BorgWarner Inc. (BWA) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Chrissie and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2016 Second Quarter Results 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, Chrissie. Good morning and thank you all for joining us. We issued our earnings release this morning at around 8:00 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 August 11. The dial-in number for that replay is 800-585-8367. You'll need the conference ID, which is 26650635 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 in New York on August 9. The RBC Capital Global Industrial Conference in Las Vegas on September 8. The Morgan Stanely Laguna conference on September 15. Finally, I would like to cordially invite the investment community to our Investor Day in Auburn Hills on September 7. We will be presenting new information regarding our views on the future of the industry and our role in it. We will have product displays to demonstrate some of our newest technologies and vehicles available for you to experience these technologies first hand. Our senior leadership team will be present and available to answer questions throughout the event. We’ve set up an RSVP link for you to confirm your attendance. You can find the link in a press release that we sent out on June 13 or send me an email and I’ll get you the information. Please join us for what we expect to be the most meaningful investor event in our history. 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 in our 10-K. Our actual results may differ significantly from the matters discussed today. Now, moving on to our results, James Verrier, President and CEO, will comment on the industry and provide a high-level overview of our results and expectations for 2016 and Ron Hundzinski, our CFO, will discuss the details of our results and guidance. Please note that we have posted an earnings call presentation to the IR page of the website. You'll find the link at the events and presentation section beneath the notice for this conference call. We encourage you to follow along with these charts during our discussion of our results. With that, I will turn it over to James.

Thank you, Ken and welcome to everybody. As Ken said, Ron and I are really pleased to share our results from the second quarter with you and also talk about what the rest of the year looks like. What I’d like to do is, just start and make a few high-level comments on some of the bigger picture perspective as we look out into the macro industry or the macro environment in our industry and you can see a couple of points here on Slide 2 for those following along. I think the theme I would talk the most to in terms of the macro view is the notion of uncertainty out there out there in the world. And whether that’s some of the civil unrest issues that we see particularly in Europe. We see tense political environment recently in Turkey, Middle East, pending U.S. elections and of course fairly recently the Brexit vote. All of that creates, I think, we all realize a sense of uncertainty at a macro view. But interestingly, when I look at the world of autos, we’ve generally seen a pretty stable steady as you go type environment and things playing out pretty much as we had expected. And as we look forward, I think that macro uncertainty will continue, but I do see the auto sides remaining fairly stable. And as I articulate that a little further and talk to you about the market outlook, first of all from a light-vehicle perspective, I would say from a BorgWarner viewpoint, we are pretty well aligned with IHS. We see the China market growing in that mid single-digit 5% to 6% type range. We see Europe in a 2% to 3% growth environment range, and we see the US in that 2% to 3% range of growth, the light-vehicle production. We do see and we acknowledge that the US plateau, its effect is certainly on the horizon and we are very mindful of that. From a commercial vehicle point of view, we still see that space challenged for sure and as you look around globally, that there is really not a lot of growth at all and we do see some pretty continued strong weakness around off-road. Some of that translates into a lot of new programs under further review and consideration. So as I look at that, I would like to share with you, what are the leading indicators or the areas of watch for us as a company at BorgWarner and the ones that can be most relevant to us. So I would characterize the North American market, how is the plateau going to play out, how is the inventory production level is going to play out and we pay good attention to that. And I’ll talk about how these relate to our guidance shortly. VW remains a critical customer and a very important customer for us and we have to monitor the share for VW around the world. And like everybody, we are going to pay attention to the potential impacts of volumes in Europe in light of Brexit and we will obviously monitor the commercial vehicle weakness. Now all that said, I would say, so fast things have absolutely planned up for our guidance and as you'll see in the guidance going forward, we still feel good about our guidance and we are building these in and going forward with good guidance. So, yes, we are watching, but we are also performing as expected and we expect to perform strongly going forward. Let me comment a little on the regulatory or the technology aspects of the business. First thing I would say to you is, the pull and the drive for fuel economy and emissions regulations, absolutely unchanged and the pull for powertrain technology remains as strong as it did last quarter, the quarter before that and the quarter before that. So we are not seeing any slowdown in customer engagement and programs that are driving and pulling advanced technology as we go forward. We do see the strong shift to increase powertrain electrification continues and we know that because we are right in the middle of it and we are talking to customers literally every day around the world in terms of working with them on solutions for them in that additional electrification content. That applies across the board. That is 48 volt architectures, it’s all the hybrids and it’s electric vehicles and we have content and discussion there and not just for the long-term, but products in the short run as well. I would say also relative to electrification our quoting activity remains very strong, multiple customers, multiple products, and we will be making further announcements on specific programs in the coming weeks and months. But I would just say this, I feel very pleased and very happy where we are at in terms of the level of engagement around new technology aligned with electrification. And as Ken alluded to in his opening comments, we plan to showcase a lot of those products, a lot of those technologies at our upcoming Investor Day on September 7. So let me kind of give us some high-level view here on the BorgWarner summary and let me start off with Q2. And needless to say Ron is going to provide a lot more detail and commentary in his comments. But I would just say this we had a really good quarter. I was very pleased with our second quarter. The growth came in at the high-end of our guidance and we delivered strong operating performance. Breaking that down a little further, it was $2.3 billion in sales, which is up 3.5% when we exclude FX and Remy. Regionally, it came in about as we had expected, which really was characterized by stronger growth in North America, and a particularly strong quarter in Korea, which was balanced with the lower growth as we had expected in Europe and China. EPS came in at $0.84 a share when we exclude non-comparables and that does include Remy. Operating margin 12.4% when we exclude Remy, 13.2%, the word I would use is impressive. Breaking that down by segment, engine sales $1.4 billion, so we grew at about 2.2% on a reported basis, or 2.8% when we exclude currency. Primary drivers of the engine growth were Turbo and Variable Cam Timing. Switching to drivetrain, sales of $895 million, that’s almost 43% but when we exclude currency and Remy still a good quarter of 5.4% growth. Largest part of the growth came from strong all-wheel drive sales in both North America and also in Europe. So let me shift gears and talk a little bit about the outlook for 2016, and again Rob will provide more color on this. Basically, we’ve narrowed our guidance range to the high-end of our previous range, which we think is very good news. We also have highlighted through the last couple of quarters four major launches this year that we’ve talked about that are very critical to our success in the second half of the year. And just to remind you folks, it was the Pentastar Engine, Ford Scorpion, Ford Super Duty, and the GM Duramax. All of these programs have launched except the Duramax which will launch in September. And I would say to you that the launches have been probably slower than the original assumptions, but here is the good news, this is exactly what we had anticipated and planned for in our guidance back in January. That’s why we did it and as a result of that, our launch activity remains on track. So the outlook on the second half of the year, if I talk about that, I would characterize it to you that I think our risks and our opportunities are pretty well balanced. I alluded earlier in my comments, there are some risks and some watchpoints out there but I also see some positive aspects too and in general, I see what balanced and with that that’s why we feel confident in our full year guidance at mid single-digit growth and continued strong operating performance. Let me make a few comments around growth in general and give you a little bit of an update on the Remy acquisition and integration. First of all, from an integration perspective, it’s going well and I think it’s fair to characterize it that both financially and operationally, it’s performing very much as we had expected. We remain very positive about the technology that came with the acquisition, and we have had many, many discussions with our customers, particularly around the combination products where we are going to leverage the rotatum electrical capability of Remy with our clutching capability. So that’s very much on track and you will see that hardware for those of you lucky enough to be with us on September 7. In general, our quoting and our booking activity remains strong and very good about the win rates on our booking business and all of that leads to inline expectations are on track for growth. So let me kind of wrap up before I turn over to Ron. We had a good first half to the year and we feel very good about we delivered what we said we would. I think the business is operating well. We continue to be heavily focused on driving growth through the adoption of our technology, and we remain upbeat and positive about delivery and our full year guidance. So with that, let me turn the call over to Ron.

