BorgWarner Inc. (BWA) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Cherry, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2013 Third 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, Cherry. 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 November 6. The dial-in number for that replay is (800) 585-8367. And you'll need the conference ID, which is 74423572. The replay will also be available on the website. With regard to our IR calendar, we'll be attending a number of conferences over the next few months. November 4, we'll be at the Gabelli Automotive Symposium in Las Vegas; November 13, we'll be at the Barclays Global Automotive Conference in New York; December 5, we'll be at the Goldman Sachs Auto Conference in London; and January 15, we'll be at the Deutsche Bank Global Auto Industry Conference in Detroit; and finally, on November 5, we'll be at the Baird Industrial Conference in Chicago. Also on that date, Tuesday, November 5, at around noon Eastern, we will release our 2014 through 2016 book of net new business. At 4 p.m. Eastern that day, we'll host a brief conference call to answer questions about the backlog. Now back to the call. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties, as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now moving on to our results. James Verrier, President and CEO, will comment on third 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 the remainder of 2013. With that, I'll turn it over to James.

Thank you, Ken, and good day, everybody. So today, I'm very pleased to review our third quarter results as well as our third quarter accomplishments. Let me first off begin by congratulating all of the BorgWarner employees on an excellent third quarter. Your efforts drove outstanding results in a challenging environment. Now on to our results. Reported sales were $1.8 billion, which is up 6% from a year ago, including the impact of foreign currencies and dispositions made in the last 12 months. Our U.S. GAAP earnings were $1.45 per share. Operational efficiency and cost controls enabled us to post a strong operating margin of 12.5%, which is a new third quarter record, truly outstanding performance by our operations. So if I look into the segments, in the Engine Group, the third quarter sales were $1.2 billion, which is up 4% 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 turbochargers, variable cam timing devices and exhaust gas recirculation, or EGR, coolers around the world. On to the Drivetrain Group. Sales were $600 million. This is up 10% from the third quarter of 2012 when we exclude foreign currencies. Drivetrain's results were driven by higher sales of all-wheel drive systems and transmission components in both North America and Korea. And as we look to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow, and in the quarter we spent about 5.7% of sales as we remain committed to supporting our future growth and productivity improvements. Our spending for R&D was about 4% of sales in the quarter, which is right in line with our target. I'd also like to talk about some of the exciting announcements we made during the quarter. First of all, BorgWarner is building a new manufacturing facility in Viana do Castelo in Portugal, which is about 30 miles from its currently rented site in Valença. The new building will expand production capacity of several environmentally friendly technologies such as EGR coolers and tubes as well as glow plug control modules. All of these are key technologies for the modern engine aimed at reducing emissions. Construction began in August of 2013, and we expect to be completed in 2014. We've also expanded our campus in Rzeszów, Poland, with a new production plant and engineering center. The production plant produces advanced chain-driven engine timing systems and also provides expanded capacity for transmission components. The new engineering center provides capabilities for application engineering and R&D. And production for several major European car manufacturers has already began. BorgWarner's Eco-Launch solenoid valve has been named a finalist in the prestigious Automotive News PACE competition. And last but not least, the company's Board of Directors declared a quarterly cash dividend of $0.25 per share of common stock. The dividend is payable on November 15, 2013 to shareholders of record on November 1, 2013. Now let me shift and talk about our current outlook for 2013 light vehicle production, which is essentially unchanged from our previous view. We still expect global production volume growth of approximately 2% in 2013 compared to the prior year. If we look at that regionally, we still expect North America to be up about 5%, China up about 10% and Europe down about 3%. The one notable change is our improved outlook for Japan, where we now expect production to be down 6% compared with our previous outlook of down 10%. In commercial vehicle, the markets there remain challenging, although our overall expectations have improved due to high CV production in China. In Europe and North America, we expect production to be relatively flat compared with 2012, consistent with our previous outlook. And in July we'd said that we are expecting CV production in China to be flat with 2012. However, the uncertainty surrounding Euro 4 emission standards was removed when it was decided to delay Euro 4 until the end of 2014. So as a result of this, production was stronger than expected in recent months, and we expect this trend to continue for the remainder of the year. And in Brazil we still expect double-digit growth in CV production. Finally, our guidance for 2013 has also changed. Sales growth in 2013 is now expected to be between 3% and 4%, which is at the lower end of the previous guidance range of 3% to 5%. When you exclude 2012 dispositions, sales growth is now expected to be 4% to 5%. We now expect earnings to be $5.55 to $5.65 per share, which is up from the $5.40 to $5.55 per share. And our operating margin is now to be 12% or better, which is up from our previous guidance of approximately 12%. And Ron will provide more color on our guidance shortly. So with the first 9 months of the year behind us, I'm increasingly confident that 2013 will be another strong year for BorgWarner. The macro environment is stabilizing but still has its challenges, especially in Europe. However, BorgWarner's record financial performance in the third quarter again underscored our operational proficiency and our ability to manage costs during challenging times. As I look beyond 2013, I'm excited about what's ahead for the company. Our operations have performed at a high level, and I'm confident that this will continue. So as our sales growth improves, the combination of efficient operations and higher sales should result in tremendous earnings power for the company. The industry's adoption of our leading-edge powertrain technology will continue for years. And because of this, I feel very good about our company's future and believe that no company in the auto sector is better positioned for long term profitable growth than BorgWarner. So with that now, I'll turn the call over to Ron.

