BorgWarner Inc. (BWA) Q2 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 Second Quarter Results Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [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.

Thank you, Melissa. Good morning and thank you all for joining us. We issued our earnings release this morning at around 8:00 AM 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 August 7. The dial-in number for that replay is 800-585-8367. You’ll need the conference ID, which is 42071781 or you can listen to the replay on our website. With regard to our Investor Relations calendar, we will be attending the following conferences between now and our next earnings release. The JPMorgan Automotive Conference on August 11 in New York, the Credit Suisse Boston Transportation Conference on August 12, the CLSA Auto Conference on September 9 in New York, the RBC Capital Global Industrials Conference on September 10 in Las Vegas and the Morgan Stanley Global Autos and Industrials Conference on September 17 in Laguna Beach, California. One additional announcement. Going forward, our net new business announcement will be combined with our full-year guidance announcement. And this new combined release will be made in January. Synchronizing the timing of these announcements ensures that our one-year and three-year outlooks will be based on the same program volume, currency and [ph] large timing assumptions, improving the link between them. Now, back to today’s earnings release. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed on our 10-K. Our actual results may differ significantly from the matters discussed 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’d like to turn it over to James.

Thank you, Ken, and good day, everybody. Ron and I are very pleased to be with you to review our second quarter results, as well as our recent accomplishments. Before I get into those, let me just take a moment to thank all of the BorgWarner employees around the world for efforts and another good quarter for BorgWarner. Onto our results. So during the second quarter, reported sales were just over $2 billion. And that’s down 7% from a year ago but up 4% when we exclude the impact of foreign currencies. Our growth in the quarter was below our normal high levels due to a few discreet items that I will discuss in the segment review. Our U.S. GAAP earnings were $0.65 per share or $0.75 per share when we exclude non-recurring charges. Our operating income margin, again, excluding non-recurring charges was an impressive 12.9% in the quarter. So, when we consider a lower-than-normal growth quarter, some of the restructuring efficiencies that we’re going through, new plants, plant expansions that we’re managing this year, this is very good performance by our operations. Now, let me talk first about the Engine segment. So, the second quarter sales were about $1.4 billion. That’s down 6% from a year ago, but when we exclude the impact of foreign currencies, the segment grew 7%. And these results were primarily led by strong light vehicle total sales around the world, particularly in Europe, and this was partially offset by some unfavorable mix of light vehicle production in both North America and China and weak commercial vehicle markets around the world. In the Drivetrain segment, sales were $627 million. That’s down 12% from a year ago or down 3% when we exclude foreign currencies, and the decline in sales for the Drivetrain was related to unfavorable mix of light vehicle production in North America, some launch delays in Asia and also lower light vehicle production in China. Now, similar to comments in the past three quarters, Drivetrain was impacted by a planned slow ramp-up of a major program by a North American customer in the quarter, and we do expect volumes for this program to return to more normal levels in the second half of 2015. So, despite the tough year-over-year comps and the challenging environment for growth in the first half, 2015 will be a really good year for Drivetrain and we expect Drivetrain to grow organically in 2015 and the restructuring work that’s under way will position this part of our business for strong growth and margin expansion in 2016 and beyond. Our financial strength and strong performance is also based on our ability to anticipate and drive the next technology ways. So, as we look to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow. We spent about 7.3% of sales on capital in the second quarter, and that’s above our long-term target of 5% to 6%. And, typically, our capital spending is primarily from machinery and equipment. However, our strong growth over the next several years does require investments in new plants, plant expansions, which is driving elevated spending in the near term. We expect this to continue through the end of 2015 after which we should return to more normal spending levels. Our investment in R&D was just under 4% of sales in the quarter, again, in line with our target for the year. The intensity around organic innovation and product development remains very strong. As Ken said, I’d like to share a few exciting announcements we made during the last few months. First of all, BorgWarner has entered into a definitive agreement to acquire Remy International, a global market leading producer of rotating electrical components. Under the terms of the agreement, BorgWarner will acquire each of the outstanding shares of Remy for $29.50 in cash, which implies an enterprise value of Remy of approximately $1.2 billion. We expect the transaction to close in the fourth quarter of 2015. We produced a number of our advanced engine and drivetrain technologies for the new Great Wall Haval H9. The domestically-produced SUV features BorgWarner engine timing systems, turbochargers and two-speed talk-on-demand transfer case. BorgWarner’s DCT clutch module helps Eaton’s new Procision seven-speed DCT, which is the first DCT for Class 6 and 7 trucks in North America, improved fuel economy about 8% to 10% compared with similar vehicles with truck converter automatic transmissions. Our facilities in Bellwood and Frankfort in Illinois received 2014 Certificates of Achievement from Toyota for quality performance. Both facilities achieved 100% quality ratings and zero PPM levels in 2014. BorgWarner is regulated to two-stage turbocharging technology improves the performance and fuel economy of Ford’s new powerful 2.0-liter diesel engine, the first Ford engine for passenger cars equipped with a two-stage turbo system. The engine will debut in the Ford Mondeo, S-Max and Galaxy in mid 2015 and will replace the 2.2-liter diesel engine. Our manufacturing plant in Seneca, South Carolina was presented with an Excellence in Quality Award from Honda North America. This award recognizing the outstanding product quality in 2014. Now, let me take a moment to provide an overview of our updated guidance for 2015. Due to the impact of weaker-than-expected market conditions in our business, we have lowered our sales growth expectations for 2015. Our sales growth guidance range is now minus 5.5% at the low end and minus 2.5% at the high end, which is down from the minus 4% to 0% previously. The change in sales growth guidance is primarily related to three major things; slower light vehicle production growth in China, unfavorable mix of light vehicle production in North America and weak commercial vehicle markets around the world. Now, when we exclude the impact of currency, base business growth and changes in product pricing, our organic growth is expected to be approximately 7% to 8%. And as a result of the lower sales guidance, we now expect earnings to be within the range of $2.95 to $3.10 per diluted share. That’s down from $3.10 to $3.30 per diluted share. And our operating margin is now expected to be approximately 13% instead of above 13%. Despite the lower guidance, I’m very encouraged by our outlook for the rest of this year. Our full-year sales guidance implies high-single-digit organic growth in the second half of 2015 and the restructuring and expansion activities are a clear transition to either strong performance in 2016 and beyond. So, as we look ahead, the industry’s continued adoption of our leading-edge powertrain technology combined with operational excellence are the primary reasons that we’re happy, we still are, and we will continue to be the leading order supplier in terms of growth and operating performance. So, with that, now, let me 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 in the quarter. Now, on to the financials. James already provided a detailed review of our sales performance in the quarter. In summary, sales were down 