Thank you, James and good day everyone. Before I review the financial details, I would like to bright you some of the highlights as I see them for the quarter. In summary, we saw solid growth, great operating performance and a return to normal CapEx spending and free cash flow generation. Now as Ken mentioned, I will be referring to supplemental financial slide deck that is posted on our website. So I do encourage you to follow along. But first, I’d like to focus your attention on Slide 2, I am sorry, Slide 3. Throughout the presentation I will highlight certain non-US GAAP measures to provide a clear picture of how the core business performed and for comparisons with prior periods. Specifically, we will be excluding the impact of FX, Remy, and non-comparable items from certain US GAAP measures. So when you hear me say on a comparable basis, that means excluding the impact of FX, Remy and non-comparable items. When you hear me say on a reported basis, that means US GAAP. Now with that our of the way, let's move forward. Let’s turn to Slide 4. On a reported basis, which includes the change in sales due to market growth, price, net new business, FX, and Remy acquisition, sales were up 14.6%. On a comparable basis, our sales are up 3.5%, just above the midpoint of our guidance. On a reported basis, gross profit as a percentage of sales was 21.3% in the quarter, on a comparable basis, gross margin was 21.4% up 30 basis points from last year. On a reported basis, SG&A was 8.7% of sales. On a comparable basis, SG&A was 8.2% of sales or basically flat from the same period a year ago. R&D spending, which is included in SG&A was 3.6% of sales. However, this did include the impact of Remy. So on a comparable basis, R&D spending as a percentage of sales was flat year-over-year. Now let’s look at the year-over-year comparison for operating income which can be found on Slide 5. Starting on the right, second quarter 2016 operating income excluding non-comparable items but including Remy it was $288 million or 12.4% of sales. If you also exclude Remy’s $13 million net contribution, operating income on a comparable basis was $275 million or 13.2% of sales up 30 basis points from a year ago and yes, James, that is impressive. On a comparable basis, operating income was up $16 million on $71 million of higher sales. That gives us incremental margin of 23% in the quarter, outstanding performance. As you look further down the income statement, equity and affiliate earnings was about $10 million in the quarter down slightly from a year ago. Interest expense and finance charges were $21 million in the quarter, up from $18 million a year ago, the increase is primarily due to the $500 million Euro fixed rate senior notes issued in the third quarter of 2015. Provision for income taxes in the quarter on a reported basis was $84 million. However, this included $2 million net tax benefit related to our non-comparable items and a favorable tax adjustment. You can read about each of these adjustments in our 10-Q which will be filed later today. Excluding these items, the provision for income taxes was $86 million for an effective tax rate of 31%, which is inline with our full year guidance. Net earnings attributable to non-controlling interest was about $11 million, up $2 million from the second quarter of 2015, this line item reflects our minority partner share in the earnings performance of our Korean and Chinese consolidated joint ventures. Now let’s take a look at our diluted earnings per share on Slide 6. Net earnings excluding non-comparable items, but including Remy were $0.84 per diluted share. On a comparable basis, net earnings were $0.80 per diluted share. Now let’s take a closer look at the operating segments in the quarter beginning on Slide 7 of the deck. Reported Engine segment net sales were just over $1.4 billion in the quarter. Sales growth for the Engine segment on a comparable basis was 2.8%, primarily due to Higher Attributable Charger and Variable Cam timing sales, partially offset by weak commercial vehicle markets around the world. Turning to Slide 8, reported adjusted EBIT was $235 million for the Engine segment or 16.3% of sales. On a comparable basis, the Engine segment adjusted EBIT was up $8 million on $39 million of higher sales for an incremental margin of 20%, again solid performance for the Engine segment. Turning to Slide 9 and starting from the right. Drivetrain segment net sales were $895 million in the quarter. This included $240 million of sales from Remy. Sales growth for the Drivetrain segment on a comparable basis was 5.4%, primarily due to higher all-wheel drive sales. On Slide 10, reported adjusted EBIT was $93 million for the Drivetrain segment or 10.4% of sales. Excluding Remy, adjusted EBIT was 12.2% of sales, up 70 basis points from the prior year. On a comparable basis, the Drivetrain segment’s adjusted EBIT was up $10 million on $34 million of higher sales for an incremental margin of 29%, very good performance