BorgWarner Inc. (BWA) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Carmen, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2013 Fourth Quarter and Full Year Results Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ken Lamb, Director, Investor Relations. Mr. Lamb, you may begin your conference.

Thanks, Carmen. 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 February 20, sorry about that. The dial-in number for that replay is (800) 585-8367. You'll need the conference ID, which is 44799493. The replay will also be available on our website. With regard to our Investor Relations calendar, we will be attending 2 conferences between now and our next earnings release. February 19, we'll be at the Barclays Industrial Select Conference in Miami; and April 16, we'll be at the Bank of America Merrill Lynch Auto Summit in New York. 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 fourth quarter and full year results, as well as some of our accomplishments during the quarter; and then Ron Hundzinski, our CFO, will discuss the details of our operating results and also our outlook for 2014. With that, I'll turn it over to James.

So thank you, Ken, and good day, everybody. So Ron and I are very pleased today to review our fourth quarter and our full year results. And as Ken said, I'll also share some of our fourth quarter accomplishments. Let me kick off the quarter by congratulating and thanking all of the BorgWarner employees for delivering an excellent fourth quarter and a remarkable 2013. Your efforts drove outstanding results in a challenging environment. So now on to our results, and let me start with the fourth quarter. So you see, reported sales were $1.9 billion, which is up 9% from a year ago when we exclude the impact of foreign currencies and 2012 disposals. U.S. GAAP earnings were $0.62 per share, or $0.79 per share when we exclude non-comparable items. Our operating income margin, again, excluding non-comparable items, was an impressive 12.7% in the quarter and 2 key factors drove our strong results: solid sales growth in both the Engine and the Drivetrain segments; and operational efficiency and cost controls that enabled strong incremental margins, again, truly outstanding performance by our operations. So let me just cover the 2 segments. First of all, the Engine segment. So fourth quarter sales were just under $1.3 billion, which is up 8% from a year ago after excluding the impact of foreign currencies and 2012 disposals. These results were led by new turbocharger launches in China, new engine timing and VCT launches in Japan and China. We saw improved commercial vehicle markets and also higher EGR cooler sales around the world. In the Drivetrain segment, we saw sales of approximately $630 million. That represents a 10% increase from the fourth quarter of 2012 when we exclude foreign currencies. Drivetrain's results were driven by new all-wheel drive launches in both North America and Korea. We also saw higher dual-clutch transmission module volumes with Volkswagen and higher transmission component sales to Hyundai/Kia. When you look at this, this segment review highlights a couple of the core strengths of the company. Our entire product portfolio is in high demand and contributing to our growth, and we are growing globally around the world. In our press release this morning, we disclosed a restructuring charge taken in the fourth quarter, and this restructuring activity is primarily related to the Drivetrain segment. Now while we've seen improved performance from Drivetrain over the last few quarters, we still believe there's room for further improvement. Specifically, we believe margins can go higher and that its cost structure can be more competitive. So therefore, we've taken actions to optimize the footprint to help that business reach its potential, and Ron will provide more detail around this restructuring in his comments later. So let me talk about the full year now. Reported sales were over $7.4 billion. And after excluding the impact of foreign currencies and 2012 disposals, sales were up 4%. U.S. GAAP earnings were $2.70 per share. And after excluding non-comparable items, net earnings were $2.89 per share, which is up 17% from 2012. And our full year operating income margin, when we exclude non-comparable items, was 12.4%. So in all 3 key metrics, sales, earnings and operating income margin, we achieved new records in 2013, which is a tremendous accomplishment when you consider the challenging environment in which it was delivered. Now as we look to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow, and we spent about 6.4% of sales on capital in the fourth quarter and about 5.6% of sales for the full year. And we remain committed to supporting our future growth and productivity improvements. Our spending for R&D was about 4.6% of sales in the quarter and about 4.1% of sales for the full year. That's a little above our targeted spend of 4% of sales and another indication of our strong commitment to investment in R&D. I'm also proud to review some exciting announcements we made during the quarter. Back in November, we reported an expected backlog of $2.9 billion of net new business for the period 2014 through 2016, which implies a return to our historical growth rates. BorgWarner introduced the world's first electronic limited-slip differential on the 2013 Volkswagen Golf GTI with Performance Pack. This system greatly enhances vehicle traction, handling and stability without sacrificing engine power. And under certain driving conditions, the technology's enhanced vehicle performance approaches that of an all-wheel drive system but with less cost and better fuel economy. BorgWarner also signed an agreement to acquire all shares in Wahler, a producer of EGR valves, EGR tubes and thermostats, subject to regulatory approvals. Now with locations in Germany, Brazil, U.S., China and Slovakia, Wahler employs approximately 1,250 people and supplies customers such as Daimler, Volkswagen, BMW, General Motors and John Deere. In Wahler, its annual sales for 2013 are expected to be approximately $350 million, and we expect the deal to close in the first quarter of 2014. Our Board of Directors approved a two-for-one stock split. To implement this split, shares of common stock were distributed on December 16, 2013, to all shareholders of record on December 2, 2013. The company's Board of Directors also declared a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable on February 17 to shareholders of record on February 3. Now let me take a moment to review our guidance for 2014, which is unchanged from our announcement of last month. That means organic sales growth in 2014 is expected to be 7% to 11%, and again, this excludes the pending Wahler acquisition. We expect earnings to be $3.10 to $3.25 per share, which is up 9% to 14% from 2013. And again, our operating margin is expected to be 12.5% or better. And Ron will provide a little more color on our guidance shortly. So I'm confident that 2014 will be another strong year for BorgWarner. We are expecting a return to BorgWarner-like growth and continued excellence from our operation. And this powerful combination should result in tremendous earnings potential for our company. We see the industry continuing to adopt our leading-edge powertrain technology, and we see this continuing for many years to come. And because of this, I really feel very good about the company's future, and I believe that no company in the auto sector is better positioned for the long-term profitable growth than BorgWarner. And with that, let me turn the call over to Ron. Thank you.