7% from a year ago, or up 4% excluding the impact of foreign currencies. Working down the income statement, gross profit as a percentage of sales was 21.1% in the quarter, down 40 basis points from 21.5% a year ago. During the same period, SG&A as a percentage of sales was 8.2% in line with last year; R&D spending which is included in SG&A was 3.9% of sales. Operating income in the quarter was $243 million. Excluding $20 million of restructuring charges, operating income was $262 million or 12.9% of sales, down 60 basis points from a year ago; 40 basis points of the decline is in operating margin, was lower in the gross profit margin line item; and 20 basis points was from higher corporate expenses. Our 13.5% operating income margin a year ago was a tough comparison concern. It was an all-time high for this company. Excluding the restructuring charges previously discussed, as well as the impact of foreign currencies, our year-over-year incremental margin was a negative 7%. In other words, operating income was lower on higher sales. I will discuss this further in the segment review. As you look further down the income statement, equity in the affiliate earnings was about $11 million in the quarter, down slightly from $12 million last year. This represents our performance of NSK-Warner, our 50/50 joint venture in Japan with 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 $18 million in the quarter, up from $9 million a year ago. The increase is primarily due to the $1 billion of fixed rate senior notes issued in the first quarter. Provision for income taxes in the quarter on a reported basis was $80 million. However, this included unfavorable net tax adjustments of $3 million. You can read about each of these adjustments in our 10-Q which will be filed later today. Excluding adjustments, provision for income taxes was $77 million which is an effective tax rate of 30% in the quarter. Our year-to-date effective tax rate is 29.5% which is our new estimate for the full year, up from 29% previously. Net earnings attributable to non-controlling interest were just over $9 million in the quarter, basically in line with the second quarter 2014. This line item represents our minority partner share in the earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings which were $148 million a quarter. Net earnings, excluding non-recurring items, were $171 million or $0.75 per diluted share. Note that the weaker foreign currencies lowered earnings by $0.09 per share in the quarter. Now let’s take a closer look at our operating segments in the quarter. As James said earlier, reported Engine segment sales were about $1.4 billion in the quarter. Sales growth for the Engine segment, excluding currency, was 7% compared with the same period a year ago. On a reported basis, adjusted EBIT was $228 million for the engine segment. Excluding currency, adjusted EBIT was $252 million or 15.7% of sales. Due to the inefficiencies related to the investments in new plant construction and expansion and the Wahler restructuring, adjusted EBIT as a percentage of sales was down 40 basis points from a year ago. And Engine segment’s year-over-year incremental margin was 10%. These results are below our trend, but not unexpected given the level of investment activity within the segment. Plant construction and expansion currently in progress should be behind us by the end of 2015. And the restructuring plan for Wahler is on target after which we expect Wahler to be a double-digit margin business. In the Drivetrain segment, reported sales were about $627 million in the quarter. Excluding currency, sales declined about 3% compared with the same period a year ago. On a reported basis, adjusted EBIT was $72 million for the Drivetrain segment. Excluding currency, adjusted EBIT was $76 million or 11.2% of sales. Due to inefficiencies related to investments in the new DCT plant in China and restructuring plant in Europe, adjusted EBIT as a percentage of sales was down 140 basis points from a year ago. And the Drivetrain segment’s year-over-year decremental margin was 53%. To keep this in perspective, adjusted EBIT declined $13 million on a $24 million decline in sales. If we were to assume a mid-teens decremental margin, you would expect a $4 million decline in adjusted EBIT on a $24 million decline in sales. The $9 million of additional expense is primarily due to investments I just mentioned and slightly elevated from the $5 million to $7 million of investment-related expenses in the previous three quarters. The Drivetrain restructuring plant and the ramp-up of the new DCT plant in China are both on target. We still expect to have the restructuring plant completed by the end of 2015 and the new DCT plant up and running in early 2016. The segment review highlights good progress on our restructuring expansion plans. Coming into 2015, we stated these investments would cause near-term inefficiencies. But over the long term, they strengthened our competitive position and performance. Now, let’s take a look at the balance sheet and cash flow. We generated $319 million of net cash from operating activities in the first six months of 2015, down slightly from $326 million a year ago. Capital spending was $285 million in the first half of the year, up $28 million from a year ago. Increase was driven by capital required to support our strong backlog of net new business. Free cash flow, which we define as net cash from operating activities less capital spending, was $34 million in the first half of 2015, down from $69 million in the first half of 2014. We expect to generate in a range of $250 million to $300 million of free cash flow in 2015. Investments in restructuring and expansions that are driving elevated spending will soon be behind us. We expect spending to normalize beginning next year. Also, our realignment plan, which we provide an increase - which provided increased treasury management flexibility will be complete. As a result, we expect to see significant increase in cash availability for corporate initiatives beginning in 2016. We will quantify this improvement and clarify our intentions in the 2016 guidance call in January. Looking at the balance sheet itself, balance sheet, that increased by $464 million at the end of the second quarter in 2015 compared with the end of 2014. Cash increased by $310 million during the same period. The $154 million increase in net debt was primarily due to capital expenditures given in payments to shareholders and share repurchases. Our net debt-to-capital ratio was15.6% at the end of the second quarter, up from 12.8% at the end of 2014. Net debt to EBITDA at the end of the year on a trailing - at the end of the quarter at trailing 12 month basis was 0.5 times. Our capital structure remains in excellent shape. Now, I’d like to discuss our updated guidance for 2015. James reviewed our guidance at a high level. I’ll discuss some of the finer points. We expect sales growth of a negative 5.5% to negative 2.5%, down from 0% to 4%. James described a weaker than expected market conditions that have changed our outlook for the year. Our full year dollar to euro exchange rate assumption is now $1.10, at the high end of the previous range of $1.05 to $1.10. We now expect EPS within a range of $2.95 to $3.10 per diluted share in 2015. This is down from $2.10 to $3.30 per diluted share previously. The change in EPS guidance is primarily due to the impact of lower expected sales growth. We spent $25 million on share repurchases in the second quarter and $63 million year-to-date. Our share repurchase activity in the second quarter was slowed by a self-imposed blackout period while working on the Remy transaction. However, our plan remains unchanged. We still expect to spend $1 billion on share repurchases during the three year period ending in the first quarter of 2018. Our weighted average diluted share count is now expected to be approximately $226 million for 2015, up slightly from $225 million previously. Our operating income margin guidance is now expected to be approximately 13% instead of above 13%. This implies a mid-teens incremental margin for the full year and high-teens or better incremental margins in the second half. We continue to be confident in our ability to execute in any market. This company has demonstrated a heightened focus and efficiency in cost. This focus resulted in a high efficient growth and record margins in each of the last four years. With our strong organic growth in 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 great for BorgWarner. So, 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, please, remind everyone of the Q&A procedure.