for the Drivetrain segment. Now, let’s take a look at our balance sheet and cash flow. We generated $362 million of net cash from operating activities in the first half of the year, which is up $43 million from a year ago. Capital spending was $235 million in the first half, which is down $15 million from a year ago. Capital spending was above our trend in 2015, but we have returned to normal spending levels. As a percentage of sales, CapEx was 5.1% in the first half at the low end of our historical range of 5% to6% of sales. Free cash flow which was defined – which we define as net cash from operating activity less capital spending was $127 million in the first half, up $93 million from a year ago. We are still on track to generate between $400 million and $475 million of free cash flow in 2016 and at the midpoint that’s up 50% from 2016. Looking at the balance sheet itself, balance sheet debt increased by $85 million and cash decreased by $83 million. In the first half, compared with the end of 2015, we purchased – our debt increased $168 million, which is primarily due to share repurchases. We spent $100 million repurchasing 5.4 million shares in the first half, they have scheduled for executing expected $200 million to $300 million of share repurchases this year. Our net debt to net capital ratio was 36.3% at the end of the second quarter, up from 35.2% at the end of 2015. Net debt to EBITDA at the end of the year on a trailing 12 month basis was 1.5%. Now I'd like to discuss our current 2016 guidance, which has improved from our previous guide, as James mentioned. So returning to the deck, let's start with our sales growth guidance for the full year, on Slide 11. Note that the baseline 2015 net sales exclude Remy. We have raised the low end of our guidance range by 100 basis points, all in, we expect to grow between 13.7% and 17.5% this year, up from 12.7% to 17.5% previously. Helping the improved outlook is due to greater comfort with volume and launch-time assumptions in our net new business. The other half is because we expect the impact of currency to be less negative, compared with our previous guide. Market-related growth and new business growth net of pricing is now expected to be between 3% and 5.5%. Now, let's look at our operating income guidance on Slide 12 from an operating performance perspective. We are expecting 15% to 17% incremental margin on our core business sales growth, which is slightly down from our previous guide of 16% to 18%. This is nothing excited about just a few minor adjustments after taking a closer look at the remaining part of the year. On an incremental - incremental margins will be lower in the second half, then the 19% we delivered in the first half, primarily due to a tough comparison in the third quarter last year. In the third quarter 2015, we implemented sharp cost controls in response to the macro uncertainty we saw last year. That spending has returned to normal making the year-over-year third quarter comparison challenging. On a comparable basis, we still expect our operating income margin to be greater than 13%, and including Remy, our operating income margin is still to be expected to be greater than 12%. On Slide 13, we have our EPS guidance. We now expect earnings of $3.16 to $3.32 per share. This includes $0.12 per share contribution from Remy, up from the $3.11 to $3.32 previously. The primary driver of the change is a lower share count which raised EPS by about $0.04 across the range. Raising the low end of our sales guidance range added another penny per share to the low end and at the high end of the range, the lower incremental margin and other minor adjustments offset the lower share count. Now let's review our third-quarter guidance issued in this morning starting with the sales growth on Slide 14. All in, we expect to grow between 13% and 21% in the third quarter, excluding 13 percentage points due to Remy. Excluding Remy, our growth in the quarter is expected to be between 0.3% ad 7.6% but this includes a negative impact to currency. Currency is expected to lower sales by 220 basis points at the low end and 10 basis points at the high end. On a comparable basis, we expect to grow between 2.5% and 7.5% in the quarter. Our growth is improving in the second half, primarily due to major truck launches with GM and Ford. From an earnings perspective, as shown on Slide 15, we expect earnings of $0.74 to $0.81 per share in the third quarter which includes about $0.03 per share from Remy. Excluding Remy, we expect earnings to be $0.71 to $0.78 per share. So in conclusion, we had a very good second quarter. This is the third quarter in a row of exceeding our EPS and sales goals. And as we look forward at the rest of the year, we expect to continue on this path. Solid sales growth, strong operating margins, and improved cash flow from a year ago, I absolutely remain confident that we will deliver our 2016 guidance. And with that, I’d like to turn the call back over to Ken.

