BorgWarner Inc. (BWA) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Melissa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2015 First Quarter Results Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ken Lamb, VP of Investor Relations. Mr. Lamb, you may begin your conference.

Thanks, Melissa. Good morning, and thank you, all, for joining us. We issued our earnings release this morning at around 8 a.m. Eastern Time. It's posted on our website, borgwarner.com, on our Investor Relations home page. A replay of today's conference call will be available through May 8, also on our website. The dial-in number for that replay is (800) 585-8367. You'll need the conference ID, which is 17762917. With regard to our Investor Relations calendar, we will be attending the following conferences between now and our next earnings release: May 1, we will be at the Wells Fargo Industrials Conference in New York; May 19, we will be at the Barclays America Select Conference in London; May 27, we'll be at the KeyBanc Automotive Industrial and Transportation Conference in Boston; and June 3, we'll be at the Deutsche Bank Industrials Conference in Chicago. Before we begin, I need to inform you that during this call, we may make forward-looking statements, which involve risks and uncertainties as detailed 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 review highlights of our quarterly operating results as well as some of our recent noteworthy accomplishments. And then Ron Hundzinski, our CFO, will discuss the details of our quarterly results. With that, I'll turn it over to James.

Thank you, Ken, and good day to everybody. Ron and I are very pleased to review. [Audio Gap] thank our employees around the world for another outstanding quarter. Your efforts drove outstanding results that help us to continue to lead our industry. Now onto our results. So during the first quarter, reported sales were just under $2 billion. That's about down 5% from a year ago, but it's up 3% when we exclude the impact of foreign currencies and the Wahler acquisition. Our growth in the quarter was below our normal high levels due to a few discrete items that I'll discuss in the segment review. Our U.S. GAAP earnings were $0.79 per share or $0.78 per share, excluding nonrecurring charges. Our operating income margin, again excluding nonrecurring charges, was an impressive 13.1% in the quarter. So considering our lower-than-normal growth quarter and some of the restructuring efficiencies and the new plants and plant expansions that we're managing this year, this is outstanding performance by our operations. Let me take a look at the 2 segments. In the Engine segment, first quarter sales were about $1.4 billion, which is down 2% from a year ago. But again, when we exclude the impact of foreign currencies and Wahler, the segment grew at 6%. These results were primarily led by strong turbo sales around the world, which was partially offset by some unfavorable mix of light vehicle production in North America. And we believe this is a temporary issue and should not impact our full year growth expectations. In the Drivetrain segment, sales of $611 million, which is down 10% from a year ago or down 2% when we exclude foreign currencies. The decline in sales for Drivetrain was related to unfavorable mix of light vehicle production in North America and also some launch delays in Asia. I'm very confident, though, for 2015 this will be a good year for Drivetrain. We expect Drivetrain to grow organically in 2015, and the restructuring work that's underway will position the business for strong growth and margin expansion in 2016 and beyond. [Audio Gap] our restructuring and expansion plans designed to improve our long-term performance. Our financial strength and strong performance is based on our ability to anticipate and drive the next technology [Audio Gap] BorgWarner continues to invest for the long term. Capital spending continues to grow. We spent about 7% of sales on capital in the first quarter, which is above our long-term target of 6%. Typically, our capital spending is primarily for machinery and new equipment. However, with our strong high single to low double-digit growth rate over the next several years, it requires investments in new plants and plant expansions, which is driving some elevated spending in the near term. We expect this to continue through the end of 2015, after which we should return to our more normal spending levels. Our investment in R&D was just under 4% of sales in the quarter, which is in line with our target for the year. The intensity around organic innovation and product development remains very strong. I'm also proud to share some of the exciting announcements that we made during the last few months. Just last week, BorgWarner received the 2015 Automotive News PACE Award for its front cross differential or FXD technology. The PACE Awards acknowledge automotive suppliers for superior innovation, technological advancement and business performance. We're very proud to receive this prestigious award this year, and that is our 15th PACE Award since 2005. The company received Supplier Awards from FCA, Toyota and Honda Japan within the last few months. And we're very appreciative of the strong relationships we have with our customers, and these acknowledgments are very important to us. The company has recently announced expanded manufacturing capacity for emissions technologies in China, Mexico and South Korea. The emissions business is gaining momentum globally and is a critical part of our growth going forward. Products produced at the newly expanded facilities include ignition products, EGR modules, valves and coolers, variable force solenoids, diesel cold-start technologies and coolant control valves. BorgWarner also supplies its GenV electro-hydraulically actuated all-wheel drive coupling for BMW's first ever front-wheel-drive vehicle, the all-new 2 Series Active Tourer. And we also announced that we are supplying VTG turbochargers for 2 newly developed 1.4 three-cylinder diesel engines from the Volkswagen Group. Both engines comply with Euro 6 emission standards and improve fuel economy up to 21% compared with the predecessor vehicles. Now I'll provide a brief overview of our updated guidance for 2015. Sales growth in 2015 is expected to be between minus 4% and 0, which is down from 2% to 6% previously. The change in sales growth guidance is entirely related to weakened foreign currencies that Ron will discuss later. Now excluding currency, our sales growth is still expected to be 9.5% to 12%, unchanged from our previous guidance. We now expect earnings to be within a range of $3.10 to $3.30 per diluted share, which is down from $3.35 to $3.55 per diluted share. Again, nearly all of this change is related to foreign currencies. And again, Ron will provide a little more detail later. And our operating margin is still expected to be above 13%. So I'm very encouraged by our outlook for the rest of the year. 2015 should be another fantastic year for BorgWarner, and the restructuring and expansion activities are a clear transition to even stronger performance in 2016 and beyond. As we look ahead, the industry's continued adoption of our leading-edge powertrain technology combined with operational excellence are the primary reasons we have been, we still are and we will continue to be the leading auto supplier in terms of growth and operating performance. So now with that, I'd like to turn the call over to Ron.

