through some management changes, James is the new CEO, we have a new chairman that was appointed yesterday. And the transition -- a lot of people are asking more questions about dividends and we have to go through management change as well. So I'd say those are the 2 major events right now.

Your next question comes from Chris Ceraso from Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: One follow-up item and then a couple of others about the backlog that came on. Do you have a rough number for us about how much new business came on in the quarter? Was it in the $75 million to $100 million range?

Chris, this is Ken. We don't have a specific number for you. But as you know, the backlog is probably a little bit weighted towards the second half of the year. We've talked about that before. And generally the comment is that it's on track for what our expectations are. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. The -- and again, to come back to something you've talk about. But just -- what's your view on where inventories in Europe are now? And to the extent that Europe output was little better in Q1, are you baking in, perhaps, a little bit weaker in the back half?

I think, Chris, inventory visibility is a challenge for all of us, especially in Europe specifically. It's just a lot less visible than so many places like the U.S. So there's a little bit of guesswork there. I would go back to the point that Ken and I discussed earlier, though, and I think this is pretty key for us. We're not planning on -- we weren't planning on a big uptick in the second half of the year indicating a significant recovery in Europe. We see -- when we compare the first half to the second half, there's not much of an adjustment at all at a market level. So I think that's the important thing. What we do in absence of the inventory lack of visibility, to put it that way, Chris, is we really focus heavily on our schedules. And as I said earlier, they're holding up pretty robustly, in line with what we thought as we've started into the second quarter, and what we saw in the first quarter. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then -- just the last item -- again, a topic that you've touched on. But the debt to capital in the 13s was below the low end of your range, should we read that you -- you do have an appetite to add some leverage to put capital to work whether through more buybacks or acquisitions or to grow the business?

Well, Chris, we came out with a range guidance coming into the year here just recently. And I would say, yes, I would be -- that's what my target range is, to get in the north of 15% in that range. And I'm close, I got to 13.8%, but yet that's my intent, to get to that range.

Your next question comes from the Brett Hoselton from KeyBanc.

Just to kind of a wrap-up the capital deployment questions. Is this a 1-month, 1-quarter, 1-year, 1-decade timing wise? What are your thoughts there? Is this something you think you might wrap up shortly or is this something that you're -- that's going to take some time to kind of work your way through it?

Brett, could you clarify?

Yes. Is that the dividend?

Right.

Well, whether it be dividend or share repurchase just capital deployment in general?

Oh. The way I view this, Brett, is we didn't have an M&A transaction 2012. And as a result, cash started to build up. And we had to become very assertive in our capital structure and we started on that process probably, what, last year I bought 4 million shares, I was very active in the fourth quarter. We gave now a range of leverage that we're comfortable with. And I would say, this is just a process we're going through that -- to convey to you where we like to be. And we're migrating toward that target right now. In the first quarter, we purchased some shares. And all I'm saying is that we have to be more assertive when the M&A activity transactions don't come as timely as we would like.

Well, I understand that. I guess, what I'm wondering is, you obviously have a very healthy balance sheet at this point in time. You're forecasting maybe $500 million of free cash flow and a $50 million repurchase rate, that's $200 million. So basically, you're going to build about $300 million in cash this year, which is a pretty healthy increase. And it seems like your balance sheet has plenty of capacity to make an acquisition. So I'm kind of wondering if it's fair to anticipate some sort of a step up in capital deployment within the next 2 to 3 quarters? Or is this something that, look, it may take another 1 or 2 years to work this issue or that issue?

Okay. I see where you're at now, Brett, on this. I wouldn't indicate the first quarter as the full year run rate on my repurchases, first of all, right? Because I was very aggressive in the fourth and there's some administrative issues, quite frankly, in the first as far as blackout periods that prevents me to be as active as I could have been. That's one issue. So I wouldn't think that's an indication of where I'm going forward. Two, the M&A pipeline comes into view as well, right? So I have to basically look at the M&A activity that could change all of the economics and the ratios, quite frankly, with a -- say a $200 million, $300 million M&A activity at a given quarter. So I got to look at the future as far as what's coming on M&A versus the share repurchase events I do get in the quarter. So I'm looking at quite a few things right now moving forward.