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

Hi. Good morning, everyone.

Good morning, Rich.

Hi, Rich.

So, on the guide, the 7% to 8% that corresponds to the 10.3% to 11.5%, that was the original outlook for net new business, is that correct?

Yes, Rich. That is correct.

Okay. So, question is I know that you haven’t given the specifics around region this year in your recent guidance updates. But for the second half, what are you assuming for the Chinese light vehicle market? And then when you think about the European landscape, what you have embedded in expectations? Just to get a better understanding of how much second half has been de-risked?

Yeah. It’s a good question, Rich. So, the way we’re thinking about it is not a lot of change compared to current levels. We don’t have specific market assumptions. The way that we do this is we have our program-level volumes that kind of roll up to our guidance. As we said at the first quarter call, we were a little bit in revenue compared to what our expectations were. And that happened again in the second quarter for actually different reasons, but that kind of same level is what we’re expecting to see for the rest of the year. And so, I think we feel pretty comfortable with the guide and where it is right now. We feel that the risks and opportunities to forecast for the guidance is pretty balanced.

Okay. And then, in terms of the North American vehicle mix, I know that’s being - in fact, it has been affected by Ford, but what’s the assumption for F-150 in just North American mix in the second half of the year? I mean, is it kind of the normal production increase the schedules suggest at this point or anything noteworthy there?

Yeah, Rich. This is James. I would say no meaningful difference from the North American view to where we were in the last call. So, what we see from IHS and what we hear from the respective OEMs that you were talking about, that’s kind of our view, too, if that makes sense. So, we’re pretty much consistently in line with pretty much the customers on IHS for North America, which is not a big difference from a quarter ago.