Thank you, James, and good day, everyone. Before I begin reviewing the financials, I would like to also commend all of our employees for their hard work and congratulate them on a great quarter. Now on to our financials. James already provided a detailed review of our sales performance in the quarter. In summary, sales were down 5% from a year ago or up 3%, excluding the impact of foreign currency and the Wahler acquisition. Working down the income statement. Gross profit as a percentage of sales was 21.6% in the quarter, up 20 basis points from 21.4% a year ago. During the same period, SG&A as a percentage of sales was 8.5%, also up 20 basis points from a year ago. R&D spending, which is included in SG&A, was at 3.8% of sales in the quarter. Operating income in the quarter was $216 million. Excluding $12 million restructuring charges and an $11 million gain related to a buyout of a joint venture partner, operating income was $261 million or 13.1% of sales. Excluding restructuring charges taken in the quarter of 2014, this is in line with the same period a year ago. Excluding the nonrecurring items previously discussed as well as the impact of foreign currency and the Wahler acquisition, our year-over-year incremental margin was about 25%, well above our long-term mid-teens incremental margin target. Very strong performance considering the cost of 2 new plants in China, several other plant expansions and restructuring related inefficiencies in both segments. Note that our new plants in China will be up and running and the Drivetrain restructuring will be completed by the beginning of 2016. Both should boost our performance. As you look further down the income statement, equity and affiliate earnings was about $9 million in the quarter, in line with last year. This represents the performance of NSK-Warner, our 50-50 joint venture in Japan, which sells transmission components to our Japanese customers in Japan and China, as well as TEL, our turbocharger joint venture in India. Interest expense and finance charges were $10 million in the quarter, up slightly from a year ago. Provision for income taxes in the quarter on a reported basis was $72 million. However, this included a $4 million benefit from the restructuring charge and other tax adjustments. Excluding the benefit, the provision for income taxes was $76 million, which is an effective tax rate of about 29% in the quarter. Our estimated effective tax rate for the full year is approximately 29%. Net earnings attributable to noncontrolling interest were just under $9 million in the quarter, up from $8 million in the first quarter [Audio Gap] partner's share in the earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings, which were $179 million in the quarter. Excluding nonrecurring items, net earnings were $177 million or $0.78 per share, our outstanding performance for the company. Note that weaker foreign currencies lowered earnings by about $0.09 per share in the quarter. Now let's take a closer look at operating segments in the quarter. As James said earlier, reported Engine segment sales were just under $1.4 billion in the quarter. Excluding currency and Wahler, Engine segment sales growth was 6% compared to same period a year ago. On a reported basis, adjusted EBIT for the Engine segment was 16.7% of sales. Excluding currency and Wahler, adjusted EBIT for the Engine segment was 17.1% of sales, up 70 basis points from 16.4% reported a year ago. Excluding currency and Wahler, the Engine segment's year-over-year incremental margin was 29%, excellent performance for the Engine segment. The restructuring plan for Wahler is on target. The remaining charges will be recorded over the next 2 years or so, after which Wahler is expected to be a double-digit margin business. In the Drivetrain segment, reported sales were about $611 million in the quarter. Excluding currency, sales declined about 2% compared with the same period a year ago. Similar in the past 2 quarters, Drivetrain was impacted by a planned slow ramp-up of a major program by a North American customer in the quarter. We expect the volumes for this program to return to normal levels by the second half of 2015. On a reported basis, adjusted EBIT was 11.6% of sales. Excluding currency, adjusted EBIT was 