Good morning. My name is Sharon and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2017 Fourth Quarter and Full-Year Results Conference Call. I would now like to turn the call over to Patrick Nolan, Vice President of Investor Relations. Mr. Nolan, you may begin your conference.

Thank you, Sharon. Good morning everyone, and thank you all for joining us. We issued our earnings release at 6:30 AM Eastern Time. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations homepage. A replay of today's call will be available through February 22. The dial-in for that call is 855-859-2056 and the conference ID will be 9599159 or you can simply listen to the replay on our website. With regard to our investor relations calendar, we will be attending several conferences between now and our next earnings release. Please see the Events section of our Investor Relations homepage for a full list. 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. Also, during today's presentation, we will highlight certain non-GAAP measures in order to provide a clear picture of how the core business performed and for comparison purposes to prior periods. When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. And finally, when you hear us say on a reported basis, that means U.S. GAAP. But now back to today's call. First, James Verrier, our President and CEO, will provide a high-level overview of our 2017 results as well as our recent backlog announcement. James will then comment on the industry and some of our recent product wins. He will conclude with the key items in our outlook and provide an update on our non-core emissions restructuring. Then Ron Hundzinski, our CFO, will discuss our results as well as our guidance. We've posted an earnings call presentation to the IR page of our website. You'll find the link in the Investor Presentation section beneath the notice for this call. We encourage you to follow along with these slides during our discussion today. With that, I'm pleased to hand it over to James.

Good morning, everybody. And, Pat, thanks for that intro. As Pat said, Ron and I are really pleased, actually, to share our results for 2017. And then, obviously, we're going to talk a lot about the outlook for 2018. What I thought I would do is start by sharing a few thoughts on 2017 as we wrap that year up. And for those of you that are following along that, you can see some of that information on slide number 6 in the deck. And the headline really is 2017 was a great year for BorgWarner, $9.8 billion of sales, which is up 10.3% organically. And that's comparing to a light vehicle end market exposure for us of about 0.5% growth. Looking at that by segment, the Engine sales were $6.1 billion, which is a growth of 7.7% organically. And Drivetrain finished up at $3.8 billion. That's up almost 15% organically, a very, very strong growth on the Drivetrain side. Regionally, how it broke down. We had strong growth in China and North America. And our Europe light vehicle revenue was up mid single digit. And that's pretty impressive when you consider some of the diesel and gas mix shift that went on. That light vehicle growth was supplemented also by positive revenue trends in commercial vehicle both on and off road. Our EPS at $3.89 was up 19% year-over-year, which we're also very proud of. It's a very strong result for us. Away from the specific numbers there, we had significant launches and wins across combustion hybrid and electric vehicles. We made a lot of progress across all three platforms. And we're expecting that to continue strongly in 2018 also. We also, towards the end of last year, completed the acquisition of Sevcon which was a really important move…

Thank you, James, and good morning, everyone. Before I review the financial details, I'd like to provide you with some of the highlights as I see them for the quarter. First, the quarter was strong and it was a great finish to the year. Second, operating performance was on target. And finally, we are maintaining the organic growth and margin guidance. But we are increasing our EPS guidance based on the tax and FX benefits. Now as Pat mentioned, I will be referring to the supplemental financials slide deck that is posted on the IR website. I do encourage you to follow along. Let's turn to slide 12. On a reported basis, sales were up 14.5%. But on a comparable basis, our organic sales were up 10.2%. This is very strong performance compared to our weighted average light vehicle industry production for the quarter which was up 0.3%. We saw 25% growth in China against a production market that was down 1%. Europe revenue was up 9% compared to the 5.6% industry production growth in the quarter. North America revenue was 10% versus the 4% production decline in the quarter. And commercial vehicle was a benefit again, contributing more than 200 basis points. And then diesel-gas mix in Western Europe was a headwind but slightly lower than we expected going into the quarter. Now, let's look at the year-over-year comparison for operating income, which can be found on slide 13. Q4 adjusted operating profit was $328 million or 12.7% of sales compared to $284 million in Q4 of 2016. Our operating margin of 12.7% was 10 basis points improvement year-over-year. On a comparable basis, operating income was up $37 million on $227 million of higher sales. That gives us an incremental margin of 16.4% in a quarter, which is in…

Sharon, we're ready for questions.