Okay. And then, is China - in terms of the China business, apart from the market, it seems like you’re maybe impacted by some key customers over there. I mean, how does that shape up for the balance of the year?

Yeah. Let me talk about that, Rich. Obviously, that’s pretty meaningful for us. We saw - as we went into the second quarter, the light vehicle production rates in China, as we all saw, slowed pretty meaningfully. That’s, as Ken said, is continuing on through the year, so we do see that. From a BorgWarner-specific point of view, Rich, we’re weighted to the JV Western guys versus the domestics as we sit right now. And it’s fair to say we’re weighted, even within that piece, quite heavily to the large German guy that’s over there. So that, as you can see from some of their commentary, kind of works a little bit against us. And in the short run, we’re probably a little skewed to cars versus SUV trucks. So from a BorgWarner point of view, yeah, mix is a little bit of a headwind for us. Obviously, looking to the future, that’s fine. We’re still in a good growth environment for China. I think that’s important from a BorgWarner viewpoint. But that growth rate versus where it was at the start of the year is down. That’s the fundamental point, Rich.

Okay. All right. Thank you.

Thank you, Rich.

Thanks.

Your next question comes from Brian Johnson with Barclays. Your line is open.

Yes. Good morning. Couple of questions. First, vis-à-vis driveline. You talked last year when you took some cost after restructuring that you’re becoming more competitive and seeing some win rates ideally increase in that unit. Has that - that certainly played out in last year’s backlog, but how is it shaping up with sort of the orders and the backlog as it’s been developing through this year?

Yeah. Brian, this is James. I would say good is the quick answer. We’re very happy, as you know from a Drivetrain perspective, we got two fundamental areas of product in the transmission side and then the all-wheel drive side of our business. And we’ve been very encouraged with the quote win-rate activity and we’re feeling good about that, actually. So, yeah, I don’t want to give any specific numbers. As Ken said, we’ll provide more color at the appropriate time. But good, good is the way to think of it. We’re happy with where we are on Drivetrain.

Okay. And the second question and maybe a little bit on the engine as well as the Drivetrain side is we’re certainly very clear that by 2020 number, the upgrades to Powertrains need to happen to meet European and U.S. CAFE requirements aren’t going to go anywhere. What’s now the shape of the ramp in between? And are OEMs at all having second thoughts about potentially pushing, winning a year for our Powertrain program if they can live on CAFE or other credits and not have to get it say in 2017 when you’re making way to 2018. Are those kind of discussions going on? And where do you think those will seek out?

Yeah. Our view, Brian, is no is the real quick answer. We’re not having those discussions. We’re not seeing those discussions. When we - both on the engine and the Drivetrain side, the adoption rate of our technology, we feel very good about. We’re not seeing any slowdown or adjustments. What you do see in the short run, you’ll see noise in launch delays that we experienced a little bit in the first quarter in Asia. And you can see a little bit of a slow in terms of volume take rates, maybe on a China program. But in terms of meaningful movement in technology or Powertrain architecture or adoption of our product, no, we’re not seeing any issues. They have very high demand for the product.

Okay. Thanks.

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

Good morning, guys.

Good morning, John.

Just a first question, it looks like you reduced your free cash flow guidance by about $100 million on the range, but if we look at the earnings reduction based on the EPS, it’s only about a $40 million decline. So, just curious if there’s something else going on in the cash flow or around the working capital or something else that’s going on that we explained that delta $60 million?

No. John, if you’ve taken a look at it, I think it’s in line with the change in earnings. Cash flow changes roughly at the same amount. Yeah.

Just to put some numbers to that, the free cash flow guidance previously was $300 million to $350 million, and now we’ve changed it to $250 million to $300 million.

Okay. [indiscernible] indeed numbers there. Okay. So, it’s largely in line. Okay. That’s helpful.

Okay. All right.

And then when we think about all the forex impact here, I mean, we really are looking at pure translation as opposed to anything that’s transactional between regions.

That’s correct. The headwind is translational on FX, not transactional.

Got you. And then also, if you could just talk about the potential for flexibility in your cost structure as we see increasing [indiscernible] about volume downturns at different regions, although we don’t agree with that, but there is a lot of concern there. I mean, can you just talk about the variability in your cost structure, what kind of actions you’d take if we saw some material declines in volume?

Yeah. I’ll talk about it for a moment, John. A couple of points, I would say, as Ken went around the globe, we see predominant relatively good stability in Europe and good volumes in North America. Probably the one area in the world obviously that got everybody a little nervous is China, and we get that. We’re still in growth mode there. So, for us, our flexibility primarily, John, is around slowing the growth a little bit. So, that’s a better problem than you can imagine. But we have good amounts of temporary employees in all three major regions of the world. We’re still in good shape. And, actually, if we need to flex on the labor side, and we can obviously flex on the spending side. So, we feel good. And as we’ve talked about in prior calls, all of the business units and the operating units have got good plans there to adjust if things were to move up or down. So, pretty good shape is the way I would describe it, John.