Thanks, Ron. We are now going to move to the Q&A portion of the call. Chrissie, could you please remind everyone of the Q&A procedure?

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

Hi, good morning everyone.

Good morning, Rich.

Good morning, Rich.

So I just wanted to follow-up on, on the launches here. So Ford indicated some issues on their end, at least with Super Duty, you indicated that it launched on your end and so, is there – as you look at it right now, and what have you factored into potential incremental risk for the launches into the back half of the year?

Yes, I think, Rich, what I would say is, let me try and take it this way with you. So as we started out the year, we – obviously, we had a lot of launches and what have you and the approach we took was sort of – build some judgment into the launch cadence, right, by the timing and volume and then, obviously, we have factored in some macros. So I am getting confidence, if you look at the first couple of quarters, where we’ve gone through other launches around the world. Clearly, the second half is a little more weighted, as I sit here today, I feel, we’ve done a pretty good job of factoring in the launch cadences as we see today. So, it’s never perfect right, you don’t know, but I think we’ve continued that mantra of applying some judgment to the both - the timing and the volume ramp. And I think as we sit here today, we are as good as we can build in terms of forecasting it up.

Okay and then within Ford and VW, two of your most important customers, when you look at Ford within North America and then VW within Europe, what’s changed since the beginning of the year in terms of outlook? Ford looks to be a little heavy on inventory in particular F-series has been. Have you factored any additional risk as it relates to some of the key programs for both those customers?

Yes, I think, again if I think of it in the first half, second half, Rich, as a good example, actually the first quarter we talked about VW run light in China, you remember that, but that is tough timing in China. But in the second quarter in China, we anticipated some challenges there and we still delivered. So again, it gives me some comfort and I think it’s fair to say, we’ve built in some judgment factor here about whether it’s VW market share, whether it’s volume ramps and I think at this stage we feel pretty well covered by it.

Okay, and then, just a last quick one for me on the fuel efficiency standards. Those got initial proposal or updated proposal for mid-term review got released a couple of weeks ago. James, you indicated that the discussions are still very healthy around Powertrain and whatnot. Anything that the changes seem to be pretty modest, at least if they go through as detailed? So, what are your updated thoughts now that we have something on a piece of paper that we can debate?

Yes, I think you captured it really well, Rich actually, it’s very modest changes. The only thing that’s a little different us, it was – obviously the truck comp mix is a little different in North America, so that kind of moves things around in our company to look at their overall fleet averages. But fundamentally, I mean, the standards are not changing of any note, have you. I would say the pull for the types of technologies that we have to deliver on those standards is as strong as it was six months, twelve months or eighteen months ago. So we are not seeing any pullback at all in terms of these iron drives for the types of technologies that we have and I think our best guess is we engage with EPA and others is, there could be some nuancing and some modest minor tweaks to the standards. But we have not seen anything material enough that changed the direction of the OEMs and what we are doing with them.

Okay. Thanks, I’ll pass it on. I appreciate it.

Thanks.

Your next question comes from the line of David Leiker from Robert W. Baird & Company. Your line is open.

Hi guys, this is Adam on the line for David.

Good morning, Adam.

Good morning.

I appreciate we are still several quarters away from you guys giving a bookings number, but as we sit here halfway through the year, can you give a little more color on the pace of new bookings over the past several years and kind of how they have trended relative to 2015?

Yes, I think, you are right, we will do our net new business update as we go into January. So it’s a few months away. If we reflect back on the current backlog of net new business, we – this year it was a mid single-digit type growth and as you can see so far we delivering against that. So that gives us comfort. It stepped up just a little into 2017 and 2018, but still in that mid single-digit range. And I think, we will give a lot more color as we get closer to it. But, I don’t think there has been any material shifts to sway us away from sustained mid single-digit growth at least for the next couple of years. So that’s typically how I think about it Adam.

Great, great. And then on the strong incremental margins in the quarter kind of driving your margin gains, how sustainable are these moving forward, just given some of the restructuring actions you've taken and then some of the improvements and Wahler and Remy, et cetera?

