Ken Lamb - VP of Investor Relations James Verrier - President and Chief Executive Officer Ron Hundzinski - Chief Financial Officer.

Rich Kwas - Wells Fargo Securities John Murphy - Bank of America Chris McNally - Evercore ISI David Leiker - Baird Brett Hoselton - KeyBanc Capital Dan Levy - Barclays Itay Michaeli - Citi Joseph Spak - RBC Capital Markets Patrick Archambault - Goldman Sachs Colin Langan - UBS Dan Galves - Credit Suisse.

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 Third 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 November 6. The dial-in number for that replay is 800-585-8367.

You’ll need the conference ID, which is 32249261 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 Baird Industrials Conference in Chicago on November 9th, the Goldman Sachs Global Automotive Conference in London on December 3rd, and the Deutsche Bank Auto Industry Conference in Detroit on January 13th. A reminder our net new business announcement will not be in November but will be combined with our full year guidance announcement 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 launch timing assumptions, improving the link between the two. This is a permanent change going forward. 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 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.

Please note that we have posted a set of supplementary financial charts to the IR page of the website. You will find the link to this document at the Events & Presentation section beneath the notice for this conference call. We encourage you to follow along with these charts during Ron's discussion of our results.

With that, I'll turn it over to James..

Thank you, Ken, and good day, everybody. Ron and I are very pleased to review both third quarter results today, as well as some of our recent accomplishments. Let me just take a moment before I begin to thank all of the BorgWarner employees around the world for another good quarter.

Now onto our results; so during the third quarter reported sales were just under $1.9 billion, now that's down 7% from a year ago but up 3% when we exclude the impact of foreign currencies. The U.S. GAAP earnings were $0.70 per share or $0.73 per share when we exclude non-recurring charges.

Our operating income margin again excluding non-recurring charges was an impressive 13.3% in the quarter. So considering a lower than normal growth quarter, some of the restructuring inefficiencies and the new plants and plant expansions that we are managing this year, we view this as very good performance by our operations.

Let me talk about the two segments. First of all, the Engine segment; so third quarter sales in the Engine segment were about $1.3 billion, that's down 7% from a year ago and when we exclude the impact of foreign currencies the segment grew at 4%.

These results were primarily led by strong light-vehicle turbo sales particularly in Europe, partially offset by weaker market conditions in China and some weaker market conditions in commercial vehicles around the world. Now the Drivetrain segment, sales were $584 million, that's down 7% from a year ago or up 2% when we exclude foreign currencies.

These results were primarily led by resurgent all-wheel-drive sales growth in North America and this was partially offset by the weaker market conditions in China. The major North American program ramp that had slowed Drivetrain sales growth over the previous four quarters did return to material volumes in the third quarter.

We believe this program combined with benefits from the European restructuring will drive solid growth in margin expansion in Drivetrain in 2016. Our financial strength and strong performance is 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 third quarter which is above our long-term target of 5% to 6%. Typically our capital spending is primarily for machinery and equipment.

However, our growth over the next several years does require investment in new plants and plant expansions which is driving some elevated spending in the near term. We do expect this to continue through the end of this year, after which we will return to normal spending levels.

Our investment in R&D was 4% of sales in the quarter which is right in line with our target for the year and the intensity around organic integration and product development remains very strong. I am also proud to share some of the exciting announcements we made during the last few months.

First of all, BorgWarner produces the 2-speed Torque-On-Demand transfer cases for the recently launched Foton Motor’s Sauvana SUV. BorgWarner's Torque-On-Demand technology automatically redistributes the torque from the rear wheels to the front wheels without driver intervention for both improved traction, increased stability and enhanced dynamics.

BorgWarner also received a 2014 World Excellence Award in the Aligned Business Framework category for exemplifying the Ford Motor Company’s principles of quality, value and innovation. BorgWarner supplies silent engine timing chains for a wide variety of Yamaha vehicles.

These include motorcycles, snowmobiles, all-terrain vehicles, recreational off-highway and personal watercrafts. Also BorgWarner supplies Eco-Launch stop/start accumulator technology and friction plates for the new 8-speed rear-wheel drive automatic transmission from General Motors.

To enable the transmission’s stop/start functionality, BorgWarner’s system enables the transmission’s stop/start functionality providing rapid and smooth engagements during engine restarts.

This new transmission will improve fuel economy up to 5% compared with similar 6-speed automatic transmissions and it will debut on the 2016 Cadillac CT6 and will also drive the 2016 Cadillac CTS and ATS. BorgWarner produces its mini direct-acting variable force solenoid for the 2016 Chevy Volt, Chevy Malibu hybrid and Cadillac ELR.

Designed to deliver increased accuracy with significantly lower leakage, the advanced solenoid reduces parasitic losses from the transmission oil pump, which saves battery power to propel the vehicle. Now let me move on and share a little bit of an overview on our updated guidance for 2015.

