Patrick Nolan - BorgWarner, Inc. James R. Verrier - BorgWarner, Inc. Ronald T. Hundzinski - BorgWarner, Inc..

Ryan Brinkman - JPMorgan Securities LLC Brian A. Johnson - Barclays Capital, Inc. David Leiker - Robert W. Baird & Co., Inc. David L. Kelley - Jefferies LLC Brett D. Hoselton - KeyBanc Capital Markets, Inc. Rich M. Kwas - Wells Fargo Securities LLC Adam Michael Jonas - Morgan Stanley & Co. LLC Joseph Spak - RBC Capital Markets LLC Brian C.

Sponheimer - G.research LLC Chris McNally - Evercore ISI.

Good morning. My name is Denise, and I'll be your conference facilitator. At this time, I'd like to welcome, everyone, to the BorgWarner 2016 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, Denise. Good morning, everyone, and thank you for joining us. We issued our earnings release at 6:30 AM Eastern. It's posted on our website, borgwarner.com, and on our Investor Relations home page. A replay of today's call will be available through February 23. The dial-in number for that replay is 855-859-2056.

You'll need the conference ID, which is 48637947. Or you can listen to the replay on our website. With regard to our Investor Relations calendar between now and our next earnings release, we will be attending the Bank of America Automotive Summit in New York on April 12.

Before we begin the call, I need to inform you that during this call we may make forward-looking statements which will involve risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now, on to the today's call.

First, James Verrier, our President and CEO, will comment on the industry as well as provide a high-level overview of our results, in addition will also discuss some of our recent product wins. Then Ron Hundzinski, our CFO, will discuss in detail of our results as well as our 2017 guidance.

Please note that we posted an earnings call presentation to the IR page of our website. You'll find a link in the Events and Presentation section beneath the notice for this call. We encourage you to follow along during our discussion. With that, I'll turn it over to James..

Thanks, Pat, and good morning, good afternoon to everybody. We appreciate you all joining us for our call here today. As Pat said, Ron and I are really pleased actually to share our results both from Q4 2016, but also some commentary about 2017.

I thought where would be good to start off is just share a few thoughts around the macro environment and some of the general industry trends, and talk a little bit how some of those play out specifically for us at BorgWarner.

So I think the headline for us, and I think all of us on the call here, we're operating, we continue to operate in a sense of uncertain times globally, both I think from a political perspective and on an economic perspective. Whether it's the transitions in Europe and Brexit, China economic stability and growth, and obviously here in the U.S.

with the new administration, it's somewhat of an uncertain time. If I take the areas that I think are most relevant to us from a BorgWarner perspective and I'll talk about, I think the two most meaningful things that are on people's mind. And I would say, it's the border adjustment or the NAFTA agreement here in the U.S. and also CAFE.

So I just want to spend a couple of minutes proactively sharing some of our thoughts on those two topics with you. So let me start off with border tax or NAFTA. First thing is to calibrate us all, obviously about 25% of BorgWarner's revenue is in North America, so now puts it a little bit into context to you.

The second thing when you looked, when you break down that revenue, it's really critical that we all kind of understand that we produced most of our products, the vast majority of our products both in the United States and in Mexico. So we're very well balanced, which gives us the flexibility to adjust production levels between the two countries.

If you actually look at border flow, a traffic of our products and what products that move North or South of the border, the net-net of all of that is about $200 million.

So our view of the world is, now you heard about $200 million on a $9 billion annual revenue total, that's quote for us, that's manageable, that's a manageable situation, particular with our flexibility of our footprint.

So we continue to track the topic closely of course, but I – my message to you from a BorgWarner perspective, we feel well-positioned around border tax and NAFTA. The second subject that relates strongly to us, obviously, is around CAFE, and you know what if anything may evolve in that space.

And I think, we're all aware that there's been, you know some discussion in the – particularly in the fourth quarter around revisiting the standards and adjusting the standards through the auto alliance recommendations. I think our view very simplistically produced that the line is going to continue to creep up.

We're going to see more stringent fuel economy and emissions regulation. I think there could be some tweaking and adjustments of the line and the acceleration of the line, but there is no doubt in our mind, there would be a continued push for increased efficiency around fuel economy and emissions, and that plays really well.

What is critical is as that slope evolves, it may or it will influence that the mix of hybrid, electric and combustion.

That's really what fundamentally will go on, and that's why it's been so important for us as a company over the last couple of years, to position our portfolio that is well balanced for combustion, hybrid and electric, so we'll become agnostic to the change.