Your first question comes from Rod Lache with Deutsche Bank.

Good morning, everybody. I just wanted to ask you, the lower incremental margin in Engine, how much of that was due specifically to the underperformance in the emissions business? And can you tell us what the losses are running at in that thermostat and pipe business that's for sale?

Sure, Rod. This is Ron. What I would tell you is that we incurred a year-over-year headwind of about $10 million in the quarter. If you do the math a little bit, I think our margins would have been probably comparable to the prior year. So we saw significant headwinds and they actually deteriorated throughout the year. If you remember, we were seeing $5 million, $5 million, I think, $10 million, $10 million as we went throughout the year by the quarters. So it was a significant headwind for us in the quarter.

The loss run rate from the business that's for sale?

Yes. The thermostats and pipes business was about a $10 million headwind for us in the quarter.

Okay. So that is the run rate, the quarterly run rate. And can you remind us just regionally what the commercial vehicle revenue breakdown is for you today? And also just lastly, what is the size of the light vehicle diesel business after the decline that we saw in 2017?

Yeah. Rod, this is James. So the commercial vehicle piece first. So it's about one-third. Regionally, it's about a third in the U.S. and about a third in Europe. And then the other third is split between China and South America. The other breakdown, it's about 50-50 split between on-road and off-road, if that's helpful for you. In terms of the diesel absolute number, I'm just trying to get that for you. Actually, Rod, if you don't mind, can I just unpack, kind of give that number to you offline in a separate call?

We can follow up with that. But back to the commercial vehicle, you said a third of it is China and South America. And that's the reason why you're expecting kind of a flat market.

Yeah, that's right.

Is because declines there.

Yeah. That's right, Pat.

Hey, Rod, it's Ron. One more thing back on emissions. This is a higher level. So that's about a $200 million business product line for us that's incurring about a negative 10% margin. So you can do the math on that. So it's significant headwind for us throughout the year.

Right. But just on that, there are other issues that are obviously happening on the Engine business because you would have had flat margins despite the growth in the quarter.

But take a look at last year's margins. We blew out the year in 2016, to say it politely, margins. And I remember in my script last year, I says don't model that going forward.

It's just tough.

It really, really didn't comp on the margins.

Yeah.

Yeah, got it, okay. Thank you.

Thanks, Rod.

Your next question comes from Chris McNally with Evercore ISI.

Thank you so much, guys. Just a follow-up on the diesel assumption. So a 300 to 400 basis point decline, I think that's up from – you were talking about roughly 200 to 300. As you said, the market, just the rate of decline could be something like 500 basis points. Could you just help us understand some of the precautions you're doing? How you're thinking about what if we continue to see the declines that we're seeing in the UK and Germany roll out to some of the other markets? What are the implementation plan?

Yeah, sure. So, Chris, this is James. So the first thing, just to be clear on. So our assumption on the diesel-gas mix is the same as what it was when we gave our update in Detroit. So we're projecting a 300 to 400 basis point shift through this year. Potentially, it could be worse than that. We just don't know. We had to put a line in the sand. For every 100 basis points it moves, think of it as that's about a $20 million net revenue impact negative to the company. So it's not that huge, frankly speaking, in a meaningful way. What we're really seeing though is the majority of – the reason it's fairly small is a lot of these diesel vehicles that are not being sold and are being replaced with a gasoline vehicle, a lot of that has similar content for BorgWarner. So a turbocharged diesel vehicle in Germany or the UK, to use your example, would quickly be replaced with a petrol or gasoline turbocharged vehicle. So when you do all the math and net it out; for every 100 basis point move, it's about a $20 million impact for the company. So it's not that meaningful. I would also say, Chris, just as an anecdote if you look at last year, last year we saw a similar level of decline. And yet we still, as Ron said, delivered a 10% organic growth. It's because we found offsets in other parts of the business and we were still growing in Europe. So we're not dismissing it because it is there. But as you see, I think our ability to manage through those – that transition, we're very comfortable with that.