Thank you, 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 up 4% in the third quarter compared with the same quarter last year. BorgWarner's reported sales were up 7% from a year ago. As James explained earlier, if we exclude the impact of foreign currencies and M&A activity in 2012, our sales in the quarter were up 6%. To get a clear picture of our 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 6%. Our vehicle -- light vehicle sales in Asia, excluding currency, were up 14%. In Europe, light vehicle production was up 2%. Our light vehicle sales, excluding currency and 2012 disposals, was also up 2%. In North America, light vehicle production was up 6%. Our light vehicle sales growth in North America was up 15%. Now let's review commercial vehicle market. Global commercial vehicle production was higher in the third quarter, primarily due to higher volumes in China and Brazil, 2 of our smaller markets for commercial vehicle products. Commercial vehicle production in Europe and North America, our larger markets, was up slightly. Our commercial vehicle and aftermarket sales were down about 1% in the quarter, largely due to unfavorable customer mix. To summarize, our typical outperformance of the light vehicle market by 8 to 10 percentage points was intact in Asia and North America in the third quarter. In Europe, we were in line with the market. However, you may recall that our dual-clutch transmission, DCT, business in Europe was exceptionally strong a year ago, making a tough year-over-year comparison. Our performance relative to North America market has been a challenge in recent quarters as adoption of advanced powertrain technology continues to lag other markets. However, the ramp-up of new programs, especially in Drivetrain segment, along with strong light-truck sales, boosted our sales in the third quarter. Working down the income statement, gross profit as a percentage of sales was 21% for the quarter. That's a 70-basis-point improvement from 20.3% a year ago. SG&A expenses were 8.7% of sales in the quarter, down slightly from 8.9% a year ago. R&D spending, which is included in SG&A, was 4% of sales in the third quarter, up 20 basis points from a year ago. This implies a 40-basis-point decline in SG&A spending, which we attribute to good execution of cost control plans. Reported operating income in the quarter was $226 million, or 12.5% of sales, compared with $192 million, or 11.3% of sales, on a comparable basis, a sharp improvement from a year ago. The 12.5% operating margin is a new third quarter record for the company. After excluding the impact of foreign currency and noncomparable items in the third quarter 2012, our incremental margin was about 36%, which is well above our mid-teens incremental margin target. Our outstanding performance by operations. As a result of our strong performance through the first 3 quarters, we are raising our full year operating margin to 12% or better from approximately 12%. As you look further down the income statement, equity in affiliate earnings was $10 million in the quarter, down slightly from the $11 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 $8 million in the quarter, up from $5 million a year ago. Interest expense in the third quarter 2012 was lower to income from cross-currency swaps. Provision for income taxes in the quarter on a reported basis was $56 million. However, this included approximately $6 million of favorable discrete adjustments, which you can read in our 10-Q. Excluding these adjustments, provisions for income taxes were about $62 million, which is a 27% effective tax rate, in line with our 2013 guidance. Net earnings attributable to noncontrolling interest were $6.1 million in the quarter, up from $5.6 million a year ago. This line item reflects our minority partner share in the earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings, which were $167 million in the quarter or $1.45 per share. On a comparable basis, net earnings were $1.40 per share, up 18% from $1.19 per share a year ago, outstanding performance for the company. Now let's take a closer look at the operating groups. Engine Group sales were up $1.2 billion in the quarter. Excluding currency and 2012 dispositions, Engine Group sales were up 4% compared with the third quarter in 2012. Adjusted EBIT for the Engine Group was $196 million in the