And last quick question on Remy. Now, that news is out there, any reaction from your customers and positively, negatively? Or what’s been the reaction from your customer base?

Yeah. I would say - the summary, I would say, John, is overwhelmingly positive is kind of what I would share with you. And we’ve talked to a number of our customers, and the general sense we’ve got is a lot of excitement about the technology and particularly the combination of BorgWarner technology with Remy technology. So, very positive. And I would say that across the landscape, that’s regionally. We got that feedback and it’s across both the commercial vehicle and the light vehicle segments. So, overwhelmingly positive and a lot of good opportunities for us.

Great. Thank you very much.

Thanks, John.

Your next question comes from Rod Lache with Deutsche Bank. Your line is open.

Hello?

Hey, Rod.

Rod Lache, your line is open.

Hi, guys. It’s actually Pat Nolan on for Rob.

Hi, Pat.

Hey, Pat.

So, can you just talk about - I know that the start-up costs are a little bit heavier in Q2. Does that mean for the balance of the year, these costs will be a little bit lower than you thought? And how are you thinking about these costs as - are they 100% eliminated as we go into 2016? So, 2016, you’ll still get your typical on [ph] commercial margin plus these costs going away and any kind of restructuring savings on top of that?

All right. Pat, so, a couple of things. One is we talked about this quite a bit coming into this cycle. And we said that the cost would be lumpy and it would be, quite frankly, hard to predict if it was going to be $5 million to $7 million or in this quarter, $9 million or if it’s going to be $4 million, and that’s what we’re seeing. This one - this quarter was a little bit higher than we anticipated. Going forward, we know one thing is going into 2016 is going to be significantly reduced. So that part we do know. And now, we still have two more quarters this year. I would say that we go back in this $5 million, $7 million range. I think this quarter might be on the high side of it. That’s what we’re hoping to achieve rest of the year. And just to add a little bit to that so the - we have a couple of things going on. The restructuring in Europe, you can expect to see those costs pretty much eliminated as we go in to 2016. There will be a little bit of cost going into 2016, but almost negligible. Now, on the new plant launch, we’ll start making product there next year, but that’s going to be in a ramp mode, so it’s going to be a while until that plant breaks even...

Right.

...making money. So, we’re going to have a little bit of a ramp on the new plant, but the restructuring, we should see the benefit eliminated.

Thanks very much. Appreciate it.

All right, Pat.

[indiscernible], Pat.

Your next question comes from David Leiker with Baird. Your line is open.

Good morning, everyone.

Hello, David.

Good morning, David.

I want to circle back on this North American mix side and just try and dig into it at a little bit different perspective. We’re not really hearing that from any other suppliers that there’s a mix issue in North America. I was wondering if you could help us with some color there, whether it’s a particular vehicle or a particular segment or a particular customer that’s causing the issue for you.

So, let me try and explain this, David. So typically, when mix moves around the way that it has this year, that being passenger cars are down and light trucks are up. It’s usually a relatively neutral event for us. Unless our largest truck customer is in a slow ramp-up in their major truck platform which happens to be our largest one globally, So, what we’ve seen is whether we normally get that offset on a truck side, when car sales are down, we’re not seeing it as much. Our exposure on passenger cars are to the guys that are seeing some lower volumes this year and our exposure in the truck side is not to the guys that are benefiting from that. If that helps.

Yeah. That makes sense. And then the second item here, as we look at some of the revenue shortfall that we’ve been running in here, some of them are mix-related, some of them are other volumes, some of it end markets. We’re not going to hear an update on what the backlog is for six months here. Can you give us some sense of what you think the impact of that’s going to be on your backlog just from those end market issues?

Sure. So we talked about that, obviously. It’s an important data point for us and you as well. We at this point think that it’s a bit early to give any indication of how this is going to play out on the backlog. What we can say is if it’s in China, mix and volume kind of stay where they are. It will likely have an unfavorable impact on the backlog. But having said that, that’s a very dynamic market and we’re not at all in a position to say that that’s what we think is going to happen at this point. So give us a little bit of time. We’re going to spend a lot of time looking at this before we come out with our actual guidance for this in January.

Okay. Great. Thank you.

Thanks [indiscernible].

Thanks, David.

Your next question comes from Ravi Shanker with Morgan Stanley. Your line is open.

Thanks. Good morning, everyone.

Good morning, Ravi.

Thanks for the detail here. But I’m certainly a little bit [indiscernible] still understand what’s changed versus your previous outlook from three and six months ago. China, I get. Clearly, that’s changed. But when you consider the lower mix in North America that you just addressed, is it that the F-150 is just a slower ramp than you saw it or why would that be an incremental drag on revenues?

Okay. So, let’s start back at the beginning of the year because that’s really what we’re comparing to because our guidance didn’t really change after the first quarter.

Right.

So, what really happened is we expected the program that you’ve mentioned to be in this deliberately slow launch ramp. What we did not expect was the weakness on the passenger car side. That weakness has persisted to the first half of the year. That was unexpected. And as far as the North America piece of what has changed, that’s the major difference from where we were as we talked about this in January.