That's fantastic. So it seems like you have a transition. This is a larger question and I know you guys have addressed this before on the call. But what are you hearing in terms of how the OEMs themselves will bridge the CO2 hole between, call it, late 2018 and 2021? Because we're seeing as they lose the diesel advantage, their CO2 rates for the fleet whether it's just a lower number of vehicles or a lower demand for PATV or even 48-volt. It seems like it's going to be a problem for them as they try to hit their targets for 2020. And I'm sure you're involved in some of those conversations to bring some of the better architectures forward.

Yeah. Well, you gave a great summary, Chris, actually. That was a really terrific summary of exactly the challenges the OEMs are facing. In the short run, the strategy really is shift from diesel to gas and optimize gasoline technology. So think advanced turbos, advanced variable cam timing. What it's doing more strategically and over the mid-term horizon is it's causing an acceleration of adoption of hybrid technology. That's the real push. So that momentum towards 48-volt mild hybrids, which I talked about in my commentary, is fast accelerating. I would say the other thing that's happening in parallel is they're looking to get the most advanced gasoline technology that they can because there's still optimization you can do on the gasoline engine to get it more diesel-like type performance. So you're right. We're right in the middle of those conversations. And frankly speaking, it's utilizing a lot of our technology. But the pragmatic thing is it's an acceleration of hybrid and electric technology and rapidly cranking up the efficiencies on the gasoline engine. So more advanced turbos, more advanced variable cam timing and hybrid technology to go with that. So that's really what we're seeing, Chris.

Great. Thank you, gentlemen.

Thank you.

Your next question comes from Noah Kaye with Oppenheimer. Noah Kaye - Oppenheimer & Co., Inc.: Thanks for taking the questions. And, James, just transitioning here as you did, talking about the hybrid and electric pipeline. If this characterization is wrong, please correct me. But it seems like geographically, what's in the backlog so far for hybrid and electric wins may be heavily China-weighted. So at what point, are we looking at 12 months from now or sooner or further down the line, does that start to sort of even out a little bit more geographically, get more of Europe in the balance, for example?

James.

Yeah. Now what I would say as you look at the – at least through the three-year window with the backlog, the initial piece of the backlog is a little China-weighted. And that's predominantly because of a lot of the eGearDrive technology that we'd been launching in China. But as the backlog rolls out and flows out, you're seeing that regional balance become more balanced, frankly, as we launch hybrid technologies globally but heavily in Europe. And then as you kick on beyond the backlog, then it becomes even more geographically balanced. So I think you're right. In the short run, in the next year or so; it's a little China-oriented. And then that balance becomes much more balanced, frankly, as you go forward over the next two or three years. Noah Kaye - Oppenheimer & Co., Inc.: So just to make sure I'm understanding this right. What's already in backlog includes more geographic balance, say, two or three years from now out of the three-year net backlog?

Yeah. Noah Kaye - Oppenheimer & Co., Inc.: Okay, great. And then just after tax reform with repatriation opportunities, how much cash do you think you'll bring back? And what's your view to spending on M&A versus buybacks at this point?

I'd say that – the way we look at this is that the Tax Act is going to make it very flexible to bring back cash. So as far as bringing it back like next week or next quarter, we don't have a significant need for the cash right now. But just having that flexibility is fantastic. A couple of years ago, we went through a lot of work to restructure to get cash to have a buyback program and a dividend program and to bring cash back. And this makes it a lot easier. I would say going forward, we are reevaluating our dividend policy. We are reevaluating stock purchases. Our stock repurchase program for this year is $100 million. But all of those decisions will have to be updated and reevaluated, what it means for the company. The thing I'm looking forward to is that we can deploy more capital back to the shareholders in, I would say, efficient way and a more flexible way going forward. But I think you're going to have to wait as far as us really giving our strategies to you folks going forward, okay?