quarter, or 16.2% of sales. That's 40 basis points higher than the 15.8% reported a year ago. Excluding currency and 2012 dispositions, the group's year-over-year incremental margin was 32%, excellent performance for the Engine Group. In the Drivetrain Group, sales were $604 million in the quarter. Excluding currency, Drivetrain Group sales were up 10% compared with the third quarter 2012. On a reported basis, adjusted EBIT was $66 million, or 10.9% of sales, sharply higher than the 8.3% of sales a year ago. The year-over-year incremental margin for Drivetrain Group, excluding currency, was 38%, which is outstanding performance and a third consecutive strong quarter for the Drivetrain Group. However, consistent performance from Drivetrain remains a concern and an area of focus for us. If you look at the balance sheet and cash flow, we generated $515 million of net cash from operating activities in the first 9 months of 2013, down $28 million from the first 9 months of 2012. Capital spending was $298 million in the first 9 months of 2013, up $15 million from the same period a year ago. 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 the period, which we define as net cash from operating activities less capital spending, was $217 million. Our free cash flow was used to repurchase 226 million of shares in the first 9 months of 2013. We purchased more than 2.6 million shares this year, leaving approximately 5.5 million shares on the current authorization. Looking at the balance sheet itself. Balance sheet debt increased by $205 million compared with the end of 2012. Cash increased by $205 million during the same period, leaving net debt flat compared to the end of 2012. At the end of the third quarter, our net debt-to-capital ratio was 9.3%, down from 10% at the end of 2012 and below our target range of 15% to 30%. Net debt-to-EBITDA at the end of the third quarter on a trailing 12-month basis was 0.3x. Our capital structure remains in excellent shape. Also, as James mentioned, the board declared a quarterly cash dividend of $0.25 per share of common stock, payable on November 15, 2013 to shareholders of record on November 1, 2013. The dividend is an important and stable component of our cash deployment strategy, which also includes capital expenditures to fund our organic growth, acquiring strategic assets and repurchasing shares. After CapEx and paying the dividend, our priority is strategic acquisitions. However, in the absence of a deal, repurchasing shares remains an option for us. We have repurchased approximately 6.8 million shares over the last 6 quarters. Now I'd like to discuss our guidance for 2013, which has changed from what we provided in July. James reviewed our guidance at a high level. I'll discuss some of the finer points. Our sales growth expectations of 3% to 4%, or 4% to 5% excluding 2012 disposition, still assumes very little currency impact. The net impact of currencies in the first 9 months was small as the weakening yen and the Brazilian real partially offset the strengthening euro. We will continue to monitor foreign currencies and provide updates as needed. We still expect raw material inflation of $15 million to $20 million in 2013 but now toward the lower end of that range. As James mentioned earlier, our operating income margin is now expected to be 12% or better in 2013, up from approximately 12%. Productivity gains and spending controls seen in the first 9 months of the year are expected to continue to drive strong results for the remainder of the year. Our expected diluted share count for 2013 is still expected to be approximately 116 million shares. This diluted share count guidance is based on share repurchases made to date. Any additional share repurchases that may be executed during the remainder of the year are not factored into our guidance. And finally, our EPS guidance range is now $5.55 to $5.65 per diluted share, up from $5.40 to $5.55 per diluted share previously. Both the current and previous guidance ranges excluded noncomparable items. The guidance raise is due to better-than-expected performance from our operations. So we continue to be 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 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. And 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. Cherry, please remind everyone of the Q&A procedure.