Okay. Understood. And margin side, Ron, you flagged the number of cost-related issues and launch and restructuring and Wahler and such. Again, so the cut in the margin guidance was driven by the volume decline or is there anything else going on?

All by the volume decline. The sales decline on the guidance update is what’s driving the updated EPS guidance.

Okay. I guess what I’m getting at is, are you seeing any weakness at all and just decrease for - in the turbo engines versus the non-turbo engines? I mean, apart from just a fast car versus truck shift, are you seeing a move away from some of the more fuel-efficient technologies towards less fuel-efficient technologies given gas prices and what’s the view on the medium term?

Yeah. Ravi, this is James. No is the quick answer to be candid. We’re not seeing any shifts in those types of specific product mix, particularly in North America. And the desire and the take rate and the opportunity for turbo in North America remains very strong. So, no, we’re not seeing any shifts there.

Great. Thank you for the color.

Thanks, Ravi.

Thank you.

Your next question comes from Brett Hoselton with KeyBanc Capital. Your line is open.

Good morning, James, Ron, Ken.

Good morning.

Good morning, Brett.

I was hoping that you could provide maybe a sense of what you’re thinking in terms of China. I know that you’ve already talked about your production expectations or kind of relatively levels from current levels, I think, through the remainder of this year. I think that’s really what you said. I guess what I’m wondering is obviously we’ve seen a slowdown in the sales rate in China here in June in particular. Delphi was out just before you kind of talking about customers adding to the production schedules in the fourth quarter and third quarter being up maybe about 3% on a year-over-year basis. So, I guess, where do you think is taking place in China in terms of the slowdown in sales, slowdown in production? And what gives you confidence that it’s going to remain roughly flat? And do you have any bias to the upside or downside and why?

Yeah. I would articulate it this way, Brett. I think that - first of all, I think to put things in perspective, what we’re talking about again is we’re still growing and growing well in China for BorgWarner. So, that’s an important reference perspective. But, obviously, as you say, the growth from where we started out the year in terms of our expectation has slowed. Q2 had moved very quickly as I alluded to earlier. And we feel comfortable with what our assumptions are right now in the guidance, which is pretty much continuing on at the level of the pace of run rates, so to speak, that we’re at. It’s a little less granularity of data in China when you compare it to, say, North America, so there is. Is there potential upside? Maybe. Is there potential downside? Yeah. My personal view is probably if there was a bias, it’s probably slightly weighted to the down versus the up based on what we see. Some of that also, Brett, maybe specifically to BorgWarner. We talked earlier before. We have large concentrations with the two leading joint ventured Western guys out there. So, that’s meaningful. We talked a lot about in the press release about Great Wall being a major customer for BorgWarner. And we see some issues there. So, we’re comfortable with where we’re at. We’re still happy with the growth rate that we’ve got, but it’s a little lower than when we started the year. And as we look beyond 2015, which I think is important, we’re very positive on China. And we see the strong growth in China, and we see very strong adoption rates to the technology in China.

And as I look at your guidance, again, the sales clearly on a year-over-year basis are improving in the back half of the year. So you’re down 6% in the first half, down 2% in the back half to get to a 4% midpoint of your guidance. And again, that is the midpoint. But your margin expectation seems to be kind of flat going from the first half to the back half. And I’m kind of thinking about some of the positives that may take place in the back half. And I’m thinking that the margins possibly should have shown maybe a little bit of improvement sequentially from the first half to the second half. They have in previous years. What is it that’s kind of driving that kind of flat margin expectation into the back half of the year?

Well, one thing I like to point out, Brett, is that I think the midpoint the sales are actually down in the second half over the first half of the year on a reported basis. Slightly it is, but they are down. So you’re going to have obviously a reduction in margins and everything remained the same. I would say this, we changed our guidance from above 13 to approximately 13. We were talking within 10, 20 basis points of movement here, okay. So, I don’t think it’s significant. I wouldn’t say there’s anything into that we’re concerned about or anything like that. Is it possible our margins could still expand, yes, but I don’t think it’s anything significant or be concerned about in your analysis that you’re doing right there.

Okay. That’s fair enough, Ron. Thank you very much, gentlemen.

All right, Brett.

Your next question comes from Patrick Archambault with Goldman Sachs. Your line is open.

Hi. Yes. Good morning. Just actually, I wanted to follow up on that question. Can we just put in the context that your new organic growth is 7 to 8? And I haven’t done the math, but what was the organic in the first and second quarter? And what exactly is implied in the back half? Can we just go through that real quick?

No. We’re not going to be able to go through that real quick. We’re going to have to do that when offline, Pat. We can give you that, though, Pat, but it’s a complete walk as you know, right? That would take us some time to go through that complete walk.

Okay. But I think you were 4%, right, this quarter and you were something similar, right, I think in the first quarter...

Yes.

...assuming that’s correct, right? So, call it...

Yes.

...like mid-single digits in the first half even if we don’t have the exact numbers. So, it does imply kind of an organic growth acceleration in the second half?

Yes.