Yeah, no. Ron gave a good summary. The only thing that I would just say to you from my perspective – we do remain – continue to monitor M&A opportunity and particularly in the electronics, power electronics type space. We're very happy with Sevcon so far. That's going really well. But I think it's fair to say we would want to be on some level of M&A activity over the next couple of years to utilize that cash, particularly complementary deals such as Sevcon. It's the way to think of it. Noah Kaye - Oppenheimer & Co., Inc.: Great. Thank you.

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

Thanks. Good morning, everyone.

Good morning, Joe.

Good morning, Joe.

James, thanks for all the color on the puts and takes to the first quarter organic guidance. I was wondering if we could talk a little bit though about what you expect on the margins because it looks like the first quarter guidance assumes total company margins are about flat year-over-year. And if I recall correctly in the first quarter of last year, you had about a $5 million lease termination thing which is like 20 bps. That should reverse out, which implies the segments here would actually be down a little bit year-over-year. I just want to make sure I'm thinking about that right. And if that's true, what the drivers are there?

That's correct, Joe, on the math. I would say that the first quarter is some transitional costs probably again that we're seeing operationally probably in the emissions business as well. We got to get that business right-sized. And we're a bit cautious about what that transition is going to cost us. The second item is that North America changeover of one of our major launches is going to impact us as well. It's a profitable product line for us. And that launch, as it starts to gear up in the second and third quarter, will give us some momentum. So it's two items. I'd say it's emissions headwind a little bit as well as this launch in North America.

And the launch is across both segments or more in Engine?

It's going to be in the Engine – I'm sorry, it's in the Drivetrain group.

Okay, Drivetrain.

It's a four-wheel drive launch program.

Okay. And then just to follow on, I guess, one of the prior questions, a bigger picture on tax reform here. You guys are always sort of been active out there in the market. You seem like you have a big pipeline. I think one of the things we've heard over the years is maybe some hesitance for companies to sell stuff because of tax implications or tax leakage or stuff. And I'm wondering if any of that has sort of changed yet in sort of what you're seeing in discussions or pipeline or if it's still a little bit too early for that or just broadly, if you think this makes it easier to actually consummate deals.

Joe, that's a good question. I can tell you right now that in the M&A discussions that we're having that language hasn't come up about it being more favorable to release those assets and not have as much of a tax headwind. But I think that's going to play out over time. I'd have to think about that. But I have not had that discussion with our investment bankers that certain individuals would be looking to divest their assets now because it's more in a tax advantage position for them. But it's an interesting concept. I'd have to think about it longer, Joe.

Okay. Thank you.

Thanks, Joe.

Your next question comes from David Tamberrino with Goldman Sachs. David Tamberrino - Goldman Sachs & Co. LLC: Hey, great. Thanks for taking my questions. Ron, you mentioned on the tax plan that you're looking at a few things longer term to continue to maybe grind that down. I think some of us were expecting a little bit lower today. Where do you think your tax rate could get to over the medium term and how many years do you think it will take to establish kind of getting there?

Yeah, David. Let me talk about what the items would be. David Tamberrino - Goldman Sachs & Co. LLC: Sure.

There's two main areas that we're looking at. One of them is when we bring cash back through different legal entities, if we can restructure those legal entities to lower that tax rate. I won't go into greater details, but that's one area. I'll just mention it's kind of out of Asia as we bring cash back and that will be significant to us. The other area is the way that intellectual property reimbursements go across borders right now. And we can change our strategy of where intellectual property is. Those two items would probably take over the course of one to two years to implement now. So that's the timing. As far as the rate, I hate to give you a number. But you can probably go down to the mid 20s fairly quickly in that number, 23%, 24% probably is a good number. But don't hold me to that number because this is a lot of work that we have to do to go through it. But the best part of all this I just mentioned is there is a pathway to lower that rate. So we're real confident we'll get there. We just got to have our tax folks do the work. David Tamberrino - Goldman Sachs & Co. LLC: Understood. Look, that's incredibly helpful. And then James just on power electronics, how big of a business are you looking to buy versus eventually build? And thinking about M&A there, what technology or further capabilities are really needed that the OEMs are asking for in your conversations?