We have narrowed our sales growth guidance range to the low end of the previous range. Our reported sales growth is now expected to be between minus 6% at the low end and minus 5% at the high end. This is compared with minus 5.5% to minus 2.5% previously. The change in our sales growth guidance is primarily related to two things.

The impact of weaker than expected market conditions in China on our business and weak commercial vehicle markets around the world. Now when we exclude the impact of currency, our growth is expected to be approximately 4.5%. We also note our earnings guidance range.

We now expect earnings to be within a range of $2.95 to $3 per diluted share and this compares with the $2.95 to $3.10 per diluted share previously. Our operating margin is expected -- still expected to be approximately 13%. Now Ron will provide a lot more details about our updated guidance shortly.

So I am encouraged by our year-to-date performance and our outlook for the remainder of the year. Despite some challenging market conditions our full year guidance implies mid-single-digit growth and outstanding operating performance in 2015.

And the restructuring and expansions activities, when they are through we have a clear transition to continue the strong performance in 2016 and beyond.

So as you look ahead the industry's continued adoption of our leading edge Powertrain technology combined with operational excellence are the primary reasons that we have been, we still are and we will continue to be the leading order of supplier in terms of growth and operating performance. Now with that let me turn the call over to Ron..

Thank you, James, and good day, everyone. Before I begin reviewing the financials, I also would like to commend all of our employees for their hard work in the quarter. Also as Ken mentioned I will be referring to supplemental financials slide deck and it is posted on our IR website. I do encourage you to follow along. Now, on to our financials.

James already provided a detailed review our sales performance in the quarter. In summary as shown on Slide 2 of the slide deck, sales were down 7% from a year ago or 3% excluding the impact of foreign currencies. Working down the income statement, gross profit as a percentage of sales was 21.1% in the quarter or up 20 basis points from last year.

During the same period SG&A as a percentage of sales was 7.9%, a 70 basis point improvement from a year ago. R&D spending, which is included in SG&A was 4%. You may have noticed that SG&A is nearly down $27 million year-over-year. Over half of this is related to currency.

Of the remaining amount, corporate expenses were down $5 million and our [indiscernible] were down about $9 million.

Operating income in the quarter was $237 million, excluding $9 million of restructuring charges and $4 million of M&A expenses related to the Remy transaction, operating income was $250 million or 13.3% of sales, up 80 basis points from a year ago as shown on Slide 3 of the slide deck.

Excluding nonrecurring charges previously discussed, as well as the impact of foreign currencies, operating income was up $22 million on $66 million higher sales, giving us an incremental margin of 35%. As you look further down the income statement, equity and affiliate earnings was about $9 million in the quarter, down from $15 million last year.

This line item represents the performance of NSK-Warner our 50/50 joint venture in Japan, which sell transmission components to our Japanese customers in Japan and China, as well as TEL, our turbocharger joint venture in India. Lower NSK-Warner sales in Japan and China was the primary reason for the decline in affiliate earnings.

Interest expense and finance charges were $15 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 of 2015. Provision for income taxes in the quarter on a reported basis was $67 million. However, this included favorable tax adjustments of $6 million.

You can read about each one of these adjustments in our 10-Q, which will be filed later today. Excluding, the adjustments the provision for income taxes was $73 million, which is an effective tax rate of 29.5% in the quarter. Our year-to-date effective tax rate is 29.5%, which is also our estimate for the full year.

Net earnings attributable to non-controlling interest were about $9 million in the quarter up slightly from $6 million the third quarter of 2014. This line item reflects our minority partner's share in the earnings performance of our Korean and Chinese consolidated joint ventures.

That brings us back to net earnings, which were $150 million in the quarter. Net earnings excluding nonrecurring items were $165 million or $0.73 per share. Now let's take a closer look at our operating units' segments in the quarter; beginning on Slide 4 of the slide deck.

As James said earlier reported Engine segment net sales were about $1.3 billion in the quarter. Sales growth for the Engine segment excluding currency was 4% compared to same period a year ago. Turning to Slide 5, adjusted EBIT was $212 million for the Engine segment or 16.2% of sales.

Despite inefficiencies related to investments in new plant construction and expansion and the Wahler restructuring, both of which are, for our emissions product family adjusted EBIT as a percentage of sales was up 40 basis points from a year ago.

Excluding currency, the Engine segment's adjusted EBIT was up $10 million on $55 million of higher sales for an incremental margin of 17%. A very good performance given the level of investment activity within the segment.

Plant construction and expansion currently in progress should be largely behind us by the end of 2015 and the restructuring plan for Wahler is on target after which we expect it to be a double-digit margin business. Now turning to Slide 6, Drivetrain segment net sales were $584 million in the quarter.

Excluding currency, sales increased about 2% compared with the same period a year ago. On Slide 7, adjusted EBIT was $70 million for the Drivetrain segment or 12% of sales.

Despite inefficiencies related to investments in the new DCT plant in China and restructuring plant in Europe, adjusted EBIT as a percentage of sales was up 120 basis points from a year ago. Excluding currency, the Drivetrain segment adjusted EBIT was up over $8 million on $10 million in higher sales for an incremental margin of nearly 90%.