And so that was really the crux of the question is - I’m sure there’s a lot of stuff you could point to like the F-150 launch and everything like that. But I just wanted to go through the line items that are relevant there in driving that pickup in the growth rate in the second half?

Pat, I can’t tell you at a very high level and then, obviously, we’ll walk you through that later on. You were right, the first half organic was roughly 4%. It does accelerate in the second half year approaches, I think, between 7% to 8% organic growth. This is on a year-over-year comparable basis. So, at a high level, those are the numbers.

And then just to follow up like the main levers that you guys see to get to that acceleration. I’m sure a lot of those are just timing of launches and things like that. But I wanted to specifically kind of hear that from you and kind of get a sense of what those are.

So, we’ll talk about it generally, Pat. Generally, we do see some pickup in the backlog in the second half versus the first half. And obviously, that North American program picking up steam is helpful in that regard. And secondly, the comps are [ph] easier in the second half. This is a big variable when you’re thinking about this. So, those are kind of the two main pieces.

Okay. And then China was brought up a lot here, and I understand that you guys do everything sort of rolled up from an individual program perspective. So, it’s not just as easy as saying the market’s going to do X or Y. But Delphi actually put out pretty helpful dimensions. They were saying up, and I’m probably getting this wrong, but I think they thought production as they saw what’s going to be up 3% in the third quarter, just based on the schedule [indiscernible] for the market and then up 6% for the fourth is what I think what they had as a best guess and at a high level, just given you have a lot in China as well. Wanted to see if you were seeing something [indiscernible].

Well, first of all, we’re not disputing what anybody else says about their expectations for the market in China. The reason that we don’t provide that information is because, as you see in our business, the mix issue is significant and those particular figures are not as important to us as what our particular programs are doing in that market. So, that may be true what they said, but by and large, what we’re looking at are the customers and the programs that James alluded to earlier because that’s what’s really driving our expectations for the second half. And just for clarity, when we talked about kind of flattish expectations for our business in China in the second half versus the first, that was BorgWarner-specific. That wasn’t a volume number that we were giving for the market overall. That was for us.

Okay. Got it. And I’m sorry. I should like - I know you guys have probably clarified this, but that flat, is that kind of the volume underlying the organic revenue? Was that actually the revenue forecast for you guys?

It’s a general description of how we feel about our business in China in the second half versus the first half.

Got it. Okay. And then, last one, I promise. And you probably just gave this, but like the - I understand VW is a big program and kind of the international guys. What’s - sorry, what’s the percentage of them in your China portfolio versus the domestic guys?

We would - I would just say we are weighted - we’re certainly weighted right now to the joint venture in Western guys, Pat. And the biggest piece of that joint venture Western piece is that large German customer you referenced.

Okay. And to push my luck here...

We got to move on to the next person. Thank you.

I’ll let you go.

Thanks.

All right. Thanks, Pat.

Your next question comes from Ryan Brinkman with JPMorgan. Your line is open.

Hi. Thanks for taking my call. Good morning.

Good morning, Ryan.

Hi, Ryan.

Just one on China, a bit about the backlog there. First of all, you stood it out by overall region, but can you say how much is China? I think it’s most of Asia Pacific. And then secondly, is there any risk that automakers could look to delay new program launches to save money like they did in Europe, which impacted you in 2012 and 2013? I don’t think there’s any risk of the automakers that I cover, not refreshing the products according to plan. But GM did on their call this quarter talk about the ability to pull back on capacity expansion if they needed to. And I was wondering maybe if product launch delays are an emerging trend that automakers that I don’t follow closely.

So when we had provided our backlog announcement this past November, we [overlapping conversation] American piece of what has changed, that’s the major difference from where we were as we talked about this in January.

Okay. Understood. And on the margin side, Ron, you flagged the number of cost-related issues in launch and restructuring and water and such. Again, so, the cut in the margin guidance was driven by the volume decline or is there anything else going on?

All by the volume decline. The sales decline on the guidance update is what’s driving the updated EPS guidance.

Okay. I guess, what I’m getting at is, are you seeing any weakness at all in just take rates for turbo engines versus non-turbo engines. I mean, apart from just a fast car versus truck shift, are you seeing a move away from some of the more fuel-efficient technologies towards less fuel-efficient technologies given gas prices and what’s the view in the medium term?

Yeah. Ravi, this is James. No is the quick answer to be candid. But we’re not seeing any shifts in those types of specific product mix, particularly in North America. And the desire and the take rate and the opportunity for turbo in North America remains very strong. So, now, we’re not seeing any shifts there.

Great. Thank you for the color.

Thanks, Ravi.

Thank you, Ravi.

Your next question comes from Brett Hoselton with KeyBanc Capital. Your line is open.

Good morning, James, Ron, Ken.

Good morning, Brett.

Good morning, Brett.