So, more to come on CAFE, but our belief is the standards will continue to drive forward, and we're well positioned. So net-net these two big issues, that we track I think are very manageable for BorgWarner.

The only other comment I would just highlight from a macro or industry perspective is – and I'll give a little color around market growth projections for 2017.

I think we all should remind as of, we're operating in a pretty healthy environment from an auto perspective, something close to 94 million light vehicles produced this year, that's a pretty good number and a healthy basis to run our business from.

So staying with slide five, where I started, let me give a little bit of color on the market outlook, as we see it into 2017. So from a light vehicle perspective, I would characterize our view is very much aligned and similar to IHS's view. So we're seeing 1% or 2% growth projection for China.

We see Europe growing modestly at about 1%, and then North American production down about 1%. So it's a low to no-growth environment overall, but as I said, that's off a very, very healthy base of 93-plus million light vehicles. From a commercial vehicle perspective, I would characterize it as still a challenged space.

We still see North America and Europe in a little bit of a down environment. We do see stabilization and a little bit of positiveness in South America, and we do see China getting better. But net-net, overall it's still a pretty challenging environment around commercial vehicle.

Now as we go into the year and we follow the year, I always like to share on these calls. One of the areas of watch that we're particularly paying a lot of attention to at BorgWarner that can move our numbers around, I would characterize three key areas of watch for the company. One is, we recognize we're in the mature cycle in North America.

So what's going to transpire around inventories and schedules, thus far we're seeing schedules playing out pretty much as we had hoped for. But we will obviously, like everybody, keep a close eye on the inventory levels as the year unfolds. I would say the second area of watch is diesel penetration share in Europe.

We did see from 2015 to 2016, we saw about a 2% downshift in that mix between diesel and gas, and we do expect the penetration to continue to decline of diesel share in Western Europe versus gasoline.

The good news for us as a company, even with that little bit of a downshift last year, we still delivered our growth numbers and we're finding a way to offset that shift down in diesel.

And as you look forward for us as a company, with the advent of our product evolution around content on gasoline and hybrid vehicles, that's going to put us in a very good position as diesel shifts down. Last but not least, the other area we focus on, particularly with our strong backlog in China, is we're expecting modest growth in China.

And we need to keep paying attention to that market a lot as well with – which is coming off the Chinese New Year. we keep a close eye on China, but I would say so far the signs are early but the signs are encouraging from a China market perspective.

All of that said, summarizing that view of the market outlook, we're very confident in our growth that we projected for 2017 by some of the demand for our products and what we're seeing in releases. Let me just make a couple of comments on the regulatory or technology trend area.

As I said earlier, we continue to see a very strong drive around fuel economy and emissions regulations, and the pull for advanced propulsion technology is as strong as I've ever seen it. So no change, no backing off on the drive and the pull for advanced technology. We see that around gas, hybrids, and EVs.

I would also like to just highlight that I think one of the really critical things that we see is that drive for advanced propulsion is very much globally playing out. So we see big pull in Europe and we see a very strong pull around hybrids and electrics also in China, but we also see continued advancements around combustion technology as well.

So as we look at our focus on electrification, our Q4 new business bookings continued to show a very positive trend for us in terms of the business we were winning with a wide range of customers and regions. And we did receive new awards in all three categories of propulsion systems, combustion, hybrids, and electrics.

Now I know many of you on the call like to keep score and keep track of numbers, so let me share a couple of numbers with you around awards. If you could cast your mind back to last year when we did our Investor Day, we talked about that we had 19 awards as a company for hybrids and electric programs that would be rolling out.

And I would say to you in the fourth quarter, we added another handful to that list, so we're now sitting comfortably in the mid-20s type number of hybrid and electric vehicle program awards for the company. And our quoting activity remains very strong for other additional programs and customers.

So the message there is still the strong pull for advanced technology and BorgWarner is winning. Let me turn now for a little bit if I can and talk about financial recap. I think I would characterize for Ron and I both and the rest of the management team, we were very pleased both with our Q4 performance and full-year 2016.

For 2016, our growth came in toward the high end of our guidance range and very solid operating performance. So we feel very good about how we delivered 2016. If I give a little more color, if I can on Q4, and obviously Ron will provide a lot more detail here. So for Q4, $2.3 billion was our sales number. That's up 6.6% organic excluding FX and Remy.