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

Ron, your comment on Drivetrain, so the margin was really good this quarter, and you said there could be some volatility going forward. So what are the kind of the key factors we should consider from a margin standpoint going forward in Drivetrain? Because this is a pretty impressive performance, and I just want to know -- get some color on the potential sustainability of it.

Rich, Q3 saw outstanding progress in absolute Drivetrain margins, there's no question. But sustainability, consistency, operational execution and footprint opportunity still exist in that segment. Final review of the segment business plan for 2014 and beyond continues to be under our review. So basically, what I'm saying is we still have some underlying issues that we haven't solved.

Okay. So the read-through on that is we shouldn't assume 10% on a straight line basis going forward here.

No, I don't want you to assume 10% on a straight line at this point until we give further notice on that, okay?

Okay. And then the European production assumption for the year, the down 3%, James, maybe you can discuss this. So IHS has improved their outlook since July. You're worse than that. What are the puts and takes within that?

Rich, we started the year with a 3%, and as the year's gone through, we pretty much stayed to that course. And we still feel it's a pretty good number for us, that 3% down. The view that we have right now is that probably we're a little more conservative than others. We still get a little bit of rumblings around what's going to happen right at the end of the year in terms of shutdown activity. And that picture will get clearer over the next few weeks. It's still a little early to get real good visibility. But we do have some general signals and indications that there could be shutdown periods that would get us close to that number that we're at, Rich. And again, we'll know more in the next month as we get closer. But that's kind of where we're landing right now.

Okay. And then just last one for me. On Drivetrain, can you remind us when you start to go against easier comparisons on the DCT? Your volume, and I know you mentioned that last quarter, was an issue this quarter in terms of your outgrowth in Europe. Just when does that start to ease for you, just as a reminder?

I would say more first half of next year, Rich. All right?

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

James, you announced that you're adding more greenfield Europe capacity. Clearly, that has to do with the penetration gains you're seeing in the region. But there always has been this impression that your growth areas are going to be more U.S., and China and Europe is more of a mature market for Engine and Drivetrain technologies. Can you just address why you see the need to add more capacity in Europe right now and what its overall capacity situation is?

Yes, we still -- the simple answer really is we still continue to see growth in Europe for BorgWarner. So as we grow the business in Europe, which we'll continue to do over the next several years, what you see us doing is, in principle, putting our incremental capacity into lower-cost regions of the world. And you see that, the examples that we've talked about this morning, in Portugal and Poland, respectively. So the way to think of it is it's the way that we're positioning ourselves around future growth in Europe. What you may be thinking is our growth rate in China and in potentially in North America could be ahead of Europe, but we're still planning to grow at a good rate in Europe as we go forward.

Got it. Do you plan to close any European capacity as you grow that low-cost European capacity?

We're not in a position to talk about that specifically today. I'd rather not discuss that in detail.

Got it. Just moving on. A question for you, Ron, and I apologize if I missed this. Did you quantify any Latin America FX impact in the quarter?

I did make reference to the Brazilian real slightly when I said that euro gains were offset by Brazilian reais and Japanese yen. That was in the script, Ravi.

Oh, so it was an offset?

Yes, it was an offset.

Okay. And just finally, can you remind us again about your margins in the CV business? As that cyclically rebounds in the next year or 2, hopefully, do you see that being a margin tailwind?

Well, we've been very transparent about how we price our products on a return on invested capital, Ravi. I wouldn't see any tailwind from margin. Tailwind from volume would be very nice, but not from the margin perspective.