Yeah. No, it's a good question, David. So the way I would think about is what we have today with the acquisition of Sevcon, we're in a really good spot. And the reason for that is we've been investing pretty significantly over the last two or three years to build our organic internal electronics capability and knowhow. And we've done a nice job there. And then Sevcon added scale and obviously some actual products also. The key thing to think up for us as our power electronics strategy and the way to think of it is that we're not necessarily looking to be, quote, a big power electronics supplier of standalone power electronics, widgets or componentry. What we're all about is complementary power electronics knowhow and products to work in conjunction with our products. That's the real strategy that we're pursuing. So we're not looking to add big scale and capacity just to go compete as a standalone power electronics guy. What we're looking is to add discrete technology that's complementary to our product offering. And the reason for that, David, simply put, is we're a propulsion system player. And in order to do that, you need obviously engine technology, you need drivetrain technology and you need power electronics knowhow and hardware that you can integrate and offer the OEM a complete solution. So all of that said, the way to think of it is if we can add another Sevcon or another couple of Sevcons over the next couple of years, that would be really good because it would just build more scale, more capability, more engineering, horsepower, frankly. That's really the strategy, if that helps you. David Tamberrino - Goldman Sachs & Co. LLC: No, it does. And are you finding that there's a plethora of those assets out there to look at or is it going to be harder to find as we think about other companies as well looking to beef up their technical capabilities through the shift towards EV architecture?

Yeah, the way to think of it, David, there are quite a few companies out there that do that. The interesting thing is it's very rare you find a pure play. What I mean by that is you'll often have companies that have power electronics capability, but they're involved in multiple end markets. Now, they may be into industrials and other spaces. So what it's about is finding one that either has good automotive technology or the ability, such as Sevcon, that does have some automotive technology. But their industrial and commercial vehicle technology is very readily applicable to light vehicle technology. So not a lot of pure plays out there, David, but certainly players out there that could add capability and scale for us that we're continuing to monitor. David Tamberrino - Goldman Sachs & Co. LLC: Understood. I appreciate the time. Thank you, gentlemen.

Your next question comes from Brian Johnson with Barclays.

Good morning. I want to talk a little bit about the backlog. As I kind of look at the distribution of your – the time series of your backlog over time, it picks up in 2020 and is a bit softer in 2018. Now, you've historically had that pattern going way back. But I know more recently you've tried to risk-adjust your backlog at least for the near term. So really kind of two questions. One, what are the puts and takes within your $650 million to $730 million guide around risk adjustment for either macro conditions, customer schedules, mix? And then, secondly, I know powertrain is very different from other sectors like seating where the awards are much more short cycle. But as you kind of look to 2020 based on the discussions you're having, would any of those help the 2020 backlog or are those really in the next backlog update?

Yeah. Let me see if I can help you, Brian. So the way to think of it is, I would characterize it that the, let's say the methodology shift, if you wish, that we made a year or two ago where we applied a little bit more of a rigid macro potential downside and launch cadence. It's the same methodology we're using for this backlog, if that helps you. So it's continuing on what we've done for the last couple of years. And the reason I say that is we've executed well over the last couple of years as you know. And so I feel it's well-apportioned with the backlog that we've got out now. It's not something that we've just really taken dramatic haircuts. It's not. I think it's set very appropriately is my view. I think the one dynamic that's a little different about our backlog than some prior year backlogs that you may find interesting is our product breadth and product portfolio is much broader than it was historically and regionally balanced. We're better regional balance than we were historically where we're a little less dependent on Europe. And I think that helps us actually. I think that helps us have even more confidence in the ability to deliver the backlog. So that's how I would characterize it, Brian. I think if you look at it by products, you still have a good portion of turbo growth in there. We do see strong DCT growth in there. So all in all, we feel really good about this. And we're confident we're going to execute it frankly.