If you recall the third quarter of 2014 we had about $3 million of headwinds related to restructuring inefficiencies. We are beginning to see those headwinds dissipate as we get closer to completing the restructuring. This benefit is reflected in the higher incremental margin in this segment for the quarter.

Drivetrain's European restructuring plant is on target and expected to be completed by the end of 2015. The ramp up of the new DCT plant in China which was expected to begin in early 2015 is under review considering the weaker than expected market conditions in China.

The segment review highlights good progress on our restructuring and expansion plans, which will strengthen our competitive position and performance over the long-term. Now let's take a look at our balance sheet and cash flow.

We generated $470 million of net cash from operating activities in the first nine months of 2015 down $76 million from $546 million a year ago.

Weaker foreign currencies, higher cash outlays for restructuring and a few other miscellaneous items reduced net cash from operating activities in the first nine months of 2015 as compared with the same period a year ago. Capital spending was $419 million in the first nine months of 2015. This is up $21 million from a year ago.

The increase was driven by capital required to support our backlog of net new business. Free cash flow, which we define as net cash from operating activities less capital spending was $51 million in the first nine months of 2015 down from $148 million in the first nine months of 2014.

We expect to generate between $200 million and $250 million of free cash flow in 2015. Investments in restructuring and expansion that are driving elevated spending will soon be behind us. We expect spending to normalize beginning next year. Also our realignment plan which will provide increased treasury management flexibility will be complete.

As a result we expect to see an increase in cash available for corporate initiatives beginning in 2016. We will quantify this improvement and clarify our intentions in our 2016 guidance call in January.

Looking at the balance sheet itself; balance sheet debt increased by $469 million at the end of the third quarter in 2015 compared with the end of 2014. Cash increased by $236 million during the same period. The $233 million increase in net debt was primarily due to capital expenditures, dividend payments to shareholders and share repurchases.

Our net debt to net capital ratio of 17% at the end of third quarter is up from 12.8% at the end of 2014. Net debt to EBITDA at the end of the year on a trailing 12 month basis is 0.6 times. Now I would like to discuss our updated guidance for 2015. James reviewed our guidance at a high-level, I will just discuss some of the finer points.

We have narrowed our sales guidance to the low end of the previous range of minus 6% to minus 5% compared with the minus 5.5% to minus 2.5% previously. James described the weaker than expected market conditions that affected the change. Our business in China was the primary contributor.

According to third-party sources light vehicle production in China was down 4% in the quarter. During that same period volumes at our four largest customers were down 12% in aggregate. And our sales growth in China for the quarter was flat. We expect our business in China to modestly improve to mid-single-digit growth in the fourth quarter.

Our full year dollar-to-euro exchange rate assumption is $1.12, slightly higher than the previous assumed rate of $1.10. We have also narrowed our expected EPS within a range of $2.95 to $3 per share. The change in EPS guidance is primarily due to the impact of lower expected growth sales. Our share repurchase activity is gaining momentum.

We spent $67 million on share repurchases in the third quarter and $130 million year-to-date. We still expect to spend $1 billion on share repurchases during the three-year period ending the first quarter of 2018. Our weighted average diluted share count is still expected to be approximately 226 million shares for 2015.

Our operating income margin guidance is unchanged at approximately 13%. This implies a mid-teens incremental margin for the full year, incremental margins north of 20% in the fourth quarter. We continue to be confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost.

This focus resulted in highly efficient growth and record margins in each of the last four years. With our solid growth and operations performing at a very high level 2015 should be another great year for BorgWarner.

As we look beyond 2015 we intend to execute our growth plan yielding solid growth and to efficiently convert our sales growth to profits. The future is bright for BorgWarner. So with that I'd like to turn the call back over to Ken..

Thanks, Ron. We are going to now 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. On Drivetrain Ron you talked about comping against some of the inefficiencies from last year but this is a pretty big step up in the margin.

So it would seem like going forward here less than inefficiencies, leverage in some of your key platforms and there's an upward trajectory from here, is that the right way to think about it versus the 12% you have [trended] this quarter?.

Rich, I will say at this point it was a really good quarter, but the overall intent is for upward trajectory on margins in that segment, right. First thing I would note is that we did get a little bit favorability from North America F1 50 obviously because the volumes have returned, that also is driving some of the upper movement in that segment..

Okay.

Then just a broader question, I know you are not going to give the backlog until January and give your 2016 views then, but how should we think about growth for the company as in the current environment, assuming that the China production outlook is relatively modest next year and the developed markets are relatively modest as well? Just trying to get an understanding of where you think growth can go over the course for the next 12 months considering the landscape and considering what's happened with some of your key customers within the backlog that you provided last year at this time?.

Rich, this is James. Maybe what I will do is take a shot if I can and just giving you a little bit of high level commentary and then I want to ask Ken to talk maybe a little bit more specifically about maybe some of the math about how to think about the details of the backlog if that works for you.