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

I guess, a few different questions here. First, from a revenue growth standpoint, 6% topline growth adjusted versus production 4%, I would say it's a little bit lighter than maybe your backlogs, but yet you're comparing it to global light vehicle production. So I guess what I'm wondering is, can you kind of reconcile your backlog growth expectations versus the end market production actually. How much did you outgrow in Europe? How much did you outgrow in North America, that sort of thing?

Well, Brett, I'm going to start, and maybe James [ph] will come in and supplement. So we outperformed the market in North America by our historical levels of 8% to 10%. Asia, I think it was about 8 points. North America was about 9. In Europe, we were in line with the market in the quarter. A lot of that had to do with unfavorable customer mix for us. So we continue to work through our issues in Europe, and the market itself is sort of it feels like it's bottomed, and it's -- well, we don't know about a recovery at this point. And our performance relative to that market is still -- it's not as strong as we'd like. And we're going to talk more about that next week when we have our backlog announcement.

And then just switching gears, just thinking about margins. Your sales outlook looks pretty good. Your contribution margins are very good this quarter. And I presume that -- what I'm wondering is what are some of the headwinds that you might face that would prevent you from continuing to see margin expansion into 2014 or into 2015? What would be some of those offsets?

Well, okay Brett. First of all, we don't intend to reduce our margins. We've been very clear about that. But the headwinds, getting back to that, for 2014 we've talked about that we deferred some structural costs, and those would have to come in, so that would be a headwind. R&D spending, if you've been tracking it, has been -- we're pushing 4%. We were down as low as 3.6% of sales in the last year. We continue to want to make those investments. I wouldn't call it a headwind because that's an investment side, but it does come as far as against our margins. So those are 2 main areas that we would see going into 2014. But again, I want to stress not at the expense of deteriorating our margins.

And then capital deployment. Can you talk about acquisitions versus share repurchase? You seem to be repurchasing somewhere in the pace of $50 million to $100 million per quarter. Any reason to believe that goes up or down significantly, and then can you just update us on your current thoughts on acquisitions? Anything imminent?

I will first address the share repurchases. We've been on track of what I would rather phrase is capital deployment of cash of about $100 million a quarter, Brett. And I think that pretty much balanced me out throughout the year with the cash I've generated. Remember, I have to keep my other eye open on M&A activity, so I'm balancing the switch between when we have M&A activity versus the share repurchases. but I think the $100 million to use is probably a good benchmark, what would be done as far as my behavior, what I've done in the past, I would use maybe going forward. But I would have James, and we can give an update on M&A activity.

Yes, Brett, I would characterize the M&A activity as first of all, still our primary use of capital [ph]. I mean, that remains at the top of our list to drive additional growth and additional technology for the company. The activity level, if that makes sense, is still very strong. We continue to be tracking and engaged in discussions with a number of targets. And I think we've said in past, we would be somewhat disappointed if we didn't get a transaction completed towards the end of this year or early next year. And I think that's still a good -- how we feel. I can't talk about the specific companies, but I will tell you the amount of targets that we've we described in the past of about approximately 30 or so companies that are in the mix that we're looking at is about the same. That list is relatively dynamic. A couple will fall off as we get further into discussions, and we're in the process of other companies getting added in. So it's a pretty dynamic process, and I would tell you that a couple of those targets are at relatively advanced levels or advanced stages of discussions. So in summary, Brett, it's still our primary use of capital, and we're very, very aggressively internally managing it and focused on it and feel comfortable that we'll be able to bring 1 or 2 of these deals through over the next 6 to 12 months.

Your next question comes from the line of Itay Michaeli with Citigroup.

I just want to follow up on the earlier question on the Drivetrain margin. Ron, you were very clear that the 10.9% probably is going to be lumpy and it shouldn't be straight line going forward. As we kind of get to some of your initiatives in the next couple of years, do you think that segment could eventually get to something like a 10.9%, 11% margin, say in next 2 or 3 years?

So Itay, I'm going to go back to what we've been saying pretty much all summer. Our first goal is to get it at 10% double-digit, 10% consistently, the 10.2%, 10.3%. I don't -- but at this point, I'm not comfortable going to 10.9%, to be honest. I just wanted to get a consistent double-digit, and that's our first goal.