11.3% of sales. Excluding currency, the Drivetrain segment's year-over-year decremental margin was 36% in the first quarter. To keep this in perspective, Drivetrain lost $5 million of adjusted EBIT on a $15 million decline in sales. That means the segment was only $2 million shy of our target decremental margin of 20%. Please note that the Drivetrain is managing through a cost associated with our new DCT component plant in Taicang, China and restructuring-related inefficiencies. The Drivetrain restructuring plan is also on target with regard to both timing and cost. We still expect to have the relocations completed by the end of 2015, after which, Drivetrain will be in a much better competitive position in Europe. Not let's take a look at our balance sheet and cash flow. We generated $33 million of net cash from operating activities in the first quarter of 2015, down slightly from $46 million a year ago. The decrease was primarily related to lower net earnings due to weaker foreign currencies. Capital spending was $140 million in the quarter, up $14 million from a year ago. The increase was driven by capital required to support our strong backlog of new net business. Free cash flow, which we define as net cash from operating activities less capital spending, was an outflow of $107 million in the quarter, which is typical seasonal occurrence for us. Our investment in working capital ramps up in the first quarter to match higher levels of business activity compared with the end of the year. Looking at the balance sheet itself. Balance sheet debt increased by $498 million at the end of the first quarter compared to 2015 -- '14. Cash increased by $238 million during the same period. The $260 million increase in net debt was primarily due to capital expenditures, a dividend payment to our shareholders and share repurchases. Our net debt-to-capital ratio was 18.4% at the end of the first quarter 2015, up from 12.8% at the end of 2014. Net debt-to-EBITDA at the end of the year on a trailing 12-month basis was 0.6. Our capital structure remains in excellent shape. Now I'd like to discuss our updated guidance for 2015. James reviewed our guidance to the high level, I'll discuss some of the finer points. We expect sales growth of a negative 4% to 0, which is down from 2% to 6% previously. As James mentioned earlier, the change in sales growth guidance is entirely related to weakening foreign currencies. Our full year dollar-to-euro exchange rate assumption is now between $1.05 to $1.10, down from $1.20 previously. We also have lowered our exchange rate assumptions for several other currencies, including the Brazilian real, Japanese yen, the Korea won, Mexican peso and the Swedish kroner. The impact of these new assumptions translates to approximately $500 million less in revenue this year. Excluding currency, our sales growth is still expected to be 9.5% to 12%, which is unchanged from our previous guidance. We now expect EPS within a range of $3.10 to $3.30 per diluted share in 2015, down from $3.35 to $3.55 per diluted share previously. This change in EPS guidance is also heavily influenced by currency, but includes additional interest expense from our $1 billion bond offering. Of the $0.25 change in EPS guidance, $0.20 is related to currency and $0.05 is related to the net impact of higher interest expense, offset by share repurchases. We expect our share repurchase program to gain momentum over the remainder of the year. Our operating income margin guidance is unchanged, which is above 13%, which implies a mid-teens incremental margin, excluding noncomparables in line with our long-term target. In conclusion, we continue to be confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost. This focus resulted -- results in highly efficient growth, record margins in each of the last 4 years. With our strong organic growth and operations performing at a very high level, 2015 should be another great year for BorgWarner. As we look beyond 2015, we intend to execute our growth plan, yielding high single to low double-digit growth and to efficiently convert our sales growth to profits. The future is bright for BorgWarner. 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. Melissa, could you please remind everyone of the Q&A procedure?