A good example Adam, just if you take a look at Drivetrain segment, which is nearly 30% incremental margins. There is a portion in there of the restructuring activities benefit that we are getting. So, when you go to a comparable basis, eventually year-over-year, that’s going to moderate back to a normal mid teen type of incremental margins. I think we expect a little bit of that still in this year, but as we go into next year is when you start to see it moderate. I think the Engine segment at 20 was actually a better performance probably we anticipate it going in, just a great job. Our target still is mid-teens, but I think the majority of that really was the benefits of the restructuring cost year-over-year

Great, and then just lastly from me, you guys have one of the largest European businesses across the auto supply space. Just wondering what you are hearing from your customers, post-Brexit?

Yes, I think, you are right. First of all the second quarter was a good quarter for Europe in general pretty much across the board with most of the OEMs, it was a good solid quarter. But I would characterize year-to-date it’s been actually stable and good in Europe. I would say from a post-Brexit perspective, we anticipate, I think like everybody else that the UK car production itself will have some impact as we go forward into 2017 and 2018. From a BorgWarner perspective our UK content is very small. How much of that then will flow into Europe in general, I think we need a little more time. I think everybody needs to kind of digest that. So we are watching it and I think it’s a little early from a – how does it impact Europe in general. I would tell you we’ve not seen any impact thus far in schedules and relationships and those types of things. So, I think it’s going to be more of a 2017 type event and a 2016 event for Europe and the UK will trim itself up, but again that’s – but that 1% of our revenue is in the UK. So, we feel pretty good where we are at right now.

Great. Thanks, guys.

Thank you.

Thank you.

Your next question comes from the line of Chris McNally from Evercore.

Hi, guys. Thanks so much. I wanted to go into a little detail on the Drivetrain margin, which is extremely strong for the quarter. You guys discussed that the incremental margin maybe in the second half will be a tougher compare, particularly in Q3. Could we just go into that in a little bit more detail some of the costs that you took out and where costs may be coming back and also can we start to think about the Drivetrain margin sequentially throughout the year? Is this sort of ex Q3 seasonality or it’s a little bit down? Is this sort of a good level going forward?

So let’s talk about the Drivetrain incremental margins for the second quarter first, okay. If you look at – I’ll go back to Slide 10, you get this 29% incremental margin which is about $10 million, probably little bit less than half of that is because of the tailwinds that we are having for the full year from the restructuring activities, so it will cost $4 million for example. So, that’s the benefit we are getting from the restructuring. If you take a look at the full year guidance, you can see $15 million roughly. I think we are $7 million year-to-date of restructuring tailwinds. So, we had about two I think it was in the first or something, sort of remaining in the second quarter. That’s going to continue through the rest of the year. We will get that other 7, say rounding numbers here through the rest of the year and now the third quarter might be a little bit tougher, but the fourth quarter will get that through the year. I think we are on track in that range that we have for tailwinds. So that’s Drivetrain, okay, which the best, we are on track. Now, the other issue that we are dealing with is the year-over-year, I mentioned in my script that we took some cost controls primarily in SG&A last year, when we saw some difficulties in the macro environment we are facing. So some of this SG&A spending is going to come back in the second half of the year, specifically, probably in the corporate spending rates will uptick about few million bucks here and there in the next two quarters. So that’s what you are going to see going forward sequentially in the SG&A side, primarily in the corporate.

Okay. Perfect. Thanks so much.

Thank you, Chris.

Thank you, Chris.

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

Yes, good morning.

Good morning, Brian.

Just have some questions. One, kind of third quarter, more housekeeping-ish, and second more strategic. On the third quarter, fairly wide range of revenue estimate for the guide. Can you talk maybe a little bit more about the factors around that plus or minus that 5% swing that it could be?

Yes, Rich, I mean, sorry Brian, and actually what I would say Brian, good observation, because it is a wide range and it’s there intentionally for several factors. First, James mentioned, our launch cadence. There is a lot of still uncertainty on the launch cadence. We are comfortable with our guidance as far as the range, but they could swing fairly wildly because, some of it is new conquest business, it’s not carryover business. So those have a significant impact on us. The second item is, we are going through the third quarter where you have customer shutdowns and although they say one thing, they may behave another way and it could be – that could be plus or minus. There is uncertainty on shutdowns. And then the third, I would like to point out, James talked about, just the general uncertainty, a good example is Ford this morning in their announcement and then James gave all the macro political issues going on. So when you factor in auto variability we kept the range wide quite frankly, because there is a lot of variability going on right now.

Okay and second question, and I know you’ll discuss this more at the Investor Day on September 7. What did you say in terms of booking activity during the quarter around 48 volt and hybrid systems? And certainly, we noted Valeo a couple of days ago had some very strong momentum in that segment of its business in terms of the pipeline. What are you seeing around that?

Yes, Brian, we will show you, as you said, we will show you in a few weeks, a little bit more around that. But, we have a wide range of activities going on. Our quote activity is strong. And I would quote it in a lot of products both across pure EVs, hybrids in general and then 48 volt architectures. So we are – we continue to see strong activity. We are limited as to what we can say on specific business wins, Brian, just because of the customer approvals and communication, but it’s a wide range of products ranging from belt alternator starter systems, E-booster technology, P2 hybrid clutching control modules. It’s a wide range and the activity is very, very strong to be open and it’s across a wide spectrum of products that is all leading to generating growth. Now what we will show you as we get to the Investor Day, Brian is, what’s the ramp and the cadence of that growth, because obviously it’s not this quarter or next quarter, these are programs that are going to kick in, in the next couple of three years. But we will take you through that basically, product-by-product and growth outlook that summarizes the specific question, quote activity is very strong and robust and we are winning pretty good share of what we want. But more to come in September Brian, is that’s fair?