So I think, as we kind of transition through this year first of all and we are looking to pinpoint mid-single-digit type of growth which clearly is pretty decent. The two headwinds that we really faced from a macro point as we have gone through the year are commercial vehicle and China. China being obviously the bigger piece of that.

So those are the two kind of headwinds that we have kind of have faced this year. I think it's fair to say as you look at commercial vehicle going into next year we are not looking for meaningful improvement in those end markets.

I think in China what we are looking for from a light vehicle perspective as we look to next year in China, Rich, is 3% to 5% type growth rate of the market in China. As you know our content will grow well above that market rate in China because of the adoption of our technology.

So we are looking for a strong growth here in China next year and that coupled with other elements of our backlog we are looking for a good growth here next year. But I am going to ask Ken to just put a little bit more detailed commentary around that so he can help you from a math point, Rich..

Thanks, James. This is Ken. Based on the preamble of your question you are not expecting a lot I think. But we want to be as transparent as we can be about where we think we are throughout next year. So let's talk about the math a little bit. So rough math, this year's backlog is coming in at about 55% of what we expected coming into the year.

Now with the conditions that caused that lower growth persist into next year and you know the conditions I am referring to is our business in China and commercial vehicles. Then we can reasonably assume that the backlog will come down similar levels next year. So essentially what we are saying is that's about cutting it in half.

Then once you layer on the potential impact of other macro risk factors, it's reasonable to expect that we are looking at low-to-mid single-digit growth next year.

Now regarding these other macro factors, if you look at the last five years we have had recessions, natural disasters, debt crisis, currency devaluations, business disruptions at some of our largest customers, just to name a few. The magnitude of the impact of these factors has varied for us but they all have had an impact.

We intend to do a better job accounting for these risks in our guidance going forward. Did that answer your question..

Yes.

So I mean basically 55% of $1.1 billion that you provided last year at this time and then what are the -- what's the other color around the macro factors that you are saying will be down?.

Well I don’t know that we have any data -- numeric data to attach to that. We just want you to know that that's something that we are definitely going to be considering as we come through with guidance next year..

Okay. So that would be developed markets and other things that are going on basically..

Yes. Sure..

Okay. I will pass it on. Thanks..

Thanks, Rich..

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

Good morning guys. I could just follow-on just on that top line thought process.

Is there any change in your view of the revenue generation that Remy will bring in next year? And if you could remind us roughly what you would expect that to be for '16?.

Yes. John this is James here. It was about $1.2 billion is the approximate revenue stream that we were expecting to generate from Remy. Obviously we are going through the [close pressure] so we are going through some additional validations and we will bring a more accurate number of course for the meeting in January.

But we are not expecting a meaningful shift away from that $1.2 billion number, is a good way to think of it John..

So if we layer that onto your base business this year and you had say sort of 5% to 6%, I am sorry -- low-to-mid single-digit growth is what you said, Ken is sort of the combination of those two would be a decent way to think about it?.

I think that's right. So the low-to-mid single digit growth was on the base business and then later on Remy on top of that..

All right. Just want to make sure we are clear on that.

Second question, Ron, you talked about some delays or sort of some real stalls here in this DCT launch in China, yet you are getting up the F150 really ramping up pretty hardcore here and you are getting the restructuring in Eastern Europe working fairly well and should be running full throttle as far as benefits in '16.

Is there any reason to think the Drivetrain should have a margin not above 12% next year, just given all those big guys? But is China really going to derail this or is that something then won't be that bad?.

So these negative there, I agree that it should be above 12%, John. The DCT plant is a Western OEM and at this point of all the headwinds we have had in DCT in China that's really basically the last one left, I would just say it that way.

But we will give more color on that impact as I said in my script and will actually articulate exactly that headwind that we might see next year. But the bottom line is that the margin going forward should be known for that 12%..

Okay. That's helpful. And then just lastly, if you think about capital and free cash flow, looks like there was a down tick in your free cash flow guidance to the $250 million, I think it previously $250 million to $300 million.

What's the key driver of that? And as you think of maybe that might in the same context of the share repos, why don’t you think you would be more aggressive with share repos just given what's happened with the stock more recently?.

Well, again, this movement in free cash flow, the combination of a little bit in earnings and a little bit items on the balance sheet movement. But to get back to the more important question right now we surely intend to be more aggressive.

If you look at the year-to-date number it's not a well represented number because we had a self-imposed blackout period during the Remy acquisition. Our intent quite frankly is to be more aggressive given where the stock price is, I can just say that John..

Okay. That's very helpful. Thank you..

Thanks, John..

Your next question comes from Chris McNally with Evercore ISI. Your line is open..

Good morning, guys. I just wanted to -- its very helpful, appreciate the color on the '16 backlog. I think everyone was just trying to triangulate those numbers. But as we look at the 55% number, I mean you have given detail in the past about roughly 40% of your backlog coming from Asia.

And then obviously the commercial vehicles are weak on top of that. I mean to get to the 55% could you just talk about how much of the backlog is pushed out from '15 to '16 to later years because of lower volumes related to the Chinese market? Because the math would suggest you are losing almost 100% of the Asian backlog.