Thank you, James, and good day, everyone. Before I begin reviewing the financials, I'd like to commend all of our employees for their hard work and dedication in 2013. We challenged the team to maintain margins in a slow growth environment and it was a tough objective, but the team was up to the challenge and exceeded expectations. Congratulations. And now on to our financials. I'm going to review the fourth quarter in detail and then provide a few key data points about the full year. James has already provided a detailed review of our sales performance in the quarter. In summary, sales were up 9% from a year ago, excluding the impact of foreign currencies and 2012 disposals. The growth in the quarter came from both segments, from nearly every product group and from around the world. Overall, a strong quarter for sales. Working down the income statement. Gross profit as a percentage of sales was 21.6% in the quarter. That's 160 basis points improvement from 20% a year ago, tremendous performance. SG&A as a percentage of sales was 8.9% in the quarter, down 20 basis points from 9.1% a year ago. However, R&D spending, which is included in SG&A, was 4.6% of sales in the fourth quarter, up 70 basis points from a year ago. This implies a 90 basis point decline in other SG&A spending, which we attribute this to good execution of our cost control plan. Reported operating income in the quarter was $188 million. However, this includes $52 million charges related to restructuring activities that I will discuss shortly. Excluding the charge, operating income was $240 million, or 12.7% of sales, compared with 10.9% of sales on a comparable basis a year ago. After excluding the impact of foreign currency and non-comparable items, our year-over-year incremental margin was about 36%, well above our mid-teens incremental margin target. So in summary, operational efficiency led to improved gross profit margin, cost controls led to lower SG&A spending. This enabled us to increase R&D spending and expand our operating income margin. That's a formula for success, outstanding performance by our operations providing good momentum going into 2014. As you look further down the income segment, equity in affiliate earnings was $12 million in the quarter, up from $10 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, essentially flat with the $7 million a year ago. Provision for income taxes in the quarter on a reported basis was $45 million. However, this included $12 million of net favorable adjustments, which you can read about in our 10-K. Excluding these non-comparable adjustments, provision for income taxes was about $56 million, which is an effective tax rate of about 23% in the quarter. For the full year, our effective tax rate, excluding the impact of non-comparable adjustments, was 26%, just under our guidance of 27%. Net earnings attributable to noncontrolling interest were $8 million in the quarter, up from $5 million a year ago. This line item reflects our minority partner share in earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings, which were $141 million in the quarter, or $0.62 per share. On a comparable basis, excluding the impact of restructuring activities and tax adjustments, net earnings were $0.79 per share, up 36% from $0.58 per share a year ago, outstanding performance for the company. As James mentioned, on a comparable basis, 2013 was a record year for sales, operating income margin and EPS. Additionally, our full year incremental margin was 37%. Also, on a comparable basis, the team performed at a very high level in 2013 and we expect great performance again in 2014. Now let's take a closer look at our operating segments in the quarter. As James said earlier, Engine segment sales were just under $1.3 billion in the quarter, up 8% from a year ago. Excluding the impact of foreign currencies and 2012 disposals, adjusted EBIT for the Engine segment was $208 million in the quarter or 16.4% of sales; that's an 80 basis points higher than the 15.6% reported a year ago. Excluding currency and 2012 disposals, the Engine segment's year-over-year incremental margin was 30% in the fourth quarter and 32% for the full year, outstanding performance for the Engine Group. In the Drivetrain segment, sales were $620 million in the quarter, up 10% from a year ago, excluding the impact of foreign currencies. Adjusted EBIT was $71 million, or 11.2% of sales, sharply higher than the 8.8% a year ago. The segment's year-over-year incremental margin was 36% in the fourth quarter and 38% for the full year. The Drivetrain segment had a great year. However, as James mentioned earlier, consistent performance from Drivetrain remains a concern and an area of focus for us. As a result, we have begun restructuring the Drivetrain segment. The objective is to optimize its footprint for more consistent performance and to strengthen its competitive position. The initial phase of the restructuring was the $52 million charge taken in the fourth quarter. About 