Great. And then just to clarify an earlier point. Could you share what you're assuming for the fourth quarter in terms of European light vehicle production, maybe just percentage up or down now year-over-year?

They're both looking at me, Itay, so I will -- here's the thing. We have to back into the math. So our full year is about 3%. Whatever that works out to for a quarterly basis, we have to back into that. Just to be clear, that minus 3%, it's not to the decimal. It's still an approximation. We recognize that there's probably some potential for it to be slightly better than that. But based on, as James said, some of the signals that we're getting from the market, we felt more comfortable leaving it at minus 3% for now. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Great. And then just 2 last cash flow questions. One, it does seem, Ron, the CapEx might be running a bit lower than the full year guidance, even with some seasonality that you typically increase in the fourth quarter. Maybe just address that. And then secondly, going back to Brett's question around cash deployment with substantial free cash flow, kind of guided for the fourth quarter, is there any reason why you might not actually accelerate some of the share repurchase activity?

Okay. Let me talk about the CapEx spending. Historically, we saw that the fourth quarter tends to be higher than the rest of the quarters throughout the year. But with that said, we are probably going to trend a little bit lower than my guidance -- not my guidance range, but the low end of my guidance range on CapEx spending. And if you go back in history, this actually happened last year as well. But so -- it will be in the lower end. Let's talk about share repurchases. Although we have cash-positive positions in the United States, you guys have to remember the majority of our cash generation is and will continue to be in lower, more competitive jurisdictions, tax jurisdictions outside of the United States. So with that said, we have been implementing an efficient repatriation strategy that should be in place in 2014, and that will increase our flexibility and cash use in the United States. So the message here is that I am still somewhat handicapped by repatriation concerns, although we are working on them. So to answer your question about accelerating the repurchases, until I get my repatriation strategy in place, it will be somewhat limited to me on my repurchases, okay?

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

It's John Lovallo on for John Murphy. First question on the Drivetrain Group. The strength there, would you say that some of that was attributable to TorqTransfer content on Ford's trucks?

Yes. That's correct.

Okay. And then on the Engine Group, EGR coolers were called out as an area of strength. Could you just remind us what percentage is on-highway versus off-highway there?

I don't have a detailed split for you. I'd say the bulk of our EGR cooler business is light vehicle, it's [ph] weighted to light vehicle. We do participate in commercial vehicle, you're correct. But I'd say the significant majority of our EGR cooler business is tied to the light vehicle segment.

Okay. That's helpful. And then finally, realizing we're going to get a backlog update here shortly, could you just talk about just recent quoting activity, how has that been trending relative to the past 6 months or so?

Yes, we'll provide obviously a little more color as we go into the backlog meeting here in a few days. But quoting activity has been good for BorgWarner, both in terms of the amount of quoting activity around the world, and we feel very good and comfortable about kind of the win/loss ratio of programs that we're bidding on. So good, solid, typical BorgWarner performance is probably the way I would characterize it, and we'll give a little more update over the next couple of weeks. But it's so far, so good.

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

It's actually Pat Archambault on for Rob. Most of my questions have been answered, but I just wanted to dive into the revenue guidance, taking down the top end of the range a bit. Is the biggest driver of that this unfavorable customer mix you talked about in Europe in the third quarter?

I would say it's a couple of things. One is a little bit of the mix issue that Ken alluded to in the third quarter in Europe. Some of it is what I talked a little bit about earlier with the -- in our view a little bit of uncertainty remaining in the fourth quarter as we come to the end of the year. And the third element that I don't want us to forget is commercial vehicle, which is about 15% of the company. And I think you guys know very well that's somewhat of a challenging environment right now, pretty much in most parts of the world other than maybe Brazil. So when you put those 3 things together, that's kind of what drives us to where we're at right now.