And so, if you could just give some color about potentially what's lost versus what was pushed out by year or two even -- from '15-'16 into '16-'17? Thank you..

So the way I want to frame this is we provided that sort of directional guidance to help you think about where things may land. As far as the split of backlog, how much is going to be Asia, how much is Europe-North America, how much of its push out and how much of it is just program cuts, you got to give us a little bit of time to work through that.

I think as we sit here today Asia as a percentage of the backlog is coming down. That's the market where we are having the most impact from what's going in the world today. In commercial vehicle the percentage of the backlog is also very likely coming down.

Let us hold through that, what we wanted was to people to have a good sense for where we think we're headed next year. We will give more details in January..

Okay.

Maybe just quantitatively if we take out China and CV would the backlog numbers for all other global production would they have come down as well and so that we are essentially near the $1.1 billion number that we were referencing probably would have been lower regardless other than a weak China and a weak commercial vehicle?.

Well. Sure. If you want to kind of recap the year and the things that affected the backlog we talked about primarily China, our mix of business in China. We have talked about the commercial vehicle issues around the world. We had some issues with the Asia launches that were coming down last year. We had some mix issues in North America as well.

As I kind of go over those four or five topics, the two persistent ones is the impact of China and commercial vehicles. The mix issue in North America, we think that's going to normalize with the F150 coming back on screen for us. And the Asia launches that's all linked to China. China kind of drives that whole market anyway.

So let us continue to do some work on that. But I think you are speaking about it correctly. We just have to work through the numbers for you..

Okay. Thanks, Ken. Thanks guys..

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

Good morning everyone. I am going to take one last stab at this comment about the backlog. How much of the short fall that you are seeing from the backlog that's realized this year is coming from currency? I think when you did the backlog last year you had enough pretty high euro value in there..

I think we are $1.20 [texture]. But the European portion of the backlog was pretty small. It was remember coming into the year we thought it was going to be what 15% of the backlog. So the euro while it came down significantly, it didn’t move the backlog number..

Appreciate the increased transparency with everything, the slides and the commentary so far. I want to see if I can go one step further.

Can you give us some quantitative ideally but qualitative perspective in terms of the revenue performance by region in the quarter?.

I gave you some David. I told you basically in China we were flat, that was in the script..

Right. In the down market..

In a down market and actually the comparable was to our customers in that market was down 12 and we were flat even though the market was four..

About Europe and North America..

We are just looking at the data..

Because remember we had modest growth in both of those regions in the light vehicle area. Both North America and Europe we did grow modestly, and obviously in commercial vehicles not much growth at all..

Thank you very much..

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

Good morning gentlemen. Two questions here. First on 2015 margins lower sales guidance but you maintained your margin guidance.

Kind of what are the offsets there? Normally you would expect a little downward leverage there?.

On just really good operational performance. I mean we had a good third quarter. As you can see we are anticipating that to continue that performance level. So that we didn't feel that we need to take down the margin when the sales came down that we could still hold the margin.

And it's probably through just good operations performance that's what's going on there Brett..

Then as you think about 2016 margins, I know you are not going to provide guidance here. But can you kind of talk about some of the major puts and takes there, pluses or minuses that you see..

So we have been very clear about our objective is to get mid-teens incremental. So if you take sales and assign mid teens incremental that's the starting point.

Now so some of the items that are going to be a tailwind for us, these inefficiencies we would see in for three quarters this year and we said that those inefficiencies will be tailwinds for us. So you take the mid-teens incrementals and then add in the inefficiencies that will now be headwinds and they will be on top of it.

So the end result would be higher than mid-teens incremental margins going into next year..

And these inefficiencies can you just remind me what they were -- not necessarily what they were but how much they were?.

Sure. So remember in the second quarter we were seeing -- while first and second quarter and actually last year we're seeing anywhere from about $3 million I think the high was what $7 million, $8 million in the third quarter headwinds and it was bouncing around some time to be $4 million or $5 million.

I think the worst stretch was that second quarter around $7 million of headwinds. It's somewhere between this $3 million to $7 million. The first time we saw it was a year ago in the third and was at $3 million, I referred in my script. So it's been between that number $3 million to $7 million.

Now I am not seeing all that dissipate all 7 or 5 whatever number you use but the majority of that will. Some of it's normal activity that we have always things going on but majority is going to dissipate as we go into next year..

Minor correction, $9 million..

What was it $9 million in the second quarter?.

Yes..

$3 million in the first and kind of $9 million-ish in the second something along those lines..

That $9 million was what we have -- first I think $9 million is the worst we are going to see quite frankly and that was in the second quarter. So it was bouncing between actually probably $5 million to $7 million was really the average, $9 million was the high end.

Now again you can't just take simple $6 million to $7 million take that off the table, but some good portion of that will off the table..

Yes.

Was there an impact in the third quarter specifically?.