If I compare that to how we did versus the market, when I do comparable end markets for us, it was about 3.6%, which is solid outperformance of about 3% growth for us in the quarter. Regionally, it was pretty much as we had expected. We benefited from very strong growth in China, as we saw a very strong environment in China for light vehicle.

And we had very strong growth in North America also. I would say Europe for us was pretty flat, and this was a little bit offset also by some modest declines around the rest of Asia excluding China, aftermarket, and commercial vehicle off-road.

All of that transpired into us delivering EPS of $0.85 when we exclude the non-comparable items, and that does include Remy. Our operating margin came at 12.6%, which we view as yet another solid quarter that we delivered. If I take down the Q4 numbers by segment for a moment, so engine sales were $1.39 billion, so growing just over 1.3%.

In the quarter, there was a little bit of headwind from light vehicle, diesel, and also I would say commercial vehicle weighed a little bit on our growth for the Engine segment, but you also see some really, really strong operating margin performance from the Engine group, which was really good to see.

Drivetrain sales coming in at $883 million, that's up almost 17% organically, which was a really strong quarter from Drivetrain on the growth side and the really good news around that, that was strong all-wheel drive sales, but also on our transmission business.

And I would say it was pretty much around the world, but primarily in North America and Europe where we saw very strong growth in the Drivetrain segment.

If I turn now and talk a little bit about 2017 outlook, the first thing to reinforce is our outlook is unchanged from the guidance we provided just a few weeks ago last month when we were in Detroit.

So recapping that a little for you, that's organic growth of 3.5% to 6% year over year, which we feel good about coming off of relatively flat market, that's good growth for us. Our consolidated operating income margin is expected to grow about 40 to 50 basis points, and that will drive EPS guidance range of $3.35 to $3.45 per diluted share.

I think the key point I would like to stress right now is we felt good and very confident about that guidance when we were with you in Detroit, and we feel exactly the same today. And on a slightly longer-term basis, we continue to believe that we're very strongly positioned to achieve that mid to high single-digit organic growth over the long-term.

As Pat said in his openings comments, I just wanted to take a moment to share a little bit more color around some of our growth and some of our recent winnings. And if you look at the slide, you'll see highlighted some key products on those slides.

And the message here that I'm trying to convey is, you'll see winning business in combustion, hybrid and electric. And I'm just going to pick a few examples that highlight what I'm talking about.

One of the key products that we announced in the fourth quarter was our first electric drive module with an integrated transmission and we're going to be launching that on two EV vehicles for major Chinese OEMs and production will begin in the summer of 2017, which is pretty soon.

Great example of our leadership position in propulsion for electric vehicles. You also see silent chain. This is really cool with Suzuki on their Solio hybrid vehicle where we're actually taking out chain technology, we're using two chains to transfer power from the electric motor to the transmission to power a hybrid vehicle.

So it's a cool story of taking somewhat conventional combustion R&D technology from BorgWarner and applying that to a hybrid vehicle. You also see we talked about advanced turbocharger technology for hybrid, electric vehicles, and the example here is the BYD in China.

And I think this is a particularly relevant point because I think we showed you together in the Investor Day that we have seen a very strong adoption rate of turbochargers on hybrid vehicles. To give you a snapshot, as we look out to the middle of next decade, around 2026, we believe 56% of hybrids will be using turbochargers.

The fourth example that we've got up there is our advanced engine timing system for Alfa Romeo and that's on their 2-liter gasoline engine and this is a good example of some really advanced timing system technology that we've brought to the market that will continue to advance efficiency in the combustion powered vehicles.

So this is as I said is just four examples, it just gives you a little bit of a snapshot. Overall we continue to see very robust quoting activity with multiple customers, multiple products. And I'm very happy with what I see in our bookings, I'm very happy what I see in our win rates.

And I really like the diversification and the balance across the portfolio of electric, hybrid and combustion. And I also like the profitability numbers that I see that are coming with those business wins. So the message really is our balanced approach to drive in a broad variety of technology is absolutely working for us.

So let me try and wrap up and summarize a little bit for you. I think 2016 was a really good year for us. We delivered what we said we would. We knew going into 2016, it was super important that we delivered four good quarters and we did it.

We did it on the top-line and we did it on the bottom-line and we feel very good about that, that just gives us confidence as we go into 2017. I think the business is operating very well and we continue to be focused on executing strong short-term performance, but also laser focused on delivering the growth for the long-term. Comment also about M&A.

M&A pipeline remained strong and active for us, and we're working very hard on that with our key focus on power electronics.