And then just -- as you think about -- you obviously had very good first quarter, better than we expected, better than the Street expected. It seems like you would generally feel a little bit better about your full year guidance. Would you consider yourself to -- I guess my question is simply, why would you not bump your guidance up? Is it just kind of, "Look, we want to be conservative because we're concerned about Europe and we just don't know and there's some uncertainty and little earlier in the game?" Or is there something else that you see deteriorating as you move through the remainder of the year specifically?

Brett, this is James. I think -- I'll say it this way. After a really solid first quarter, as you point out, just -- it really helps. When you actually get over that 11.5% out of the shoot in your first quarter, it's a really -- it's a good feeling in terms of how you feel about the rest of the year. I think just some of the uncertainty that is still out there in Europe, it's pretty significant. I mean, that's still 40-plus percent of our business. The commercial vehicle space continues to be a little bit volatile. Those are kind of the 2 things that cause us to just keep monitoring. I would tell you it's less on the operating side. I have a lot of confidence in the[indiscernible] and I think we've showed that in the first quarter. So it's not an executions issue at all. I feel very good about our operational proficiency and our performance. It's more just the uncertainty that overhangs in Europe, light vehicle and commercial vehicle that just -- we kind of want to get another quarter behind us to see how that plays out before we would feel more comfortable. If that make sense to you.

And comes from Colin Langan from UBS.

This is Rahul Chadha for Colin Langan. Just wanted to -- a follow-up on Chris' question from earlier. Could you provide some granularity into the inventory situation in Europe? How is the inventory looking at the luxury OEMs versus mass market? And how does that translate into your mix outlook for the rest of the year?

I think as I was talking about earlier, the specific inventory levels in Europe are just really -- we don't have that visibility. So again, we focus more on the schedules. I would say, from a BorgWarner point of view, the mix projections that we see, predominately with the luxury vehicles and the higher-ended contented[ph] vehicles, is playing out about what we expected it to be. And maybe I could just add a little bit of color on that. If you go back to the first quarter of 2012, that segment was performing extremely well. As the year played out, particularly in the third and fourth quarters, we sort of pulled back somewhat on the luxury segment, which caught up with the lower-ended contented[ph] vehicles. And the way we're running now and the way we're expecting it to run is for that mix to continue more in line with the second half of 2012. And that's about what we're seeing right now in the first quarter and as we look out to our schedules into the second quarter.

Got it. In terms of the diesel mix, what's your outlook on that for the year?

It's pretty much stable in that 53% type range for diesel in Europe. So no, no meaningful adjustment there.

Okay. And just one last question. Ford and GM are -- could be moving to a 9- or 10-speed transmission. Is that a positive trend for the traditional clutch business?

Yes. Yes, it is. They are definitely moving in that direction collaboratively, as you all know, with that 9- and 10-speed architecture. And BorgWarner is an integral part of working with both Ford and GM on utilizing some of our new technologies to help bring those transmission to the market. So directionally, it's a good move for us.

Your next question comes from Ryan Brinkman from JPMorgan. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Most of my questions have been answered. But just one on turbocharger take rates. We continue to hear a lot about rising turbocharger penetration on light vehicles here in the United States as they proliferate into gasoline powered vehicles. But can you maybe talk a little bit about the trend that you see in turbocharger take rates in various different other regions around the world?

Yes, we see a continued adoption rate. I think we've talked about this where, today, the global number of engines that are turbocharged is around 30% of the world, and that will climb up in the next 5 to 6 years to about a 40% adoption rate. And a lot of that is driven by a couple of things, really. One is, increased turbocharged gasoline engines and that's a global phenomenon. But geographically, the 2 areas that are seeing and getting the biggest growth rates are North America and China. That's where there's particular very high penetration rates over the next 5 to 6 years that get you from the 30% to the 40% penetration growth rate[ph]. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Great. And then just on Europe, on your book of business over there. Sometimes, the registration data we get is more timely than the production data that we get out of that continent. Can you just kind of update on the latest trends and the automakers that are disproportionately exposed to over there for example, some of the German customers, did they continue to do better than the market overall?

I think if I got it right, Ryan, you're just asking for kind of outlook view on production volumes? Is that... Ryan Brinkman - JP Morgan Chase & Co, Research Division: Just the latest trend in your largest customer's production rates?

Okay. Yes. I mean, we're seeing -- what we're seeing from majority of the customers are the schedules are holding up about what we anticipated both in terms of actual volumes and then mix of product. So we're not seeing any meaningful change out of them and its holding up pretty well.