2/3 of the charge was asset impairments, noncash, while the other 1/3 was cash outlays for severance and other activities. The remaining phases of the restructuring will be almost entirely cash outlays for the severance and other activities. We estimate charges related to remaining phases of the restructuring to be approximately $90 million. These actions will be taken over the next 6 quarters and the full benefit of restructuring is expected to be realized after that. The plan includes closing 2 Drivetrain facilities in Western Europe and 1 in North America, all of which is now underway. Despite these actions, Drivetrain is a growing business. The other side of optimizing the footprint is expanding into lower-cost economies. Investments related to Drivetrain's growth are happening in Poland, Hungary, Mexico and China. From a performance perspective, we expect this restructuring plan to improve segment margins by 100 basis points or more and make the Drivetrain segment a solid double-digit margin business. Also, with cost -- better cost structure, the business will be more competitive, which should translate into winning more business. If you look at the balance sheet and the cash flow, we generated $719 million of net cash from operating activities in 2013, down $160 million from 2012. The primary driver of the decline was a $138 million discretionary contribution to our German pension plans. This allowed us to reduce pension liability risk and deploy offshore cash without incurring repatriation tax penalties. This discretionary contribution was accretive and on par with share purchases of the same amount. I would like to point out where this line item is in our cash flow statement. If you look on the tables, you'll see changes in assets and liabilities of about $273 million. This $138 million makes up the majority of that line item. Capital spending was $418 million in 2013, up $11 million from 2012. 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, which we define as net cash from operating activities less capital spending, was $301 million in 2013. Our free cash flow was used to repurchase shares and to pay dividends to our shareholders. We purchased more than 5.2 million shares in 2013, split-adjusted, leaving approximately 11 million shares on the current authorization. Looking at the balance sheet. Balance sheet debt increased by $155 million at the end of 2013 compared with the end of 2012. Cash increased by $224 million during the same period, leaving net debt down $68 million compared with the end of 2012. At the end of 2013, our net debt-to-capital ratio was 7.2%, down from 10% at the end of 2012. Net debt-to-EBITDA at the end of the year on a trailing 12 months' basis was 0.2x. Our capital structure remains in excellent shape. Now I'd like to discuss our guidance for 2014. James reviewed our guidance at a high level, I'll just discuss some of the finer points. Our sales growth guidance range of 7% to 11% excludes the pending Wahler acquisition. Wahler sales were expected to be $315 million (sic) [$350 million] in 2013. Assuming that we close by the end of the first quarter, the transaction would add about 300 to 400 basis points of revenue. Our sales growth guidance also assumes very low currency impact. Weaker Asian currencies continue to offset the stronger euro. We expect raw material inflation of $5 million to $10 million range in 2014, still a headwind but less -- but much less than what we've seen in typical years. As James mentioned earlier, our operating income margin is expected to be 12.5% or better in 2014, up from 12.4% in 2013. Some of the deferred cost from 2013 will come back in 2014, but we expect strong sales growth, productivity and spending controls to support, maintain or possibly expand the margins. Incremental margins should be in the mid-teens, in line with our long-term range target. Our expected diluted share count for 2014 is expected to be approximately 230 million shares. This diluted share count guidance excludes any share repurchases that may be executed during the year. Finally, our EPS guidance range of $3.10 to $3.25 per diluted share, which includes the impact of the pending Wahler acquisition, remaining phases of restructuring and any other non-comparable items, excludes those. All right, here's my conclusion. We continue to be confident in our ability to execute in any market. This company has demonstrated heightened focus on efficiency and cost. The focus resulted in highly efficient growth and record margins each of the last 4 years. With return to historical growth rates and our operations performing at a very high level, 2014 should be another record year in sales and record profits for BorgWarner. As we look beyond 2014, we intend to execute our growth plan yielding high-single-digit to low-double-digit growth and to efficiently convert all our sales growth into profits. The future is bright for BorgWarner. And with that, I'd like to turn the call back over to Ken.