No impact. That's well the year-over-year difference was favorable, right, that's what drove the high 120 basis points of improvement in the Drivetrain segment because we didn’t have that headwind. So it is a good example of what we are trying to talk about here and why the incremental was 90%..

Thank you gentlemen..

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

This is Dan Levy on for Brian. Thanks for taking the questions.

First question are you seeing any signs of program delays from any of your larger customers to may have been impacted by certain issues in the past quarter?.

Okay. Let me take a shot at that and answer this answer. I think know maybe which OEM you maybe referring to and the answer is we have not. We have seen no impact on any of our product development activities and we have really not seen anything relative to the engineering activity or launch activity with the customer that I think you are referring to..

Okay.

More broadly on the diesel front, any signs that the diesel activity globally and I guess specifically within Europe still remains intact?.

Yes. Thanks for the question. If I can, I think this is kind of an important issue relative to specifically I think the two things that I would like to just address to the group here. The first one is, the Volkswagen specific emissions issue.

I think it would be good for us to put some context on that and how that impacts or potentially impacts BorgWarner. Secondly, I will talk a little bit more generically around diesel specifically and any concerns that maybe an overhang on diesel.

So let me start with Volkswagen and I think it's really important that I try and provide again some additional clarity and transparency around this. If I start with the Volkswagen business for BorgWarner it represents about 16% of our total revenue of the company.

Significantly 4% of our total sales were a quarter of the Volkswagen business is tied to light vehicle diesel engine products. So I hope that provides a little bit of clarity. So what's really kind of in debate so to speak is about 4% of the total business for BorgWarner on diesel light vehicle products for Volkswagen.

When we look from the BorgWarner perspective of the affected engines that have been disclosed by Volkswagen that breaks down to less than 0.5% of total revenue for BorgWarner.

I think this is really a critical point I am trying to make because I know you guys have been trying to wrestle with that what's the exposure, what’s the impact to BorgWarner and again the affected engines that Volkswagen have publicly talked about that breaks down to about 0.5% or less of our total revenue stream.

If anybody would like a little bit more clarity and color on how we get to the 0.5% please feel free to follow-up because Ken's happy to provide that additional level of detail. So when I say that it frames it from a BW perspective it's really not a particularly meaningful impact.

On top of that I want to be clear that from a schedule and releases perspective to Volkswagen we have seen no impact. We have seen no adjustments, no impact on our schedules. Furthermore I think the other point I will point out relative to specifically on the Volkswagen issue.

Our opinion is as they go through the recall transition efforts next year we see that there will be no impact on BorgWarner because our products are not involved in any of the recall solutions. So hopefully that just gives you a little bit of clarity and a little bit of color. The message fundamentally to that issue is we are not seeing an impact.

Now let me quickly transition and take a moment just to talk about the broader perspective of diesel. So I think it's fair to say we have been talking over the last couple of years that the slowdown in diesel adoption has been expected. We have seen that and proactively been managed around that.

We still see that transition around a [slowing] adoption of diesel being a relatively slower trend over several years and part of that is because we still see diesel being a key element of the customer's plans to get to the fuel economy and emissions standards.

I want to also give you a little bit of clarity and color, light vehicle diesel sales is about 15% to 20% of total BorgWarner just to give you a frame. So what we are talking about here is what's in play of diesel is about 15% to 20% of total BorgWarner revenue. So that's important.

As we -- as the transition moves from diesel to gas we have talked quite openly about this, that in the short run as this transition occurs the way to think of it on a diesel engine for BorgWarner, BorgWarner related on a comparable advanced gasoline engine, BorgWarner gets about 70% of the content on a gas engine versus a diesel engine currently.

That actually over time is evolving because we are having more and more content to gasoline engines, such as ETR valves and ETR coolers. So over the long run and I am talking two, three, five years, gas-diesel will become a relatively neutral event from the BorgWarner perspective.

I know I have shared quite a lot of information there but I think I do recognize from the various conversations how important those two issues are relative to BorgWarner and I wanted to take some time to clarify that and hopefully that did. And of course if there is any follow-up questions we could take those now or later through Ken..

Thank you very much. That's very helpful..

Your next question comes from Itay Michaeli with Citi. Your line is open..

Great. Thank you. Good morning. Just want to go back to the backlog discussion. Ken with the 55% arithmetic for 2016 and also roughly applied to 2017, the reason I am asking is just because if you kind of apply that it does make the 2020 revenue even if you adjust a little bit for M&A and FX kind of implies an acceleration in the last three years.

And if so maybe talk about booking activity and kind of you know the visibility around the trajectory over the next five years or so?.

It's a great question. So let me answer it this way. So the part where we were talking about making sure that we account for macro rich factors in our backlog, I think that it's fair to say that we intend to apply that thinking to the entire backlog.

Now the actual cutting the backlog in half directionally and how that applies to the out years of the backlog is still under development. I can directionally that's probably a pretty fair way to think about it. We have to continue to work through that.

But we expect the backlog in those out years to also come down kind of at similar level but again we have to work through that. I am going to let James speak to the 2020 target of $15 billion, but that's kind of in the next few years is kind of the way we are thinking about it..