And just to hit me, one quick follow-up, on Ron's comments about the third quarter. Ford indicated the need or we wouldn’t necessarily argue there is a need to work down Ford inventory. So as you put together your guide, were you thinking in terms of what you would consider to be conservative Ford schedules as you thought about Q3 in second half?

The way I would articulate it Brian is, the way we have been modeling for our business was, sequentially a step-down in the second half of the year versus the first half of the year. So that’s how we had modeled it. I think it’s fair to say, through the first half of the year, we had modeled might be a little lighter than customer relations and schedules and as you see we’ve done well in the first couple of quarters. So I think, we are pretty well aligned at this stage. Obviously, inventory adjustments and those things can be a little choppy and can create some noise, but I think, thus far we’ve done a pretty nice job of anticipating and modeling in a pretty – in a balanced way, Brian, is the way I would characterize it.

Okay. Thank you.

Thanks.

Your next question comes from the line of Ryan Brinkman from JPMorgan.

Hi, this is Samik Chatterjee on for Ryan. The first question I had, a lot of discussion today on the call about the Ford Super Duty launch. So just wanted to get a context here from you I know, you have roughly indicated what sort of revenues from Ford, but, okay, are you able to share what ballpark for the Ford Super Duty is in terms of revenue for you guys?

Yes, I can give you a couple of thoughts here. So, if you look at what – our business and let’s focus a little bit on North America, because I think that’s really where the majority of the action is here. So, if you look at what our percentage is there, it’s high single-digit of our total company. So, rough numbers, you can think of all of BorgWarner with Ford in North America maybe about an $800 million, $900 million revenue number for the year. So half of that’s gone, right. So we are talking about a 400-ish number in the second half. I said that, earlier that, sequentially we are at a little lower, so you south the $400 million in the second half of the year. So let’s just play that out and maybe that moves down a little bit based on some inventory true up, what are you, $20 million, $30 million, $40 million type of a number for our things. So it’s important for us. We are not dismissing it, but it’s also scaleable and manageable from a BorgWarner point of view. It’s the way I would think of it. Specifically on the Super Duty, as Ron alluded to earlier, it’s important to recognize that’s conquest business for us. So, we go from zero to whatever. But our view is, at this stage is, we’ve been following the schedules from Ford pretty well and we anticipate a good second of the year on Super Duty.

Got it. The second question, just pretty wide ranges for organic growth both in third quarter and probably implied for fourth quarter as well. I was wondering what are you really embedding in that guide for the commercial vehicle markets in the second half and what is the degree of risk you see in that market?

Yes, now that’s good thought. We’ve – I think, we’ve factored in overall a very low growth environment at all for commercial vehicle. We’ve built in a pretty low Class-8 build for the North America and so that’s a pretty strained area. I would say, a low to no growth environment in China and continued weakness around all highway pretty much globally and then a little bit of a growth in Europe over the road. And then Brazil remaining very challenged. So that’s kind of what we are saying and I would say for us, what we’ve seen in the first half of the year is, commercial vehicle is coming pretty much where we had anticipated for both Q1 and Q2. So I don’t, and those have been some choppy orders. So I wouldn’t expect this to be far off as we look into Q3 and Q4.

Just a final housekeeping one. I got to be trying both on incremental margin in the Engine segment year-over-year, just going sequentially and looking from 1Q to 2Q, the margins did sort of decline slightly, even on higher revenue. So, I was just wondering what that probably was attributable to?

Yes, that was what we just discussed this previously. SG&A costs will sequentially probably tick up. So that will probably bit more incremental margins more into – what I would call the normal range for us, which is mid-teens. So that’s what’s driving that is the SG&A spend sequentially.

Okay, thanks. Thanks for taking my questions.

Your next question comes from the line of Pat Archambault from Goldman Sachs.

Hi, good morning. Hi, it’s actually Dave Tamberrino on for Pat. A couple quick questions from us. One, as we are unpacking the revenue growth of the two segments, looking at Engine being up 2.8% versus Drivetrain up 5.4%. Traditionally, you'd think about the Engine business with the turbochargers being really the growth engine here. Wondering what’s kind of creating this dynamic where Drivetrain is growing faster than Engine? Is it just the commercial vehicle weakness that you spoke to earlier, Ron, in Engine, and the all-wheel drive growth that you are seeing in Drivetrain that’s driving it or is there something else there?