So we really believe and we continue to believe we have a winning strategy that focuses us on delivering advanced propulsion technology for combustion, hybrid and electric vehicles that will absolutely deliver that mid-to-high single-digit organic growth that we've talked about.

Before I turn it over to Ron, I just did want to take just a quick moment to recognize in our press release, the details we've put in around asbestos. And Ron will clearly give a lot more detail on that, but I just wanted to give at least a comment from my office as the CEO.

And I feel very good about the clarity that we're bringing to this issue, both internally and in our external disclosures. We really understand this issue very well and we also understand the impact on our business, and now Ron will talk about that.

I think for me what's really fundamental that I want to make sure is clear, is it is no change at all on our cash flow generation and how we go about running this growth company going forward. So with that, let me stop there and turn the call over to Ron. Thank you..

Thank you, James, and good day, everyone. Before I review the financials, I'd like to provide you some of the highlights as I see them for the quarter and the full-year. First, we had a solid growth in the quarter and we were slightly above our guidance for the quarter. We saw great operating performance with the 17% incremental margins.

And our 2016 free cash flow improved by nearly $245 million or almost doubled from 2015. And we exceeded our 2016 guidance by about $100 million at the midpoint. So I think we had a very great year. Now as Pat mentioned, I will be referring to the supplemental financial slide deck that is posted on our IR website and I do encourage you to follow along.

First, I'd like to focus your attention on slide 9. Throughout the presentation I will highlight certain non-U.S. 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, net M&A and Remy acquisition and divestiture of the light-duty aftermarket business and other non-comparable items from certain U.S. GAAP measures. So when you hear me say on a comparable basis, that means excluding all those impacts. When you hear me say on a reported basis that means U.S. GAAP.

So let's turn to slide 10. On a reported basis, sales were up 6.4%, but on a comparable basis, our sales were up 6.6% or nearly 7%, again solid growth. On a reported basis, gross profit as a percentage of sales was 22.2% in the quarter, up 110 basis points from last year. On a reported basis, SG&A was 9.6% of sales.

R&D spending, which is included in SG&A was 3.8% of sales in the quarter. On a comparable basis, SG&A was 9% of sales, up 80 basis points from a year ago. There's three reasons for the increase.

First, R&D spending, as I mentioned was up by 10 basis points, 40 basis points is related to a stock-based comp true-up for the quarter, and a remaining 30 basis points is related to various increases in compliance cost. So now let's look at the year-over-year comparison for operating income, which can be found on slide 11.

On a comparable basis, Q4 operating profit improved to $284 million, or 12.6% of sales compared to $269 million in Q4 of 2015. Where on an organic basis operating income was up $24 million on a $139 million of higher sales, that gives us an incremental margin of 17% in the quarter, a great finish to the year.

The full-year incremental margin on a comparable basis was 15%. As you look further down in the income statement, equity in affiliate earnings was about $11 million in the quarter, down from $12 million last year. Interest expense and finance charges were $20 million in the quarter, which is basically flat from last year.

Provision for income taxes in the quarter on a reported basis was a benefit of a $183 million primarily, because of the asbestos charge. However, this – the non-comparable item is really asbestos.

You can read more about each of these adjustments in our 10-K, which will be filed later today, but if we exclude all the non-comparable items to provision for the income taxes was about $85 million for an effective tax rate of 11.5% for the quarter, or for the full-year effective tax rate of about 30.9%, very close to 31% that we guided all year.

Net earnings attributable to non-controlling interests was about $12 million, up $2 million from the fourth quarter 2015, this time it reflects our minority partner share in the earnings and performance of our Korean and Chinese consolidated joint ventures. Earnings per share on a reported basis was a negative $1.39.

On a comparable basis, net earnings were $0.85 per share. So let's switch to the segments now, which begins on slide 12. Reported Engine segment net sales were $1.39 billion in the quarter.

Sales growth for the Engine segment on a comparable basis was 1.3% as demand for our light vehicle OEM products were offset by a weak aftermarket and off-road commercial vehicle markets around the world. Adjusted EBIT was $248 million for the Engines segment, or 17.9% of the sales.

On a comparable basis the Engines segment adjusted EBIT was up $24 million on $18 million in sales for incremental margin of a 133% due to strong cost performance in the quarter. Turning to slide 13 and starting on the right, Drivetrain segment net sales were $883 million in the quarter.