I think Ken explained that very well. Let me say a couple of things that I think may help a little bit here Itay, because what you are hearing is, you are hearing that there is some macro headwinds sort of a challenge for us a little bit right. It's primarily again China and its commercial vehicle.

What I would say is important for people to think about it is, what you are not hearing about is the adoption rates of our technology slowing because we have not seen that We are still seeing continued strong desire and adoption rates for all of our products at a similar rate.

That's when we talked you to what we have -- we probably have been talking about the last couple of years. The reason that's important that still gives us tremendous confidence actually as we look out to the future for the growth of the product.

We do recognize this year we faced some headwinds and as Ken said that will spill into '16 and somewhat into '17. But again the adoption rates of our products remain very, very strong from the technology point of view, which leads us to have very good confidence in mid-single-digit growth outlook.

Again part of the $15 billion by 2020 is additional acquisitions that we remain focused on. So the fundamental story here, Itay, is not changing. BorgWarner's technology adoption is strong. We are going to be a strong growth company but we are in a little bit of a transition period this year and somewhat into next year as well.

But still delivering single-digit growth which we feel is very strong in this industry and clearly obviously we are converting that into strong EPS performance..

That's very helpful and thanks so much..

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

Thanks, good morning everyone. And just to reiterate thanks for all the additional color and commentary. Just going back to Volkswagen mainly from the other side of that equation. I mean they have been out publicly talking about going after some big savings from the supply base to try to deal with some of the costs they are going to have to incur.

I was wondering, if that's -- if any of that sort of that creeped into your discussions and if at all or if not how you feel you are positioned to handle with what seems like it would be more difficult conversation going forward?.

Yes. Certainly Joe, we sure saw some of the information and we pay a lot of attention to that of course. Frankly at this stage we have not seen I would say meaningful increased pressure specifically around pricing reductions and those types of things. I think our mindset right now, Joe, is it may likely intensify as we go forward.

But our belief right now is that we can push back and contain that and stay somewhat in the range of [indiscernible] we have done over many years which is in the 1.5% to 2%. So quick answer, yes, we expect the intensity to come.

We feel comfortable about our ability to deal with that and not deviate from our historical annual [IRF] type numbers that we provided..

Okay. Just one more on the backlog. I mean you pointed out Ken and Ron that Europe was much lower for next year, which I believe was a result that you are talking about decreased diesel penetration there.

So is that -- do you believe that any shift from in diesel and the impact from Volkswagen that's not one of the factors related to the backlog for next year or is that contained in maybe sort of the more conservative macro view you are taking?.

Yes. That's a good clarification there. So that's a good way to think about it. Our view in diesel has been pretty well-established in the backlog. We brought that up last year, I am sure you remember when we came out with the new backlog back in 2014.

So yes, the changes are mostly happening in the areas that we talked about, which would be China and commercial vehicle. Diesel's kind of already built into that. And to James' point earlier, the impact of the Volkswagen issue is diminished. So that's not expected to impact our backlog as we sit here today.

So I think as you think about it that the Europe is probably as a percentage of the total backlog is going to go higher because that feels like probably the most stable region for us out of the three between the Americas, Asia and Europe..

Okay. I will pass on thanks..

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

I guess just a couple of follow-ups. The margin improvement in Drivetrain was obviously very, very strong year-on-year. It seems like you posted a little bit of margin improvement as well on the Engine side like 40, 50 basis points. I was just wondering, I think you have laid out the trajectory for further Drivetrain improvements pretty nicely.

But how do we think about the growth potential on margins in Engine, are we getting -- are we close to levels that they are likely to be or is there some upside potential there as well?.

I would say that our objective has always been mid-teens. Now the question is how you define mid-teens. But I would say that Engine still has room for improvement..

And if you were to benchmark like the main drivers is it just efficiencies with better growth or anything sort of more specific than that?.

Well we have a couple of things. One is the growth and being able to convert in the mid-teens is above the average now. That's one area. The second one which is probably more important is the Wahler acquisition is going to gain momentum as time goes on.

And quite frankly somewhat of a drag on our margins now as we go forward and then become a double-digit business that will start to move margins up. And then someday I don’t know when commercial vehicle might actually start being a net tailwind for us and that will obviously start driving margins up too.

But I am not going to predict that for '16, that's somewhere down the road..

Yes, I hear you on that last one. Just on the revenue side did you -- I mean I guess I will keep this question including FX because I guess that's the simplest way to take it. But your new guidance I guess midpoint of down 5.5% implies that your fourth quarter is down about 2% and you've been down about 7% year-to-date.

I understand that currency is probably a big part of that improvement, right, if you think if it's just a delta as we progress year-on-year going from down 7% to down 2%. I guess the F150 would be another piece.

I guess what are the -- how do we think about the improvement there?.

I am going to start this and Ron can follow up. You know a couple of things for Q4. First of all you are right, the F150 is kind of a major mover of our growth in Q4 which was last year and also you have to remember Q4 2014 is where we took a major currency hit.