Yes, this is James, let me take a shot at that for you. I think, obviously, you will see quarters bounce around a little bit. Sometimes we are a little up in – higher in Drivetrains, sometimes it’s Engine, it moves around a little bit. But in terms of why Engine was a little lower than some of our historical quarters, you are right, commercial vehicle was clearly a factor that only applies for our Engines segment. There is no commercial vehicle revenue in Drivetrain. So that was a key weight for us. I would say the other area that weight a little bit on us is China where some of our larger customers in China, so I am talking about Volkswagen, I am talking about Great Wall, I am talking about Ford and GM. I had pretty low growth quarters if you aggregate those four, actually it was no growth. So, that weighed more on Engine than Drivetrain as well. And those are two of the biggest things. It doesn’t really concern us, as I say, because we do have bounces from quarter-to-quarter. So, I think it’s explainable and it’s kind of frankly speaking what we had anticipated in our guide.

Okay, that’s very helpful. And then just lastly, if we are thinking about the European production guide that’s kind of under or production cadence that's underlying your guidance. There – it didn’t sound like there is any softness as you are seeing or hearing, and there is not much as you’ve really predicated into 2016 of any contagion from slower European sales growth as a result of the UK referendum. Is that the correct way to think about it?

Yes, that’s actually a good summary. As Ron alluded to, there is always a little noise around shutdowns. That obviously plays its part, but we feel we’ve got that pretty balanced and as I said earlier, I think the UK referendum impact will play itself out over the coming months and probably even into next year. So, yes, I think, you captured that pretty well.

Thank you very much. I appreciate all the detail.

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

Good morning, gentlemen.

Good morning, Brett.

Good morning, Brett.

I wanted to ask you a longer-term strategic question and I know you’ve talked about this some, but there is, I have got a number of questions from clients with regards to Remy and I was hoping you could provide us with some specific examples of how Remy helps you get into the electrification of the powertrain specifically? Secondly, do you anticipate it resulting in maybe, some sort of a hockey stick improvement in your revenue growth rate or does it just kind of allow you to continue to grow in the current range? And then finally, if you do actually see some sort of an uptick in your growth rate, what’s kind of the timing on that? If I remember correctly, it’s kind of a few years out, but go ahead.

Okay, Brett. That’s happy to talk about that. So, let me talk a little bit about sources of growth for Remy. I think that was kind of your key question. I would encourage you and the investors to think of two channels of growth, first for Remy. First, channel of growth is primarily through their existing off-the-shelf technology for vehicles and applications that are in service today. What I mean by that is selling more belt alternator starters, starters and motors and generators to than they shell today. And what I mean by channels is on light vehicle, today they ship to Hyundai and General Motors and that’s it and we see you leveraging the BorgWarner channels and the BorgWarner Relationships. But there is no reason on the planet why we come installing starters and alternators and belt alternator starter systems through other customers beyond their current. And regionally, they have almost no presence in Europe and clearly Borg has a big presence, so that’s a regional play where we can accelerate our European relationships to grow what I would describe, Brett, as their core existing product line business. So that’s a source of growth for us that we will leverage. And you would anticipate that can be done in a shorter horizon only because this quoting activity today and we have product to put on those vehicles. So that’s the first source of growth. The second source of growth is where you are alluding to is to help take us further into electrification and there is a number of potential opportunities there. First of all, they have the motor technology that you could use either in a hybrid vehicle or a pure electric vehicle and that’s the traction motor of sorts that we can use. The second path for them is to combine the rotating electrics of the motor coupled together with our clutching technology to offer hybrid vehicle solutions, where we need to bring together the motor and the clutching technology. So we can offer engagement or disengagement between the motor and the combustion engine. We have product on the shelf to do that today and we are quoting that activity. The third leg of opportunistic growth is the more advanced starter – belt alternator starter systems that will emerge as a lead for stop-start technology and hybrid technology and Remy has a number of products in that space that we will be pushing forward on to hybrid applications. The last area I would say just in general they bring motor technology that helps us on other product applications, so if you think of – I talked about earlier about an e-booster technology, which is the turbo charger with a boosting device compressor device, it requires power electronics and motor know how, Remy can bring that knowledge to us. All of that said, Brett, so where does that all translates to into dollars of growth? We are working our way through that. But there is certainly absolutely no reason why Remy wouldn’t grow at least at BorgWarner levels. You got to give us a little bit of time to lay that out for you in terms of cadence and pull all of that together and we’ll get through that over the next few months. So what we are going to do, Brett is, we’ll use this September day to showcase the technology for you and some of the – and what we are dong on it and then we’ll pull all of that together in the January net new business to lay out for you what the next three years of growth looks like from – for Remy both from conventional products and the combination products with BorgWarner products. Hopefully, that helps you a little bit.

That was very thorough, James. That’s perfect. Thank you very much. Have a great day, guys.

Thank you.

Your next question comes from the line of Matt Stover from SIG.

Thank you very much. A question just to clarify again on the Drivetrain margins. When you spoke to the second half compare, Ron, you referenced incremental margins. So, we should expect that your incremental profitability should improve in the second half? You did have quite a heavy third quarter period there last year or am I misunderstanding it?

All right, there is two topics here. One is, the Drivetrain segment will continue to get tailwinds from the restructuring activities that we did. If you look at the full year guidance from tailwinds, the majority of that tailwind is Drivetrain related. And we haven’t seen all those benefits yet go through Drivetrain. So we will continue in the Drivetrain segment on the tailwinds. Now when you step back and it’s the total company, what’s often it offset that a little bit is probably SG&A spending that’s coming into the business. So you have two dynamics going on. One is Drivetrain benefits tailwind, somewhat offset by SG&A spending coming back on a comparable basis.