This includes $37 million of net sales from Remy activity, when I refer to the activity, I'm talking about the purchase last year and then the subsequent aftermarket sale in the fourth quarter of this year.

So sales growth for Drivetrain segment on a comparable basis was up 16.9%, primarily due to higher all-wheel drive and transmission component sales, as James mentioned earlier. This is a very strong sales growth for this segment. Adjusted EBIT was $91 million for the Drivetrain segment, or 10.3% of sales.

Excluding Remy and currency, adjusted EBIT was 11% of sales, flat from the prior year. On a comparable basis, the Drivetrain segment's adjusted EBIT was up $13 million on $123 million of higher sales for an incremental margin of 11%. Now, let's take a look at our balance sheet and cash flow.

We generated $1.035 billion of net cash from operating activities in 2016, which is up by $168 million from 2015. Capital spending was $101 million in the quarter, down $77 million from a year ago. CapEx was 5.5% of sales.

Free cash flow, which we define as net cash from operating activities less net capital spending was $545 million in 2016, which is up $250 million from a year ago. Again, like I said in my opening remarks, this exceeded our 2016 guide as a midpoint by $100 million, we had a great cash flow year and quarter.

Looking at the balance sheet itself, balance sheet debt decreased by $331 million and cash decreased by $134 million, compared with the end of 2015. The $197 million decrease in net debt was primarily due to the settlement of a 10-year senior note coming due, lower revolver debt offset by share repurchases.

We spent $288 million repurchasing just under 8.3 million shares in 2016. Our net debt-to-capital ratio is 35% at the end of 2016 and that's down from 35.2% at the end of 2015. Net debt-to-EBITDA at the end of the year was 1.15 times.

Turning to slide 14 now, in Q4, as James mentioned, we recorded a charge of $441 million net of tax and expected insurance recoveries for estimated asbestos-related liabilities for historical automotive products that went out of production in the late 1980s and were manufactured by a legacy legal entity of ours.

This amount primarily relates to estimated pending and potential future claims for an additional 50 years. This is net of estimated insurance recoveries. I do encourage you to read the disclosures in our 10-K, which is planned to be filed later today. The important details around this charge are as follows.

First, it's non-cash charge net of our insurance recoveries. Second, it's not a discounted value, the number is nominal. The impact on cash flow should be viewed like this. We have paid claims since 2004 more than we have recovered from insurance companies, and the cash amounts have been reflected within our operating cash flows since that time.

While we continue to collect from insurance companies under existing agreements and continue to litigate and pursue settlements with those, we have not reached agreement with every single insurance company.

We expect that the annual future cash outflows for the next 5 to 10 years will be closely mirrored to what we have seen in the recent past and handle it in the same manner. And finally, none of this currently impacts our strong operating performance, our strong revenues and cash flows.

Again, I would refer you to the disclosure in our 10-K that covers all the details around this. And in addition, Pat and I will welcome your calls later on. All right. Switching gears.

I think it's important that we go over our 2017 guidance in detail again, despite the fact we did it at a conference earlier in January, just so everybody can be clear on this. So let's start with our sales growth for the full year on slide 16. Backlog, pricing, and market-related growth are expected to drive 3.5% to 6% organic sales growth.

I'd like to note the net unfavorable market growth pricing amount in that number. Our assumption is that our weighted average market growth is about 0.6% with a negative pricing of 1.4%. Currency is expected to reduce sales by $320 million, or 360 basis points. All this nets to 2017 sales at the midpoint of $8.925 billion.

Next, I'll walk our operating income on slide 17. From a performance perspective, we continue to expect mid-teens incremental margin on our sales growth. Included in this are some tailwinds and headwinds. The tailwinds include continued improvements from Wahler and Remy, offset by expected headwinds from commodity prices and corporate costs.

We do expect an inflationary environment in commodities and rising compliance cost. Our consolidated operating income margin is expected to expand by 40 to 50 basis points. To finish up, our full-year guidance, please turn to slide 18. EPS guidance range is $3.35 to $3.45 per diluted share.

Free cash flow, which we define as net cash provided by operating activities less CapEx, is expected to be in the $450 million to $500 million range. Capital spending, which does include tooling, is expected to be in the range of $475 million to $525 million.

We expect to continue executing our share repurchase program, targeting about $100 million or plus depending on our M&A activity in 2017. R&D spending as a percentage of sales is expected to be about 4%. The tax rate is expected to be up slightly at about 32% due to more cash repatriated from Asia.