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

Ron, on the Drivetrain, so should we think of the delta on the decremental, the $5 million decline in operating income typically would be $3 million at delta $2 million? Is that the inefficiency? Should we assume that? Or is there other stuff going on there?

That's a good assumption, Rich. But I would also say that in the Drivetrain itself, the inefficiencies are probably actually running a bit higher in that, the number you just gave out, okay?

Okay. And then for the balance of the year, I know there's some moving parts, but how are you -- what do you have embedded in the guidance in terms of inefficiencies as we move through the last 3 quarters of the year?

So let me disqualify, when I say efficiencies, there's 2 things in Drivetrain. There's a couple of startups and there's inefficiencies. So I want to make sure I distinguish between those 2. The inefficiencies are going to take us through this year, and that was the relocation of Western European plants to Eastern Europe. But what I'd also like to point out is that in the Drivetrain, we still have a DCT plant being launched in China that's going to take us through the rest of the year. So the answer to your question is the inefficiencies should get better, but the drag on the startup of the plant in China should continue throughout the year. So long and short of it is we're going to see this headwind for a little while yet.

Okay. But it sounds like net-net, it should get a little less as we move into the second half.

Yes. Right.

Okay. And then, James, there is a comment around a pushout of some programs in Drivetrain in Asia. Is that related to DCT? And then if you take a step back and look at the adoption rates in quoting activity around DCT in Asia, is there any change?

Yes, I would say, Rich, from a -- first of all, from a quoting activity on DCT remains very strong and good, primarily up in China or in Europe. So we're not seeing any shift or slowdown in quoting activity and even win rates for BorgWarner. So that remains very healthy. The little bit of the launch delay, a little part of it is DCT, but the majority of it is related to other TorqTransfer and transmission products. But I just want to stretch something for the call, it's not a BorgWarner-related issue, just to put that out there, for the -- if that gives you a bit of help, Rich.

Okay, great. And then, Ron, real quick on commodities, last quarter or when you gave the initial guidance, you assumed that commodities -- I don't think you assumed that there was going to be any benefit. Is that still the assumption for the year?

Not anything material. So it's the same assumption, Rich.

Your next question comes from Ravi Shanker with Morgan Stanley.

So you guys kept your second year revenue guidance unchanged, and that's still a pretty impressive level. But can you confirm that you're not seeing -- or are you seeing any shift in OEM bake[ph] rates or program launches related to fuel efficiency from where gas prices are? And the flip side of that, are you seeing any uptick in Drivetrain-related cost?

Ravi, let me take a shot at that. First of all, I appreciate your acknowledgment and recognition of that strong growth, and we feel good about it, too. And as we've outlined, we still feel good about that. The way I would articulate it is, Ravi, during the year, you'll always get little shifts, little mix shifts between whether it's cars and trucks in North America and other such things. But when you get all the puts and takes together, our sense is we're still comfortable with our full year projection of that 9.5% to 12% growth when you strip out currency. But no real significant shifts, Ravi, is what I would say to you in terms of -- in some of your specific points.

Got it. And the thing with the guidance here, the mark-to-market and FX is, of course, completely understandable. But we are seeing a stronger-than-expected production run rate in Europe. The SAR in the U.S. continues to be pretty robust. Is your -- I believe your underlying industry growth assumption back in Detroit was 1% or 2% or something. Is there room to pick that up? And is that already embedded in the new guidance?

Ravi, what I would say and I think what you -- how I would articulate it is the fact that we're reaffirming our full year view from what we gave out in January, I think, it's an indication that our overall macro assumptions haven't changed materially. I mean, I think you can point to unique specifics in different parts of the world or different programs, customers and countries, but at a high level, nothing major has moved in the quarter. And that's why we're holding the revenue guidance where it is.

Okay. And just finally, Ron, the follow-up from Rich's question earlier. If you were to adjust Drivetrain margins this quarter for all the efficiencies, all the -- the China launch and the F-150 delays, what would the margin have been this quarter?

What I would say, Ravi, I'd have to do the calculation on the margin, but what I would say is that we lost $5 million. And I'd say we'd be nearly breakeven, maybe. So I don't want -- I'd have to do the math there, but we'd be, probably would've been breakeven on $15 million down in sales.

Your next question comes from Brett Hoselton with KeyBanc Capital.

Let's see. First of all, your underlying sales expectations for the full year, 9.5% to 12% growth, is that pretty much comparable to the 3% number you did in the first quarter apples-to-apples and therefore, obviously implies an acceleration as you move through the remainder of the year? Or is Wahler kind of factored into the -- or I mean, are there some other things factored into the 3%?

Brett, let me take a shot first and maybe Ken and I will add a little detail. What that implies is Q2, Q3 and Q4 are going to run stronger than Q1, which we're comfortable with. And a couple of those items that both Ron and I alluded to, specifically the North American customer, which we outlined, is a contributing factor to that. So, yes, we're going to run stronger in 2, 3 and 4 than we did in 1. And based on all what we know right now, we're very comfortable with that. Ken, you might want to...

Yes. I'll add just this one thing. James alluded to the North American program also gaining steam over the rest of the year. Also the issues in Asia, the pushouts, we're expected to recover those in the back half of the year as well. So all of that together pretty much implies that this is a timing issue more than anything is kind of really the message.

Yes. The North American comment obviously relates to, well, the F-150. But the delays in Asia, what is that in regards to?

Well, James had talked about some Drivetrain-specific issues and that none of them were really BorgWarner-specific, just a change in timing with our customers on the ramp-up of these programs. So a little bit slower in the first quarter, but picking up as the year goes forward.

Okay. And then, Ron, your comment about kind of the mid-teens incremental margin in 2015. Obviously, that's an excluding FX comment. Is it also an excluding M&A comment? In other words, Wahler?

Yes. Excludes -- this is on a comparable basis, which would exclude foreign currency. But actually as you go forward, Wahler falls out, right? Because we had it in last year's numbers, so that won't be as much of an issue going forward.