Okay. And then the second question is on just the equity and affiliates. I would assume, although this may be incorrect, that the Japanese profitability was up year-to-year in the second quarter, how should we then think about the profit contribution from the other geographies?

That line item doesn’t really move that much. It fluctuates, what $1 million to $2 million historically, although it’s been trending up over time. I wouldn’t put a lot of focus on that line item. It’s been a little bit ball – there is other things that come into play, FX comes into play and the production of those areas. But I would say that in general, if you are going to have a bias I guess, from that line item I would bias it maybe to the positive side at the end of the day.

I am just - I am trying to figure out the regional variables in this. I would assume that with the strength in the yen year-to-year, the NSK-Warner profit contribution would have improved. And I am just trying to think through what happened with Korea and the other equity affiliates?

Right, that’s I was referring to the FX impact. So, you can see favorable impacts from Japan, but the one is softer a little bit. So they get somewhat upset. So there is a lot of variability up and down in that item and it doesn’t really move that much. The underlying production for us has been fairly positive. But it gets more offset by the FX variability quite frankly is what happens. So as you are trying to model it, what I would do is I would just try to model it where it’s been and it’s biased maybe to the positive side.

Thank you.

Thanks, Matt.

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

Good morning, guys. And I apologize, I got on the call late. So, if any of these are duplicative, please let me know and I can follow-up. Just first, as we look at the Super Duty launch in the second half of this year, I was wondering if you could indicate how much your content is going up on this new truck? And if you could give us a relative indexing or maybe even absolute of Super Duty content versus the F-150 for you on Drivetrain?

Yes, John, so, Super Duty first thing, that’s kind of good to know is it’s – so this is conquest for us. We got – so it’s zero. So you should probably think in the $400 to $500 range of content for us on that vehicle. It’s probably a good reference point, John.

Okay, and relative to the F-150?

Depends – it’s less than the F-150. If you think of the F-150 with all of our stuff on, transfer case, turbocharger, some variable cam timing product, you are kind of getting up kind of 2x versus the Super Duty. But it does depend a little bit obviously not all F-150s take a transfer case. So – but directionally, it’s - F-150 is meaningfully higher than on content for us versus the Super Duty.

Okay. Thank you. And then a second question and just very simplistically, on Remy and you may have talked about this, I mean, the margin progressioning and cost performance, I mean, where is that relative to your expectation? And was that a significant driver to, maybe some of the upside we saw in margins in the quarter?

Yes, obviously, the Remy performance second versus first quarter has improved almost about 100 basis points, which is quite frankly, was what we expected given the synergies that we talked about when we did the acquisition. So, long story short, I would say, John, we are pretty much on track on executing those synergies right now.

Okay. And then just lastly, I mean, some of the tone of the sort of the macro environment or industry environment from the automakers seems to be changing a little bit, a little bit less positive, not necessarily negative yet, but a lot less positive. Are you seeing any change in your relationship on bidding or pricing with the OEMs at this point? Or is there is just really no change in the environment relative to some of the macro pressures that might be seeping into the industry?

I would say, John, really no meaningful change. I mean, not to the labor, products and environment is always competitive, it’s tough. But we are not seeing any movement there. I think I alluded earlier, John, maybe in terms of quoting activity, we are not seeing that tail-off or anything like that. R&D reviews, technology programs, advanced engineering programs, all pretty much continuing on as is so to speak. So, yes, we are not seeing any meaningful shift to your question.

Great. Thank you very much guys.

Thanks.

We have time for one final question and that question comes from Joseph Spak from RBC Capital Markets.

Hi, this is Jacob Hughes on for Joe. I just had one final question. I was wondering if you could just comment on the M&A pipeline and as well as what you are assuming in your guidance for the buyback for the rest of the year?

I’ll take M&A pipeline first if you wish and then Ron can make some comments relative to the stock buyback program. So, M&A we’ve talked about in recent calls, our primary focus obviously is to do successful integration of Remy. That’s our priority one. You heard from Ron and both – Ron and myself that that’s playing out well and as expected. So, that’s kind of moving along well. We remain active and very interested in additional M&A activities. I’ve alluded in earlier calls that our primary focus is around electronic software, power electronics type place and we have a number of things moving forward in that space and then other areas of interest as we’ve talked in prior calls around valvetrain and we’ve also talked about boosting our thermal management capabilities. So, yes, we remain active and if a deal is there for us, we would move forward. But again, priority one is successful integration of Remy. Relative to buybacks, Ron can give a clear format.

Yes, buybacks, real quick. Our guidance for the year was $200 million to $300 million. If you took a look at our year-to-date, which is about $180 million. Obviously, I would say that we are into the high end of our guidance range right now where we are trending and short.

Yes, thank you.

Thank you.

All right, Jacob.

So, I would 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. Chrissie, please close out the call.

That does conclude the BorgWarner 2016 Second Quarter Results Conference Call. You may now disconnect.