Got it. That's helpful. And this is a bit of a detailed question, so maybe I'll take it offline, if you guys don't have [ph] it. But just mechanically, when we think about your backlog, if you have a large existing program that has a good amount of shutdown within a year, does that typically reflect in your net backlog? So if there's a large program that had a bunch of downtime within a year, would that be an adjustment down to your backlog?

So you're saying there would be a change in the expectations because of an unexpected shutdown?

Well, it's not unexpected. But say you have a large program, your existing -- it's an existing business but it's a business that's changing over within a given year, so there's a couple of months of shutdown of that program. Does that work against your net backlog announcement or is that kind of -- is that a separate kind of detail like...

Yes, I understand the question now. So if it's an existing program and something like that would occur, that does not affect the backlog.

Your next question comes from the line of Joe Spak with RBC Capital Markets.

Most of my questions have been answered as well. I was just wondering if you could provide a little bit of color maybe just even order of magnitude of the -- on the cost side, you talked -- you highlighted productivity gains versus cost controls. And obviously, one of those is a little bit more sustainable. You've been pretty vocal about some of those cost controls having to creep back in over the coming years. So how should we think about just the split between those 2 thus far this year?

Joe, that's -- if you kind of compared the third quarter year-over-year, that is going to be a little bit different than maybe what we've done in the prior 2 quarters, and I'll explain this, in that Drivetrain margin substantially increased year-over-year, and a lot of that was basically predicated on operational efficiencies in one of our business units' product lines. We struggled last year. Some higher volumes like in DCT. So that component was more driven by productivity and operational efficiencies. In the first 2 quarters of the year, I would say it was more weighted toward cost controls. So year-to-date average, I don't know where it's at. I'd have to do some math. So you have a little of a mixed bag year-to-date on those 2 items. I think going forward, you probably -- I would say more was weighted to cost controls in the SG&A line. Think of it as a GP number versus your SG&A lines. I think that's where the answer comes in. The growth in GP number is more based on operational execution, and the SG&A line will be more based on cost controls.

Okay. Great. And then just -- and obviously, we'll get more color on this next week. But can we just think about the relative growth between the 2 segments? I mean, can you help us better understand how that should progress? Obviously, the Drivetrain Group is a smaller group, and I think you're beginning to finally have, as we go forward, certainly some of the China DCT coming in. But by the same token, obviously turbo penetration has continued to increase. So, I mean, shouldn't the growth between the 2 be relatively consistent? Do you see Drivetrain as a larger grower going forward?

Yes, Joe, we'll give a little more detail, of course, next week so you can get that 3-year view. And in our usual fashion, we'll show that by, obviously, regionally and by product line. When I look at the portfolio as a whole for the company, all of the products that we have in provide opportunity for growth at a very good rate for us. So when I take that into account, we're expecting to see above-industry growth rates in all of our product lines. And sometimes it's a little cyclical, where, say, turbo has got a natural momentum around penetration rates. If you contrast that to maybe DCT, that's more of a still an emerging-adoption technology that might be a little slower. You see a trend right now to, I'd say, a more accelerated penetration rate around EGR cooler products on gasoline engines. So it'll vary a little bit in the product life cycle, Joe. But in general, we expect above average growth -- industry growth on both the Drivetrain and the Engine segments.

Okay. And what about just your turbo positioning in China? If you could compare that maybe to some of the global market share statistics you've talked about in the past.

The way I would encourage you to think about this is we've said pretty consistently our market share position in turbo combined is about a 1/3 share of the market. And there's not a whole lot of differentiation around the world when you look at that share. If you look across the products, there's not a big difference either when I'm in gasoline and diesel. So think of China, think of North America, think of Europe and that 1/3 share. It may vary a little bit, but think of it -- I would think of it consistently around the world of us not only having that position but continuing to maintain that position on a go-forward basis in all regions of the world.

Your next question comes from the line of Colin Langan with UBS.

This is Rahul Chadha for Colin. I just wanted to dig in a little deeper on the performance in Europe. Can you provide any color on the negative customer mix you talked about? And German OEM production seemed pretty strong this quarter. So is the underperformance related to diesel penetration or any specific product?