That's when this all kind of started and then that dissipating relative to the previous quarters. So the impact of currency year-over-year is a little bit less, so that's helping us a little bit on the growth side..

Okay.

So it sounds like it's those two main things, right?.

I think that that's fair..

Okay. And then final just one housekeeping for me.

The timing of Remy I think you had previously said closing in the fourth quarter are we still on track for that?.

Yes. We are Patrick. The only thing really left is the regulatory approval from China which we didn’t process. So we are anticipating an early to mid November closing is what we are on track for as it stands today. So we are looking forward to that for sure..

Okay. Got it. Thanks a lot guys..

Your next question comes from Colin Langan with UBS. Your line is open..

Can I have a follow-up on the European light vehicle diesel.

When you talk about 15% to 20% of your sales does that -- I mean is that total diesel or is there a chunk in there that's commercial vehicle which would be almost very unlikely to be impacted? And then can you also talk about you relative share in Europe on gas and diesel products? I mean are you pretty balanced on both products or is some -- you have had a strong position in your Europe are you more leveraged today market share wise on diesel products?.

Yes. Colin let me take a shot at -- or at least to clarify your first question. And then maybe Ken can offer you a little bit of commentary on the European split between gas and diesel. Just to -- what I wanted to do is to clarify, so light vehicle diesel sales are about 15% to 20% of the total company revenue. If that makes sense to you.

So we deliberately wanted to exclude the commercial vehicle piece in terms of how we look at that. So it's 15% to 20% light vehicle diesel sales of our total overall BorgWarner revenue. So that frames it for you.

Does that clarify for you?.

Yes. That's exactly about what I was talking about..

I will take part two of that. So the commentary that we had made around $0.70 on a $1 of content for advanced gasoline engines versus diesel, that's kind of a direct comment on our mix of business in Europe diesel versus gas, okay. Two other factors, that gap is closing over time.

There is going to be more and more content on gas engines as we continue to evolve in that market. We have seen that happening over the last few years and that's going to continue going forward. And secondly our market share for gasoline turbochargers is higher than it is for diesel today and it's only continuing to get stronger going forward.

So that's going to give us a bit of a lift as we see the shift from diesel towards gas. A few points higher for gas than it is for diesel..

Okay. That's very helpful. You talked earlier about take rates being stable, but I think some of the recent award data shows that turbo take rates are flat year-over-year which is consistent but they have been growing for the last few years.

Has that been a factor in your outlook for this year that you would have probably anticipated if gas wasn't so cheap that take rates would have actually continued to grow? And when do you think that starts to reaccelerate because I can't getting to the 2025 standards without more turbo adoption?.

Yes. Let me take a shot at that. We have not seen a slowdown in [indiscernible] penetration rates at all actually.

As we look -- and primarily as you know Colin the two primarily areas of the world are increasing rapidly on penetration is China and North America and we are not seeing slowdown in the adoption rates fundamentally of the technology, if I can start there.

What you do see a little bit is of course there is some volume reductions of which we have seen this year in China obviously and we have seen some launch impacts in Asia which could be turbo related. But that's got nothing fundamentally to do with slowdown of adoption rates of turbo.

If that helps you?.

That's very helpful. Then just last question, can you give any color on the margin direction? I am trying to bug in the numbers. It seems like margin -- sales should be up a little bit -- margin direction quarter-over-quarter, seems like sales should be up a bit but margins look fairly flattish.

I mean how should we think margins [indiscernible]?.

Are you talking sequentially or are you talking into the fourth quarter?.

Yes. To Q4, yes..

I think if you do the math it will be down slightly sequentially more in line with what you saw in the better half of the year..

And in fact usually the seasonality better at [indiscernible] production?.

Yes. But we have some other offsets going on that we anticipate in the fourth quarter on the costs side that probably might bring that down right now. So that's booked in the guidance.

If you do the math on the guidance you will have slightly lower margins in the fourth -- from the third but it will be more in line what you saw in the first half of the year. I am going to even go one step further. You can see that our SG&A expense was quite lower in Q3 and we don’t think that's going to be the run rate going into Q4.

The Q4 run rate for SG&A is probably going to be more like the average over the three quarters for the first part of the year. If that helps and certainly in the SG&A line in there..

Okay. Thank you very much..

We have time for one final question and that question comes from Dan Galves with Credit Suisse. Your line is open..

To kind of following up on Patrick's question. On organic growth into Q4, it seems like you and the guys need to do somewhere 7%, 8%, 9% in Q4.

Can you talk about what your organic growth expectation is specifically for Q4 and if there is a big acceleration from the first three quarters of the year why wouldn't that slow into at least the first half of next year?.

I think that the math indicates that the fourth quarter organic growth about foreign currency is around 5% which is slightly above year-to-date average I guess at this point. I think that's how the math works out. Not -- I think you had a higher number..

Yes. My mistake. Thanks guys..

I’d like to thank 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, with 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 third quarter results earnings conference call. You may now disconnect..