Okay. And then finally, did you repurchase any stock in the quarter? I didn't see any comment along those lines.

Yes, we did, 650 some thousand shares, I think it was, $38 million or something.

Your next question comes from Patrick Archambault with Goldman Sachs.

Just on the F-150 question. Can you -- I get the production cadence and that's come up a number of times this earnings seasons. But is it -- how do we think about the content opportunity there? Is there much different on the powertrain side? I think there was only maybe one new configuration, but I could be wrong about that. So just wanted to see if there was anything different or it's just really the volume piece that's the big teller [ph] .

I think you said it well there at the end, Pat. The content opportunity doesn't really change for us as you go from the previous version to the current. It's really just the ramp-up and the volumes that are significantly different this year than compared to what they were last year. Last year was very strong in the first half, weaker in the second half, and it should be just the opposite this year.

Okay. And then one question. I think the R&D number that you gave out, I had it written down, but it was like 3 -- sort of mid-3% range.

3.8%.

3.8%. Right.

Yes. I mean, that's lower than what you guys have traditionally done. Is there just a seasonality to that spend? Or is it something you're dialing back a bit as you're digesting some of these other elevated expenses? How should we think about that?

Pat, I can tell you one thing, we are not dialing back. That's one point I want to make. The other point is maybe there's some seasonality because it's pretty comparable to the last year. But other thing that is also embedded in there, and I don't want to go into all the numbers, but there is some FX issues that -- a lot of our engineering is outside the U.S. So you're getting some FX noise in there. And in fact, I think if you right-size that, Ken, wasn't it actually was about 4 or 4%. I think about 20 basis points impact of FX on it. So it's sort of a distorted number, I don't want to go into those details, but we're not dialing back at all. Not at all.

Okay. That's helpful. And then just, I guess, building up on the Drivetrain question. The rebound that you have there. I guess, just wanted to dig into that a little bit more, like how -- because you didn't change your guidance for that, right? So it is fully assumed that it's coming back. How good is the visibility on those products? I mean, I take it that you kind of see the order book and the backlog, but just wanted to hear more on that.

I think, you said that pretty well. Our expectations for the full year haven't changed. So all that has played out so far is kind of what we expected. We expected this large North American program to be slow in the first half and pick up in the second half in a pretty meaningful way. I would say, the only thing that was really a bit of a timing issue that was probably not big then was the first quarter was a little bit -- we're just a little bit off pace from where we thought we would be at this time of the year. But we fully expect that to come back into quarters, 2, 3 and 4.

Your next question comes from Brian Johnson from Barclays.

A couple questions. More of a housekeeping guidance question and then into sort of a broader strategic question. Do you have any visibility yet into incremental margins for '16 over '15? You talked about they could be a step function higher in '16. How are the puts and takes shaking out?

Well, Brian, we have some of these headwinds as far as inefficiencies and restructuring. We have some plant startups. So I would say that at '16, we go into '16 and I would anticipate, I guess, a tailwind in incremental margins from where I sit today. I mean, it's still long ways off, but I think that's possible.

Okay. The second is a broader question. Yesterday, in a kind of well-followed controversial call, Sergio Marchionne, Fiat Chrysler, made a case that ROICs for auto OEMs were low, margins were low. You probably hear that from your customers all the time when they compare it to your good margins in ROIC. And secondly, that there was a lot of redundant R&D and CapEx across the OEMs, in particular about 20% of vehicle development costs in powertrain. And you would argue and he would argue, in the mass market, V sedan market who really cares about the engine. So I guess, the question is, is this going to be an opportunity at all, mid-term, for you guys to step up and actually kind of move to what I might call the Apple model? Where they're not making their chips, they're not assembling their cars. You're providing engine and transmission components, but you're not providing engines and transmissions. Any possibility at all the industry could move in a direction that would make it more like other modern industries in terms of the value chain and, hence, perhaps offer better opportunities for all players?

Let me try and take a shot, Brian. I actually didn't read the details of his commentary. I saw the headline. My take and you kind of touched on this is, we somewhat control what we can from a BorgWarner perspective. And as you alluded to, we feel very positive about where we're running from an ROIC point of view and from a margin perspective. And I would just point out, I think that's -- what we feel about that is that, that's the financial discipline, I think, we like to operate with the company in terms of capital utilization. So I can only look at that perspective from our viewpoint, and I'm very happy with where we're at. Your broader question. The way I would look at it and the way we think about it is I think there is going to continue to be more and more technology applied to the powertrain over the next decade or more. And I see that the BorgWarner's of the world having opportunity to bring additional system capability and content capability. And whether that be around additional content through electrification or even a broader system package, if that makes sense to you, I do see -- I see those as opportunistic -- opportune growth plans for BorgWarner. Yes.