Thank you, Ron. Now let's move to the Q&A portion of the call. Carmen, can you please remind everyone of the Q&A procedure?

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

This is David in for Rich. So the quick -- first question is on the free cash flow for Q4, a little below than what we expected relative to last year. Is that mainly due to that pension contribution?

That's a significant impact in that quarter is the pension contribution plus some tax deferral adjustments on the balance sheet.

Got you, got you. And then on the guidance, if we assume the midpoint of the margin at 12.5% and -- I mean, the 12.5% margin in the midpoint of the revenue guidance, it sort of implies like a 13% incremental. I know that you said you're going to do 12.5% or better but is that sort of -- is that something that you're sort of still looking at? Or could that go higher versus maybe our calculation that we came up with?

Yes, David, we've been saying that our incrementals will be in the mid-teens, and to me, that's mid-teens.

Got you, okay. Fair enough. And then, I think last quarter in Q3, you mentioned that production was going to decline about 3% from 2012 to 2013 on the European basis. What -- can you sort of put into color -- or provide us with some color related to what transpired in Q4? I mean, did it come in better than expectations? And then granted you mentioned earlier on the call that a lot of your revenues from all your geographies improved on a year-over-year basis, can you sort of categorize where you found the most strength?

Yes, David, let me take a shot at your first question. I think if we look at how Europe as a region finished up in the -- at the end of the year versus what we thought at the -- a quarter ago, it was a little better. I think it was just -- it was a little better. And I think that's probably a good summary for BorgWarner, too. So a little bit of an improvement in the fourth quarter for Europe. I think the key message, as we now move into '14, is we're seeing growth in all regions of the world and it just -- it varies a little bit around the world, but we are seeing significant growth. Not surprisingly, David, our strongest percentage of growth for the company still is in Asia, in China, and that's probably not a surprise to you when you look at our backlog, which was significantly weighted actually towards China, which we think is a great thing when you've got a country building over 20 million vehicles. So that's really strong for us. And the growth is pretty well balanced as we look across Engine and Drivetrain. So I think Ron alluded to it earlier, David, the growth is pretty much all products, all segments, all regions of the world. Varies a little bit between them. But all of that translates into that 7% to 11% of organic growth that we've talked about, which we feel really good about, David.

And one last question. When we look at last quarter, you guys did great on Q3, did great on Drivetrain margin. Again, stellar performance in Q4. Is that a figure that we could sort of use as a baseline going forward in the 10%? Or is there going to be some choppiness where it might be in the high-single digit on a margin basis on Drivetrain as 2014 unfolds by quarters?

David, I would say as a baseline, those are 2 slightly above the performance, but I think we're in the range that you like at this point. And then, we're going to obviously drive even more north of that point.

Your next question comes from the line of Brian Johnson with Barclays.

I just wanted to follow up on that Drivetrain question and maybe try to get underneath the covers in terms of what's driving this very good margin expansion. How would you roughly divide, if we think of the couple of hundred basis points year-over-year, the 100 basis points maybe versus our model, between sort of you're having a better product mix, higher value-added products, you're filling up some factories in China, other cost actions around the world or maybe kind of uptick in just volume driving it above where you thought -- might have thought?

Yes, Brian, this is James. Let me try and take a little bit of a shot at that for you. I think the way I would characterize the improvement in 2013, Brian, is the volume piece certainly helps. We've seen very good growth in Drivetrain in the year and that absolutely is helping the cause. I think the bigger piece -- the biggest piece, Brian, it would be the excellent operational performance and discipline. And what I mean by that is if you take the clock back a while ago, there was -- we had challenges around capital installation, program launches, product launches. And we've done a nice job of resolving a lot of those issues. So the existing footprint or the existing operations have executed well. And that, coupled with the volume has, in general, driven the improved performance and improved stability thus far. As you look out a little bit, as Ron alluded to, Brian, the next step, if you like, in the journey is the optimization of the footprint, as well as the continued good execution that we're doing today. So what that really comes down to is reducing our Western European footprint and a little bit of an adjustment in North America and adding additional capacity and infrastructure into lower-cost regions of the world. So think Poland, think Mexico, think China and that will take us to the next level. So growth plus a better footprint is going to absolutely help take Drivetrain up to the next level, Brian.

And do you have an estimate of roughly the margin expansion from the restructuring actions, or alternatively, the payback period on your restructuring investments?

Brian, it was in my script, don't know if you heard it completely. We said there would be 100 basis points of solid improvement there and incremental incomes going forward.

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

I have yet another follow-up question on Drivetrain, so I apologize to stay stuck on that topic. But the 100 basis points that you referred to as the potential margin expansion, as you work through these restructuring actions or reallocation actions, what is the time frame that you think you can get those? I think you had mentioned 6 quarters would be the -- where the $90 million incremental restructuring costs would come in. Is it over 6 quarters you think you can get that 100 basis points or maybe it would be just a little bit longer?

So let me be clear here, over the next 6 quarters, we're going to be implementing restructuring activities, which would require us to move some facilities and close facilities -- move equipment and close facilities. After the 6 quarters is when we start to see the significant improvement of margins going forward. So 100 basis points or better, I will say that, or better, going forward after we get all this in place, okay? So we have -- there's a lot of work over the next 6 quarters to get us ourselves in that position.