Okay. Second question which is somewhat housekeeping, somewhat restructuring. Your 28% GAAP tax rate, 20% cash tax rate, is it fair to assume you have some legal tax entities that are unable to use deferred tax assets and so hence you don't get the losses flowing through for that? Is that related to your emissions business? And how long do you expect the cash tax rate to run below GAAP?

The first question you had there. No, it has nothing to do with the impact of losing any kind of credits through legal entities. We fully utilize all of our foreign tax credits in the process. So, no, that doesn't apply. And the second is our long-term plan is always to have our cash tax lower than our GAAP tax rate. The only time you have differences is, quite frankly, Brian, is when you have settlements with the closing of tax audits. Those are typically when you see unusual items on a cash basis and those are just one-offs. But normally on a run rate basis, you'll expect it to be lower. And the only difference is our tax settlements with tax years.

Okay. So it's more structurally in terms of – can I assume that...

Right.

...the expenses and the CapEx you get to depreciate, bonus depreciation and so forth as opposed to anything like the OEMs not being able to write off losses under GAAP in money-losing geographies. Okay, thanks.

Correct.

Thanks, Brian.

Your last question comes from Richard Kwas with Wells Fargo Securities.

Hi. Good morning, everyone.

Hi, Rich.

Hey, Rich.

On North America, so the last couple of quarters – last quarter you had a 20-point spread versus underlying production. This quarter is 14%. How should we think about this year? It seems like you have very good momentum there. I know there has been some key launches and obviously truck market shares are very high. But just how do we think about the cadence over the course of 2018 in terms of outperformance?

You're thinking North America specifically, Rich, or -

Yeah, North America specifically. You've had really good outperformance there.

Yeah. We still expect good outperformance in 2018 versus the market. I don't have a specific number in my mind actually, Rich, but we can get you that. But we do see good. I think the one thing what we do see is in the quarter, we have the changeover program that we're dealing with on the truck side that Ron alluded to earlier. So Q1, it'll be distorted a little bit by that truck changeover. But I think we'll have good outperformance. It probably won't be quite as high as we did last year, but it's still pretty good. But I'll have Pat and Ron try and get you a bit more specificity, Rich, so we can get a number to you. But think of it as good outgrowth in North America but probably not quite at the high level of last year.

Okay, I appreciate that. And then two for Ron here. Just to clarify, the emissions losses on the non-core stuff; that's part of guidance, correct? That's within the Engine – well, that's how we should model it correctly?

Yes. So the 2018 guidance includes the operating performance of the pipe and thermostat business. And what I was trying to allude to was that in the quarter one, we just have to execute basically what's in our plan at this point. So our puts and takes could be we could execute better, we could execute worse than what's in the plan. The restructuring costs will be all called out, okay. It won't be in the run rate in the margins.

Sure. But that $10 million is the run rate, correct, $10 million loss?

Yes, correct.

And you don't expect that to be any worse or any better. That's kind of the run rate we should think about.

That's the run rate that you should expect, correct.

Okay.

Now, obviously, we're going to try to improve it, right, and not make it worse.

Right.

But that's what's in the guidance right now.

Right, okay. And just real quick on free cash flow. So CapEx is going up. That explains some of the miss or I should say the decline in free cash flow. Like you had a very good year in 2017. Is there something going on in working cap? Looks like there's maybe $30 million or so gap there relative to the free cash flow guidance and then the CapEx increase. Just anything noteworthy there?

No, I don't think there's anything noteworthy on that right now. It would be working capital. A couple of things you have to note is we have to build banks in the emissions business to move the products back into other plants that we want to move. So that's one issue is the bank builds throughout 2018. But the other side, the more positive side is there are some opportunities to improve it that we're working on. So that's where we're at right now. We're working on some opportunities, but we do see some headwinds of bank builds.

Okay. This makes sense. Thank you.

Thanks, Rich.

I'd like to thank you all for your great questions today. With that, Sharon, you can close the call.

That does conclude the BorgWarner 2017 fourth quarter and full-year results conference call. You may now disconnect.