I'd obviously like to stay away from any specific details about individual customers. And it's -- I would just say to you it's a little bit of a mixed bag when you look at all of Europe. And I think the way you have to think about that is for sure there could be model mix shifts between diesel and gas; there could be mix shifts between customer shares on certain applications. And when you put all of that together, that's what drives it. It's no one specific product or no one specific customer, so I wouldn't think of it in those terms. I would think of it as just an aggregate of all the variants that play out there in Europe and how it affects us as a supplier.

That's helpful. And in general, how have the diesel mix been trending over the last few quarters in Europe?

Generally pretty stable. So think of it in the low 50% type number. And it varies. It could move a point or 2 during a particular quarter or to quarter comparison. But it's relatively stable through the year. And if you -- just another comment there is as that mix shift occurs, a percent or so either way, it doesn't have a material impact on BorgWarner. And that's fundamentally driven by the content that we have on gasoline engines and gasoline vehicles continues to grow and increase. So it's not a material impact on BorgWarner but generally consistent in the low 50s diesel share in Europe.

Okay, that's very helpful. And then just once again, digging deeper into the Drivetrain margin. Was there any onetime benefit in the Q3 margin or any help from the China JV ramp?

No, there was no significant onetimers or any significant tailwind from China.

We have time for one final question. And that question comes from Dave Leiker with Robert W. Baird. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: This is Joe on the line for David. First one, a lot of your growth historically came from having technologies and pretty attractive secular themes that drive the outgrowth. But when I look at the transmission market today, it seems like a lot of the OEMs are having quality issues with their drivetrain suppliers. So I'm just wondering, given your, let's say, quality reputation, are you seeing share gains accelerate, and what is maybe some of the more mature or slower growing product opportunities that could help you accelerate your outgrowth?

From a -- a couple of things, Joe, from a drivetrain point of view, we're not experiencing quality issues in those products. I think you've got a good assumption there. I think there's continued areas of opportunity for technology innovation and invention. We've talked about the migration to DCT continues to be a trend that we see playing out in Europe, and particularly China, which will be a key growth opportunity for the company. I think you've also seen our -- in this call an evidence or an example of the ever-increasing adoption of stop/start technology, and BorgWarner participated with some very innovative solenoid technology that's helping the automakers on stop/start solutions and fuel economy solutions. So there is continued evolution and opportunity for innovation and growth for BorgWarner on the transmission side of the business. And we'll share a little more on how that plays out in more detail next week, Joe. But I think your assumption is right where it's a good opportunity for additional growth for us. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. Maybe shifting over to the commercial vehicle piece of your business. I'm wondering if you could just remind me what the maybe market growth assumption was embedded in the backlog last year. Because even though things were getting worse last year and I'm sure that sentiment is reflected in the backlog, I think the lack of a V-shaped recovery in '13 and really into '14 has been tripping up commercial vehicle suppliers so far. So maybe just if you could weigh in on whether that's going to weigh on your business as well.

So I'm going to speak specifically to this year. And you're right. We didn't actually give any detailed estimates for commercial vehicle production, but we do expect more recovery this year than what we're actually seeing. So, yes, that has played into this a bit. And again, next week we'll talk more about how we see things going forward. But you are correct. For 2013 things did not materialize as we had thought that they would. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: And then my last one. If I just look at the equity income line item, it's down a little bit year-over-year, but you had pretty negative headwinds from the rupee and yen in there. So can you maybe just give an organic growth rate, what those businesses are growing at?

They typically are in line with BorgWarner growth rate. But you're right, Joe. That is what it's -- I didn't say that in my script, but it's really more currency is what's driving that negative over last year, more so than the volume side of it. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: So if BorgWarner outgrew the Asian markets by 8%, those JVs are probably doing likewise, 8%?

Yes, we have 2 main joint ventures. One of them is in India, on TEL, turbocharger business, which obviously is a good growing business. And the other one is in Japan, which I'd say would be less than the turbocharger business but still growing.

I'd like to thank you all again 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. Cherry, please close up the call.

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