Got you. So the benefits would come 6 quarters out. Between here and there, it will just be the mix and your execution is what -- like what we saw in the second half of this year, is that a fair characterization?

Yes, the full benefits will start after that. We'll see some incrementals as we go forward, but the full benefits of all the restructuring will start after that.

Okay, very helpful. Second question, and this is a high-class problem, but you've been spending a little bit more than 4% on R&D towards the end of 2013 or for 2013. Would that potentially come in as your sales grow going forward? Or should we expect you to be spending sort of more closer to the 4.5% range as opposed to your 4% long-term target in the near term?

Yes, John, I think the 4% is still a decent number for you to think of over the -- as you look forward. But as I -- to your point, I think when we get an opportunity to spend a little more in R&D, if we've got some critical innovation programs and products we want to work on, we're going to find a way to do that. So I think 4% is not a bad number and you may see it go a little below that quarter-to-quarter or you may see it go a little bit above it. But we're not going to slow down the R&D spend, that's just a critical, critical part of the company, John.

Okay, that's great. And then just lastly, we've heard a lot of issues in the industry of sort of shortage of casting capacity in all sorts of parts. Are you seeing any problems with that, any of your parts, particularly around your turbo housings? I mean, it just seems like there might be some risk going forward, particularly as Ford ramps up its EcoBoost engines with the new F-150 late this year?

No, John, I would say 2013 was really a very good year for us in terms of capacity utilization and all that came with that. We're not really seeing anything of significance at this point, John, as around the world, we're not. There's always day-to-day, week-to-week challenges, but I would say nothing fundamental and nothing holding us back, delivering what we need to deliver. And I think you've seen some of that translated into our incrementals that Ron alluded to. So, so far so good for us other than, I would say, normal challenges, John.

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

Can I just follow up? I think the first question was on free cash flow. Net income was up about $70 million, but the cash flow was down about $160 million. I mean, so you have a pretty big delta between the 2 of over $200 million. So the $140 million was the pension. Was the tax really that large? Or are there other items going on that are affecting the cash flow this year?

The $140 million is the funding of the pension is what it is. So there was cash left. There's other adjustments and liabilities that at the end of the year that you true-up. And then, working capital actually was in pretty -- we do a really good job -- if you look at true working capital, receivables, inventory and payables. But you have what I call nonoperating items like tax changes and things of that on the balance sheet that changes the working capital number, that you have to fund certain tax payments, prepayments and so on and so forth. I'm comfortable as far as the working capital related to the operations of the business. I would call -- I would say some of these adjustments were nonoperating.

Okay. So you're comfortable with the cash flow guidance for next year? Because that implies a pretty big swing, I believe.

Absolutely. If you track throughout the year, what typically happens is the first quarter is a neutral cash flow. You start to build second and third. Fourth is typically a pretty good quarter, but again we had some funding requirements that we met in the quarter that would take that out, what you would have seen on a normal cycle.

Okay. And then in terms of the pension contribution, I mean, any color on where that brings your pension funding by the end of the year? Is that -- it must be pretty close to getting fully funded.

It's not -- well, 90%, if that's close, that's what we're at, especially with the German and the total company. In the U.S., our funds are very well funded right now. In Germany, we made this contribution, we got into 70%. So I think the average is like high 80s as a company. More importantly now, we're able to put this money to work and match the liabilities with the assets. And in that way, we can risk going forward, adjust movements in discount rates and earnings so that we don't see as much volatility going forward.

And high 80s, is that about $100 million or $150 million underfunded? Or. . .

I'd have to check exactly.

We'll get that to you, Colin.

And just lastly, any color on why the Q4 tax rate was so much lower than normal?

Yes, like I mentioned, we're about -- our effective tax rates -- run rate was 27%. We came in, to be exact, 25.9%. What happened is you can go in our Q, but we took a look at some U.S. state valuation allowances, then released a couple of those, offset by a few other items. There's like 6 -- 4 or 5 items in there that puts and takes, but the net result was a benefit.

Okay. And the guidance for next year is still 27%?

Yes, it is. And I'll just expand my comment on why it's still 27%. Like I said, there were those state tax valuation adjustments. And we will reevaluate the tax rate probably halfway through the year to make sure where it's at. We are always trying to lower the tax rate and maybe we'll have some opportunity. But at this point, I got to get a half year under me to see where we're at.

Your next question is from the line of Ryan Brinkman with JPMorgan. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: It looks like you didn't make any repurchases this quarter after doing so in each of the past 4. I'm just curious, probably it doesn't owe, or does it, to the rise in your stock price during the quarter, more does it have to do with maybe the acquisition coming up or the German pension contribution. What do you attribute that to?