Your next question comes from Joe Spak from RBC Capital Markets.

Ron, you mentioned earlier about keeping options open for the M&A pipeline. Maybe you or James can just give a little bit more texture about what you're seeing there, whether stuff seems to be loosening up a little bit? And also, potential multiples?

Yes. I would say a couple of things, Joe. The intensity and the processing side of the company is in not letting up at all. We're still very pushing that process robustly. We do have a few targets that we're engaged in discussions with, I'll put it that way, that are very -- of high interest to us. So we've got a number of those moving forward. I think you know typically the companies that we're looking for are company's not for sale, they're family owned. So that process is a little bit hard to predict how it would play out in terms of closing a deal or getting the deal over the line. But I would tell you, the intensity's high. The number of targets in play is significant for us. And we're doing all we can, Joe, to bring one of these targets home as quickly as we can.

And would the focus be more on technologies that could help near-term -- or sort of next-generation technology that may take a little bit to develop, that might come a little bit cheaper, but could be home runs down the road?

The real quick answer is both, Joe. We very much look at products of technologies that we can bring into the companies that are already in place, so to speak, that we can bolt on and go running with those. So examples of those would typically be the Haldex deal, the ENSA deal that we've done in recent years, and then the Etatech technologies, a good example of the other part of the profile, which is a technology that's yet to be fully developed and brought to the market. So both. Both is where we're looking, Joe.

Okay. And then you've mentioned the weaker yen as a reason why, as an offset to maybe the stronger euro. Just out of curiosity, with the NSK-Warner JV, competitive wise -- are most of your competitors also based over in Japan, so there's no sort of competitive advantage there for you? Or is that -- with that relatively cheaper, is that a potential advantage for you?

The way I would answer that, Joe, is obviously, NSK-Warner ships -- I mean, they're shipping to Toyota and to the extent that Toyota can get a benefit of cheaper yen, we'd see more volume going through the joint venture, right? So everyone's been talking about how Toyota's going to respond with a lower yen. We would get volume increases through there.

Okay. Great. And one quick one. I realize there's a ton of moving parts. But broad strokes, is it fair to say that when you talk about Europe down 3% production year-over-year, does that more or less correlate to the midpoint of your guidance?

Yes, more or less, I would say, to the mid-point. Yes.

We have time for one final question and that question comes from Brian Johnson with Barclays.

Yes. I don't think we've discussed kind of your relative outperformance in Asia. Just a couple things. Kind of given your selective participation in Japan, how did those production trends stay out? And do you know your -- if you look at Japan versus China, what your growth there was relative to production in each of those markets? And then the second is kind of what's behind that? And then third would be, with the yen now broaching 100, are you seeing more signs of life out of the Mitsubishi turbos, the[indiscernible], Sekos and other Japanese powertrain vendors?

There's a lot of questions there, Brian, but let me talk, first about Asia in itself. We saw a very good -- we have a Japanese facility that had extremely good volume year-over-year in the first quarter. That's where we saw a lot of good growth in Asia came out of Japan. China's been a good market for us. Korea wasn't as good in Asia as we've seen in the past, maybe the holiday season, not quite sure. But the majority of that growth came out of a Japan facility and China, which has been an ongoing story for us for some time. Now you had a bunch of other questions on data, but quite frankly, if you wouldn't mind, I -- we're still going through all those numbers, maybe we can get with you later on some on these, Brian, okay?

Well, I guess then -- speaking of Japan, with the yen at 100, are you seeing any different competitive profile coming out of the Japanese domicile powertrain vendors?

Not significantly, Brian. I - the only trend that I think is pretty meaningful is -- you do see a trend to more localization efforts. And I think that's not driven purely by the yen movement, that's the result of some of the natural disasters that were suffered there. So I think that's a been playing out over the last year or so where we're seeing, particularly in North America, the Japanese OEMs looking to increase local content and I think that's playing out. And that's a meaningful move that we talked about in prior calls, that potentially creates opportunity for BorgWarner.

I'd like to thank you all for joining us. We expect to file our 10-Q before the end of the day, which will provide details of our results. If you have any follow-up questions about our earnings release, the matters discussed during this call or our 10-Q, please direct them to me. Michelle, please close out the call.

That does conclude the BorgWarner 2013 First Quarter Results Earnings Conference Call. You may now disconnect.