But any possibility of moving all the way where an engine becomes modularized, common across different OEMs, so it can be plugged into a car, much as a Qualcomm chip goes into a smartphone?

I mean, honestly, I don't know, Brian. But I will tell you, today, you see opportunities where there are shared engine capacity or engine platforms across OEMs. We participated in that, and it's been successful. Do I see more of that looking forward? I don't really know at this stage, Brian. But I've seen that model work, whether it's been shared capacity on engine development and a modular engine program across 2 OEMs, and it's been successful. And we've participated in that.

I want to add one thing to that Brian. While James is making those comments, we also continue to see, as he said earlier, increased technology in the powertrain. We don't see the engine becoming a clotty [ph] in any way. We still see there's an awful lot of opportunity for improvement in the performance of the engine. And we are going to be a valuable partner to our customers in that regard.

Yes. I was more getting at less maybe a commodity and more -- there's lot of innovation in smartphone chips, but that doesn't mean each of the smartphone makers is manufacturing its own separate chip.

Yes.

Right, right.

Your next question comes from Rod Lache with Deutsche Bank.

A couple questions. One is just wanting to confirm. You did give us a helpful impact just from the FX. It looks like $0.20, and calibrated to maybe $64 million and like a 13% margin on the $500 million impact from FX. Is that what we should be thinking about going forward? Is it just basically translation? Or is there also transactional sensitivity as currencies continue to move?

So Rod, you're absolutely right. It's translational. And at a high level, it's roughly equal to our operating margin is the impact both ways on average. So that's correct. I'd like to respond on the transactional side. We do see transactional, but it's not material. Not to say we don't see it, we do. But net-net, it ends up being not that material for us.

Okay. And on this F-150 mix issue, got to check the numbers, but wasn't that an equivalent headwind for you in the fourth quarter? You actually had 6% organic growth in the fourth quarter. Are you basically saying that you're not seeing any other mix headwinds in diesel or any other place? And can you give us a sense of kind of maybe high level the kind of organic growth that you would expect in the second quarter as the Kansas City plant is starting to ramp-up now?

Rod, specifically, for the first quarter, as we talked about, the significant piece obviously, as you outlined, is the large American platform we talked about. But we also -- the other aspect was a little bit of the launch issue -- issues in Asia that were also playing into that a little bit and a little bit of mix in the quarter, which is basically car truck mix in North America as well. So those were the kind of the components that impacted it. As we look forward, Rod, what's holding our guidance, as you know, from a revenue point of view, so that implies that we're going to be stepping up to more normalized growth levels in Q2, 3 and 4. And we're comfortable with that for sure.

I guess, I'm just asking your -- I want to say that F-150 was down 40% in the fourth quarter and 40% in the first quarter. So it doesn't look like the headwind is greater. Are there other factors? I would think that truck -- car truck mix would actually be a favorable thing that you're seeing increasingly at this point.

Well, specifically, the programs in Asia that James is talking about is the main delta from Q4 to Q1. So we talked about those additional launches that were happening in the first quarter that are ramping slower than we thought. That's kind of the main delta.

Okay. Can you give us an idea of the ramp from here in terms of the organic growth? There are some pretty big programs that are going to start kicking in again, as we look at the Q2 maybe.

Well, you and I can work on that offline. But obviously, the full year organic growth number is still intact, so you can kind of back into it, we think the rest of the year should be.

Okay. And just lastly, I guess, this has been asked a couple times, but there are a number of unusual headwinds that you're absorbing this year that should go away. And presumably, that's going to help your incrementals into next year. There are also potentially some commodity tailwinds that become increasingly favorable as we look out to next year, just because some things are locked under contracts and commodities have been declining. Can you just put any parameters at all on how we should be thinking about that there's something else kicking into next year that we should be thinking about when we adjust your normal incremental margins?

I think, Rod, you kind of hit most of the highlights. We're going through a lot of restructuring efforts in Drivetrain, and that is going to settle down. The other one that's not explicitly been mentioned in the call that I think helps with the transition with Wahler, we talked about that, the entry point there was that low single-digit margin. And we expect to be moving that up. So there's certainly more, as Ron alluded to earlier, certainly more tailwinds than headwinds as we look forward to the setup in '16. But obviously, we're also heavily focused on '15 and very pleased with where we're heading in '15 as well. But generally, more tailwinds. And I think as the year rolls out, Rod, we'll probably give more color on what we can -- how that translates into incremental margins for '16. But I think it's setting up well.