Yes. Obviously, I have the ability to look to see where my cash needs are going forward. The pension I thought was a very good move for BorgWarner given that the cash is in Europe. We could take a liability and start to derisk a liability going forward. That was a real good move for us. Now I'm also looking, we have the Wahler acquisition here right around the corner and there's other opportunities for us as well for cash that we're looking at. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Okay, great. And then just a real high-level question about your revenue guidance. I guess now you're pointing to $700 million of backlog for '14. That would be 9.4% growth on the 2013 revenue that you just reported. And then IHS, at least, has global light vehicle production up 3% next year, so that kind of gets you to 12.4% kind of growth although you've guided to 7% to 11%. So what are the differences there between kind of that 12.4% I walked to. I mean, obviously, there's price down, there's maybe geographical profile. Is there anything else that we should be thinking about like diesel versus gas mix or anything?

Ryan, this is James. I think the first thing for me that's probably worth reinforcing is 7% to 11% growth isn't too shabby. We feel really actually very good about that and that gets us back in the somewhat normal typical growth rates of BorgWarner. So we feel good about that. The simple way to look at it is, you take our backlog as you articulated and that's a strong number and then you take out price down, FX out and then you look at, I'll call it, a BorgWarner mix-adjusted production volumes around the world. And that's about where you get to where we are. So the quick way of saying it, the pricing is probably a couple of percent, global production adjusted for BorgWarner mix around the world and our products is also a couple of percent and that's what gets you to the 9% number. And again, we feel good about that. That's organically, as we've reinforced. As Ron alluded to, if all goes well and we close out the Wahler transaction, that's going to add another 300 or 400 basis points on top of that, which gets us to where we think we're going to be over the long term, which is this low-double-digit growth rate, which we feel is very, very strong. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Okay, that's great, really helpful. And then just very last question. I know you were already asked about this a little bit, but can you just kind of take us around the world -- I know you haven't in previous quarters, about how you performed relative to light vehicle production in maybe some of your key end markets?

So we -- what we provided was our global growth and we have maybe stepped away from the comparisons versus the regional look, primarily because when we've talked about this over the last month or so, it's not really a constructive exercise as we've seen. Every time we kind of go down that path, it's a pretty complex analysis from what the market did in the region versus what our sales did. So what's really important to us is our absolute growth. That's what we're focused on as a company, that's how we manage the company. And frankly, that's what really matters. I think when you think about growth, where it comes from is not as important as why we're growing. So that's why we're going to talk to you about where our growth was and where it's coming from and I think that's the right message for you.

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

[indiscernible] big picture, I don't know if you saw or not, but there's a J.D. Power report which cited some reliability issues with smaller [indiscernible] engines and while they didn't specifically call it turbos or anything, I know you guys are increasingly on those engines. Is that consistent with some of the feedback you've been getting from your customers? Or what -- any comments on that report, I guess?

Yes, I'm not sure the actual specific J.D. Power report that you -- the specific one you're referring to. But at a high level, we had -- with the adoption rate and desire for turbo just continues to go as strong as we've thought over the last several quarters and that, I would say, is across all of the displacement ranges. So we continue to see a huge shift towards smaller downsized turbo engines and we're not seeing anything there. We've not really seen any meaningful issues around launches or volumes relative to that type of stuff. So we're not seeing it in our business is the real quick answer for you.

Joe, I read that article earlier in the week, I think, I saw it. And there seemed to be some confusion about the consumers' expectations of certain things. It wasn't truly a durability issue as you would think that the engines are failing prematurely or anything like that. It was, if I recall, reading that article, that there was some confusion by the end users on what their expectations were on some of these things, if I remember, going deeper down in that article.

Okay. I know we'll probably hear more about Wahler as it closes. But it does seem like there may be some off-highway exposure there. And I was wondering if that accelerates your plans to sort of move into some non-auto adjacencies, which some of you highlighted in the summer as for the longer-term goal. Well, maybe just a general update as to whether there's any progress on some of those other end markets?

Yes. Joe, our current emissions business is balanced between both light vehicle and commercial vehicle. So we play in that space today, both light and commercial vehicle. And your assumption is a good one, that Wahler will bring both light vehicle and commercial vehicle revenue stream into the company and technology as well. A couple of other comments around Wahler. As we've unfolded over the last few years, really, around this emissions business, we've taken a number of really critical steps. We started off with a primarily EGR valve business, North American-centric, and have taken that more globally. Then we did the Dytech ENSA acquisition that gave the cooler capability, which was primarily in Europe but we've now been successful in taking that globally. What this really brings is a really key piece for us, which is valve, tube and thermostat capability but with somewhat of a European-centric view, which we feel is a fabulous asset for us because that really brings strength to us from the German OEMs, both light vehicle and some commercial vehicle. So this is a terrific fit for us strategically, and we're excited to move forward and get it closed and start integrating it into BorgWarner and growing the business. The other -- one other last thought for you, Joe, in terms of the broader question of end markets. Our backlog, again, was pretty robust. I think we were -- 15-plus percent of our backlog was tied to commercial vehicle market and I use that term generically because that includes a lot of off-highway-type volumes as well. So we're continuing to make progress in serving those broader end markets beyond light vehicle.