I was hoping that you could provide maybe a sense of what you’re thinking in terms of China. I know that you’ve already talked about your production expectations for China. Relatively from current levels, I think, through the remainder of this year. I think that’s exactly what you said. I guess, what I’m wondering is, obviously, we’ve seen slowdown in the sales rate in China here in June, in particular. Delphi was out just before you kind of talking about customers adding to their production schedules in the fourth quarter and third quarter being up maybe about 3% on a year-over-year basis. So, I guess, what do you think is taking place in China in terms of the slowdown in sales, slowdown in production? And what gives you confidence that it’s going to remain roughly flat and do you have any bias to the upside or downside and why?

Yeah. I would actually equate it this way, Brett. I think that - first of all, I think to put things in perspective, what we’re talking about again is we’re still growing and growing well in China for BorgWarner. So this is an important reference perspective. But obviously, as you say, the growth from where we started out the year in terms of our expectation, that’s slowed. Q2, it moved very quickly as I alluded to earlier. We feel comfortable with what our assumptions are right now in the guidance, which is pretty much continuing on at the level of the pace or run rate, so to speak, that we’re at. It’s a little less granularity of data in China when you compare it to, say, North America. So there is - is there potential upside? Maybe. Is there potential downside? Yeah. My personal view is probably if there was a bias, it’s probably slightly weighted to the down versus the up based on what we see. Some of that also, Brett, might be specifically to BorgWarner. We talked earlier before we have large concentrations with the two leading joint venture western guys out there, so that’s meaningful. We talked a lot about in the press release about Great Wall being a major customer for BorgWarner and we see some issues there. So we’re comfortable with where we’re at. We’re still happy with the growth rate that we’ve got, but it’s a little lower than when we started the year. And as we look beyond 2015, which I think is important, we’re very positive on China. And we see strong growth in China and we see very strong adoption rates for the technology in China.

And as I look at your guidance and again the sales clearly on the year-over-year basis are improving in the back half of the year. So, you’re down 6% in the first half, down 2% in the back half to get to a 4% midpoint to your guidance and again that’s just the midpoint. But your margin expectation seems to be kind of flat going from the first half to the back half and I’m kind of thinking about some of the positives that may take place in the back half. And I’m thinking the margins possibly should have shown maybe a little bit of improvement sequentially from the first half to the second half, they have in previous years. What it is that’s kind of driving that kind of flat margin expectation into the back half of the year?

Well, one thing I’d like to point out, Brett, is that I think the midpoint to sales are actually down in the second half or the first half of the year on a reported basis, slightly it is...

Yes. Yes

...but they are down. So, you’re going to have obviously a reduction in margins and everything remain the same. I would say this, we changed our guidance from above 13% to approximately 13%. We’re talking within 10, 20 basis points of movement here, okay. So, I don’t think it’s significant. I wouldn’t say there’s anything in it that we’re concerned about or anything like. Is it possible our margins could still expand? Yes. But I don’t think it’s anything significant or be concerned about in your analysis that you’re doing right there.

Okay. That’s fair enough, Ron. Thank you very much, gentlemen.

All right, Brett.

[ph] You bet.

Your next question comes from Patrick Archambault with Goldman Sachs. Your line is open.

Hi. Yes. Good morning. Just actually one follow-up on my question. Can we just put into context, so your new organic growth is 7% to 8% and [indiscernible] on the math, but what was the organic in first and second quarter and what exactly is implied in the back half? Can we just go through that real quick?

No, we’re not going to be able to go through that real quick. [indiscernible], Pat. We can give you that though, Pat, but it’s a complete walk, as you know, right? It would take us some time to go through that complete walk.

Okay. But I think you were 4%, right, this quarter and you were something similar, right, I think in the first quarter...

Yes.

...assuming that’s correct, right? So, call it like mid-single digits in the first half even if we don’t have the exact numbers. So, it does imply kind of an organic growth acceleration in the second half. And [indiscernible] and so that was really the crux of the question is I’m sure there’s a lot of stuff you could point to like the F-150 launch and everything like that, but I just wanted to go through the line items that are relevant there in driving that pick-up in the growth rate in the second half.

Pat, what I can tell you at a very high level and then obviously we’ll walk you through it later on. You’re right. The first half organic was roughly 4%. It does accelerate in the second half year approach as I think between 7% to 8% organic growth. It’s on a year-over-year comparable basis. So, the high level of those are the numbers.

And then just a follow-up like the main levers that you guys see to get to that acceleration. I’m sure a lot of those are just timing of launches and things like that, but I wanted to specifically kind of hear that from you and kind of get a sense of what those are.

So, we’ll talk about it generally, Pat. Generally, we do see some pick-up in the backlog in the second half versus the first half and obviously, that North American program picking up steam is helpful in that regard. And secondly, the [indiscernible] in the second half which is [overlapping conversation] suppliers there.

There’s a little bit of mix there. Well - actually, I’m sorry. That particular vehicle, the turbochargers are ours.

Okay. Terrific. Can you give a dollar content for the whole program or not? Maybe a rough range of what it looks like.

It’s a high-content vehicle for us, okay?

Okay. [indiscernible] with that. All right. Great. Thanks for [indiscernible].

All right. Thanks, [indiscernible].

Thanks.

I’d like to thank all of you 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 second quarter results earnings conference call. You may now disconnect.