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

Just a follow-up on the F-150, just to beat a dead horse here. I mean, obviously, there's some pressure that's in the Drivetrain segment, but also given your content on the engine there, there's a little bit of pressure there as well. Just curious, as you see the -- those lines ramp in the second quarter and real more materially in the third and fourth, I mean, will you get a boost in the engine segment? Because the engine segment margins are still very strong right now, it doesn't seem to be suffering from pressure much, if at all, on the sales or margin line. So just curious, is there a drag in the Engine segment as well and will we see that same recovery in the second half?

Yes, John. So, let's talk about that vehicle that Rich was mentioning here. The content on it that we have is on an EcoBoost engine, we have turbos. Turbos fall under the Engine. We also have timing systems on that engine. So that's also under Engine. And then really, we have transfer cases if a four-wheel-drive option was selected, which impacts the Drivetrain. So yes, the volume reduction we see on that vehicle right now is impacting the Engine segment. But the Engine segment is a lot larger, so it's not as material as it is to the Drivetrain segment.

Okay. Very helpful. And second, on mix. I mean, obviously, there's some stuff that's going on with the German lux manufacturers in China, where that market is relatively a little bit weaker for them, and the U.S. seems to be picking up and Europe is a little bit better. Is there anything that's going on with mix, given those different end markets that those vehicles are ending up in for you? Or you're not seeing any change with German lux manufacturers at this point?

Actually, John, no -- from that perspective, no impact for us. We continue to see very strong growth in China, both domestically-produced and then imported-from-Europe product. That's all very, actually, helpful for us. And so no, no negative impact at all on the luxury stuff for us. It's been good, good and as kind of expected, John, is the way I would say.

Okay. And then just lastly, I mean, as we think about the share buybacks and the stock being down almost 4% today, would you consider getting a lot more aggressive with the share buybacks? I know you bought back a little bit in the first quarter, but given what were seeing on the stock and given the sort of the disbelief in what your earnings are going to be around forex, it seems like a good time to buy the stock. Would you consider accelerating the buyback dramatically?

Yes, we would accelerate the buyback. I think I said that actually in my script, that we anticipate acceleration going into the year, John.

Your next question comes from Itay Michaeli with Citi.

Just a couple of a -- it's just follow-up clarifications. So it's good to see that you've confirmed the 9.5% to 12% x currency revenue growth. I think in January, you laid out that of that the backlog was roughly, I think, 10% to 11.5%. Just wanted to clarify if that still is the case or if things kind of shifted around between the base business and the pricing assumptions within that.

Just about everything else is unchanged, little movement here and there. But that chart that we laid out for you in January is still intact, with the exception that foreign currency piece is now a much more dramatic impact.

Great. And to that, is there any dollar amount of backlog that came in Q1 that you can share or just kind of timing of the launches of the backlog this year for -- to help us out.

We don't have a dollar amount for you, but -- and you should've gleaned from the comments, I think, that we think that we are probably a little bit behind where we thought we would be after the first quarter. But as we review the programs for the rest of the year, it seems that what we had lost in the first quarter's going to be recovered for the rest of the year.

That's helpful, Ken, and then just 2 quick last ones. First, any change to the free cash flow guidance for the year, apologize if I missed it. And second, just any thoughts on the M&A environment in general and kind of what you're seeing out there?

Yes, Itay. We're going to adjust that guidance probably about $50 million down, and that's all driven by FX as well. Nothing on that's driving other than that.

Okay, $50 million.

Itay, this is James. Just on the M&A environment, no real change from what we talked about in Detroit in January. We remain -- we've got a lot of work going on, got a lot of targets that were engaged with. And a lot of opportunities. Obviously, we're not announcing anything right now, but we continue to remain optimistic about M&A activity. And we're aggressively focused on it for sure.

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

This is Jacob Hughes calling in for Joe. Just had a quick strategic question. I saw a competitor announce that they're working on an electric supercharger, which I think combines the benefit of a turbo and supercharger. But what are your thoughts on that? Is that going to be more prevalent, any update what you're doing in that area? Just...

Yes. We see -- we do see adoption of, we'll call it, generically electric turbos or electrically-assisted turbochargers. We do see that trend emerging. Not surprisingly, BorgWarner is engaged with most of the OEMs, if not all, that are working on that. And we expect that to be a key program for BorgWarner going forward. We do have production orders for BorgWarner on electrically-assisted turbochargers. We're not in a position to announce those details at this stage, but we do have orders in the back, so to speak. And we see a steady growth of it, and we feel very good about it. And just to give you the primary reason why, generally, all forms of electrically-assisted turbocharger require turbocharger know-how, power electronics know-how and motor know-how, and BorgWarner brings all 3 together in a very nice integrated system approach.