Okay. And maybe just one quick one. Near term, given some of the elevated inventory levels in the U.S., which it seems like weather played at least some role. Are you [indiscernible] near-term schedules, call-offs yet?

Yes, I think -- you're specifically talking North America, right?

Yes, and sorry, North America.

Yes, I mean, so far, what we're seeing is schedules and releases holding up pretty well. As we've started out the year, we're 5 or 6 weeks in. We're like everybody else. We pay close attention to inventory levels and pricing dynamics in the industry to not kind of get ahead of ourselves. But I would say so far so good is what we're seeing in terms of what we were hoping North America would start off at. So, so far so good is kind of our sense, Joe.

Your next question comes from the line of Brian Sponheimer with Gabelli.

Just looking at the balance sheet, I know I ask this a lot, given that the leverage is so low even after this Wahler acquisition, you mentioned that some of your -- a good portion of your cash is in Europe and that's why it works so well. Would repatriation be something that would keep you from being more aggressive from a share repurchase perspective?

Repatriation is always going to be a concern for a multinational company. We're putting structures in place to make it more efficient to bring back cash. I wouldn't say that's a primary concern. There's a lot of factors you look at on share repurchases, just not one item. You look at your outlook as far as M&A activity, you look at obviously share price, your multiples, you look at a lot of things. I wouldn't point to just one item when you look at share repurchases.

I agree with that. Just along those lines, Ron, when we met in the fall, you talked about a decent acquisition pipeline, you kind of referred to it here. Has there been any change in potentially getting closer to even beyond Wahler, obviously, some larger pieces that you think would fit really nicely in the portfolio?

Yes, Brian, this is James. We're feeling pretty good actually how the acquisition pipeline is working out. Getting Wahler closed and behind us, which hopefully is only a couple of weeks away, should be a good thing and that will be kind of in the bag. We -- our pipeline is still pretty robust. We talked about it last summer, the target pool companies of about 30 or so companies. Just like with any process, some companies have fallen out, a couple more have emerged and gone into there. So it's still a really robust pipeline for us. And I think the key message that I would probably want to share is the Wahler transaction, assuming it all goes through, won't stop us doing other ones, both from a cash perspective, and probably as importantly, resources and integration perspective. So we're actively looking and engaged in a lot of conversations to get another one done, and we're working as hard on that one as we did on Wahler. So we're feeling pretty good where that's playing out right now, Brian.

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

So just following on the last conversation, that last question. It sounds like there's a good possibility that you could get maybe another acquisition done this year, possibly, no guarantee, but that's kind of the idea. Is that the idea?

It's the idea, Brett. Whether we can execute it is, as you know, I think, from prior conversations, is much a function of the seller as it is us. We have a strong desire and intent. And with a number of possibilities on the table, we're certainly hopeful. But it just really will depend on the willingness of the seller, but we're working awful hard on getting it done.

And then -- and I missed the beginning of the conversation, so I apologize if I'm asking something you've already addressed. But as you think about Europe, you think about the luxury brands and so forth, what's your general sense? What are you seeing in the marketplace today? And what's your general sense for the outlook? I know you've got an outlook embedded in your guidance and so forth, but do you see things improving, deteriorating relative to your expectations?

Brett, I would say pretty similar to where we were when we were all together in Detroit a few weeks ago, which, for us, in Europe means a little bit of growth this year in light vehicle production, whether it's 2%, 1.5%, 3% in that range. We don't see a significant mix shift between gas and diesel. We're not seeing much of a shift in our luxury or premium vehicles versus none. So it's about where we were in January and that, for us, is actually okay. I mean, that says things are holding up reasonably well, little bit of growth, little bit of stability. And then in the out-years, we're expecting it to be a very slow and modest recovery is kind of our view, Brett.

Your next question comes from the line of Matthew Stover with Guggenheim Securities.

2 things, or 3 things, maybe. Following on to the Wahler acquisition, how should we think about that from a margin standpoint relative to the existing engine business? I would assume that it's, after the allocation for amortization, it would probably be a lower-margin business. But I just want to make sure I have my concepts straight.