Your next question comes from Ryan Brinkman with JPMorgan. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Can you just talk about the expected ramp from plus 3% organic growth in 1Q to the target range of 9.5% to 12% for the full year? What gives you the confidence you can ramp that strongly? And I definitely understand that 1Q was impacted by the pushout of the program launches. But I guess, what I'm still hazy on is that even if the impact to 1Q was temporal, how does that allow you to be on track for the full year? Can customers somehow make up for lost time by overproducing when the vehicle does launch?

That last point that you made is relevant, especially in the programs we were talking about in Asia. They absolutely can do that. And secondly, remember that this growth number that we're talking about has a baseline. And the baseline gets easier for us in the second half of the year. If you go back to 2014, the first half was a very strong year, especially in the areas that we've been discussing today, and it was much weaker in the second half. So for us to see outsized growth in the second half is easier because it's an easier comparison. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Okay. That's very helpful. And then my last question is just on raw materials. Can you remind us what your biggest commodity exposures are, and then how the cost-sharing arrangements work with your customers? And any help you can give us in terms of how it could impact your results in 2015. And then sort of separately to that, but related, does some amount of the pressure on revenue relate to the cost-sharing as you pass savings on with no negative impact to EBIT?

Okay. So, Ryan, let's go back in time. There was -- a couple of years ago, we used to see headwinds of about $30 million in commodity prices, I think in '14 that came down to probably under $15 million. And then in 2015, it's coming down again as far as that year-over-year headwind. So it's come down to where, at this point this year, it's a much smaller number than it was 3 years ago. So with that said, this year, it's much, much less. And the commodities we're buying, we see copper, we see nickel, we see resins and we see steel. But steel comes in a lot of different areas. Now what I will say is this, this is a very complex discussion, because what happens is each one has different contracts and different timing periods. And some of it's pass-through and some of it's not. So for example, in nickel, we probably have pass-throughs of maybe [Audio Gap] enable to pass prices up and down the change -- chain, that it's not that materially of a headwind or tailwind for us on average. So it's a very complex question you're asking, but we are in an environment that's more positive. I will say that.

We have time for one final question, and that question comes from Richard Hilgert with MorningStar.

Over in China, we've seen vehicle license lotteries coming into play in a lot of large cities, primarily because of the smog issues. We've also seen the government over there incentivize a lot more for the electrified powertrains. I'm curious, are the OEs over there more interested in your [Audio Gap] than OEs in other parts of the world? Have they started to utilize these things more so than in other world regions?

Richard, I would summarize it this way. Our growth rate for BorgWarner in China remains on path to be, rough numbers, about a 30% CAGR over the next 5 years. And it remains very strong. I would say to you, the adoption of the BorgWarner technologies for fuel economy and emissions come in China. We've seen no pushout slowdown at all in China at the adoption rates. And all of our technologies in the product portfolio for BorgWarner are getting adopted. And if you think how that translates into new facilities that we've been building, whether it be Drivetrain-related or Engine-related, it really is very, very strong adoption. And that applies to both the domestic customers, Richard, as well as the global joint venture partners. So no slowdown and very rapid adoption rates of all of our technology over in China.

Okay. And Ron, I was wondering if you could tell me, we saw the percentage change in the operating segment income come down less so on the Engine side versus the percentage change in revenue than we did on the Drivetrain side. Was there anything about currency in there that may have affected the way that the operating -- the EBIT -- adjusted EBIT changed year-over-year?

Okay. In my opening remarks, I gave some numbers around the comparable incremental or decremental numbers in those 2 segments. I did say that in the Drivetrain decremental, it was roughly 40-some-percent decremental, which was down -- I said, you've got to look at that segment because it's small numbers. So yes, I would say that the Drivetrain, I guess, is what you're getting at, probably was -- performed not as well, I guess, I would say, because of about $2 million. But it's small numbers, Richard. So yes, I think what you're getting at is the performance in the Drivetrain wasn't as impressive on the Engine side.

Well, either that, Ron, or there's something positive about the margin that a weak euro has provided for the Engine segment. And that's what I'm trying to figure is if engine, because of currency, might not be necessarily as unfavorable a margin decline or profitability decline simply because of the year-over-year change in currency. But it sounds like it's more of a negative impact on the Drivetrain side than it is a positive impact on Engine.

I think to sum it up, Richard, the Engine segment had a really good quarter. The Drivetrain segment is under a little bit more pressure, both on the revenue line and on the cost line, because we've got the restructuring inefficiencies, new plants and a lot of the revenue pressures that we talked about were more focused on Drivetrain than Engine. That's the good way to think about it.

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. Melissa, please close out the call.

That does conclude the BorgWarner 2015 First Quarter Results Earnings Conference Call. You may now disconnect.