Matt, what we're going to do here is we're going to discuss all of this once we close the acquisition. Purchase price accounting is very complex and if I start giving out estimates and things and I have to retract them, I don't want to go down that path. I want to close the books, allocate all the purchase price accounting and then we'll discuss these in much more full detail in our Q, and obviously, as we meet with you folks as well once we close the acquisition. We'll be very transparent. I want to get a good look at this when I close this transaction.

Makes sense. So -- and I want to fully beat this dog to death with the restructuring of the Drivetrain business. If I look at the working capital intensity of the Drivetrain business versus the engine business right now, are they similar? And as you think about the restructuring of this business, do you envision any changes in terms of working capital intensity and CapEx intensity to that business?

I don't anticipate any changes. But the question is about where are they at today. It's really more complex than just one segment for us because I have several product lines in there. I will say a couple of products in there maybe do require a little more CapEx and a couple of them require less CapEx. So it's hard to generalize in that area. They're not exactly all the same, but I will say going forward it should remain the same.

So the working capital intensity of the 2 businesses is quite similar?

There's no material difference.

No material -- okay. And on the corporate expense side, typically, in the fourth quarter, you see a tick-up in your corporate expense. It was stable versus the third quarter. How should we think about that as we go into next year and its implications?

What I would say right now is the average, if you were to average the full year out, that's probably a good number to go into 2014. I know -- actually, we did tick up slightly in the fourth but it's immaterial, but I would take the average for the year.

We have time for one final question and that question comes from the line of Richard Hilgert with Morningstar.

A couple of questions, a couple of housekeeping first. Can you disclose the R&D expense for the full year? And did you -- I apologize if I missed this, did you give a restructuring expense number for 2014?

Okay. First, Richard, it was 4.1% on the full year. In the K today, it'll show you the expenses and everything. I think we're up $30 million for R&D expenditures, okay? You can back in for the quarter, which was like 4.6, okay? And now switching to, what was the other question, restructuring? We said that the $90 million additional restructuring expenses would be over the next 6 quarters, I think, is what I said in my script. We didn't identify how much in '14 per se but -- because there's a lot of accounting rules we have to go by. We know within 6 quarters we should be finished with the restructuring expenses.

And in case your question was about the fourth quarter, it was $52 million in the quarter.

Okay. And then was the $90 million primarily European?

It's going to be primarily European and cash as well. It'll be more on the severance side, I think, is what I also said in my script. Yes.

Given the sensitivity over there to various labor issues in various regions of Europe, are there any risks that you can identify for us to that number?

Richard, this is James. It's not an easy thing to do and it's something we take very seriously. These are not easy decisions as a business for our employees, as well as for our customers, as well as us. It's not something we enjoy doing at all. It's something that we feel very difficult, but we do feel that we have a plan in place that will be okay, actually. What Ron is doing is quite right; obviously, he's giving you estimates because things do vary. There's a lot of -- still a lot of discussions and negotiations that are pending with our employees, with our unions, et cetera. So -- but I think in terms of the approximate numbers and the timeline that Ron has outlined, Richard, I think it's a pretty good, decent set of assumptions at this stage for sure.

Okay, great. And then finally, wanted to ask a little bit about dual-clutch. Some of the -- when the products were first coming out, some of the knocks against it were that it's a heavier product, the replacement cost is going to be much higher if you have a failed transmission in the aftermarket, and the expense of R&D to use that kind of transmission is going to be higher. So there were these offsets, too. If you compare to a liquid torque converter transmission, you're getting anywhere from 5% to 10% fuel savings. But then you've got these offsets. Are there still pushback in the industry to dual-clutch? Or is the fuel savings enough at this point that we should see more penetration and more high gear transmissions coming in future years?

Richard, the quick answer I would give to you is we are not seeing a slowdown in adoption rates of DCT. What I'll translate that to into specifics for you is as we look out over the next 4 or 5 years, we see a compound annual growth rate for the DCT product line. I'm not talking BorgWarner revenue, but for DCT adoption rates of about a 15% compound annual growth rate, which is not materially different from what it was a couple of years ago. So no, we're not seeing a slowdown at all, which I think is good. And it's for all the reasons I think we've articulated before. It's an extremely effective way to get a fuel economy benefit and still have great driving performance. So we're not seeing any real shift there, Richard, is the quick answer.

Are there any competing technologies to DCT?

Well, you can utilize obviously stepped automatics, which is also a great technology for BorgWarner, and you can also use CVT or you can stick with a conventional manual transmission. Those are the 4 primary architectures that are used. We see -- and we see manual transmissions somewhat declining and we see growth in stepped automatic, DCT and CVT as a mix shift, with DCT being arguably the strongest growth of all of those, Richard.

I'd like to thank you all again for joining us. We expect to file our 10-K 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-K, please direct them to me. Carmen, please close out the call.

That does conclude the BorgWarner 2013 Fourth Quarter and Full Year Results Earnings Conference Call. You may now disconnect.