Our assumption for the dollar-to-euro exchange rate is $1.05 for the full year, although I'd note that it is slightly higher right now. As a reminder, for every $0.01 change in the dollar to euro exchange rate equals about $30 million to $35 million of sales for us on a full-year basis.

Now I'd like to switch to slide 20 to talk about the first quarter guidance, first sales. Note that Remy light vehicle aftermarket sales divested are about $70 million, so the starting point is at the base of $2.2 billion. Net of new business, pricing and market related growth are expected to drive organic sales growth of about 2.5% to about 6.5%.

Currency is expected to reduce sales growth between 270 basis points. Therefore, 2017 Q1 sales is expected to be $2.24 billion at the midpoint. From an EPS perspective on slide 21, we expect negative $0.01 to $0.02 per share from operations perspective.

This doesn't include the headwinds from commodities and corporate costs, which are more weighted to Q1 from a comp perspective. Foreign currencies are expected to lower earnings by about $0.03 per share in the quarter as well. Below the operating income line items are expected to contribute about $0.02 per share.

Primarily, it's related to the lower share count, offset by a little bit higher tax. On a consolidated basis, we expect earnings of $0.81 to $0.85 per share. So let me summarize a few things right now. When we look back, 2016 was a great year for us.

We executed very well on the top line, slightly above our guide, and basically hit our metrics on the top and bottom line. We grew mid-single digits, like I said, and exceeded the sales guidance. We expanded our operating margin by about 10 basis points on a comparable basis.

I'd like to point out that even with the dilutive aspect of Remy in there, we significantly improved that cash flow as I went through in the script here. In addition, we returned about $400 million in capital in the form of share buybacks and dividends to shareholders.

Now as I look forward to 2017 and beyond, we see improvements in a couple key areas. Again, single-digit growth despite being in a flat environment, and we also expect our margins to expand as well in 2017.

So first and foremost, it is important that the intensity around our new product development to support the impending electrification trend has never been higher, as James talked about, and actually gave you some clarity around some of the more recent wins that we've been seeing.

There is no question in our mind that we'll drive growth for many years going forward. So with that, I'd like to turn the call back over to Pat to lead some Q&A..

Thanks, Ron. Denise, we're open for questions..

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

Great, thanks for taking my question.

Can you talk a little bit about your sales performance in China in the quarter? How it tracked relative to your own expectations versus the industry? Maybe remind us of any disproportionate over- or under-exposures you have there to certain automakers or segments that maybe performed better or worse than the industry overall?.

Yeah. Let me take a shot at that Ryan. So I would characterize it this way, I think where we landed in the fourth quarter versus where we thought we would at the beginning, if that makes sense to you is we got, it was a stronger quarter than what we had anticipated going into the quarter. And I think that's pretty consistent to what others have said.

We did go in and expecting to outperform and grow at a double-digit number in China and we did a little better than that.

So we grew well above the market, I don't have an exact percent for you Ryan, but Pat can get that to you offline, but we went in, expecting very strong growth and it came in even better than that and our market outperformance held even in that stronger environment, if that helps you. And again, Pat can get you..

Ryan, I actually have that number, James..

Okay..

It grew about nearly 30%..

Okay. Thanks, Ron..

Wow – it's impressive..

In China..

you've been pretty clear about your desire to expand your engine electronics capabilities, maybe via inorganic.

I mean can you just talk about what the acquisition environment in general looks like out there right now? Has it been affected much by the increase in the equity markets since your last earnings call? Then, is it also maybe your capital allocation decisions, could they be impacted by any sort of holiday on taxation of repatriation of cash overseas, et cetera?.

Let me say a couple things, Ryan.

First and foremost, in terms of adding and expanding our capabilities around electronics and power electronics, it's important actually to know it's both organic and an M&A play, so we've been continuing to build and add capability and capacity organically, fundamentally through hiring the folks and we continue to do that, but specifically we were also looking to add through M&A.

We do have a number of targets that were – we see and we're engaged in various levels of dialogue. I would say there's nothing externally in the marketplace that would be holding us back, if that makes sense, Ryan.

So it's just purely a function of identifying the right technology capability within the company and then convincing them to sell, I mean that's the fundamental issue. So there is nothing – there is no overhang in terms of regulatory environment, in terms of as Ron alluded to, in terms of that capital deployment.

We're ready to go do what we need to do. And the team is doing a great job of pursuing a number of targets. And it'll just be a case of getting one or more of those over the line as we can, Ryan..

Okay. Great. Thank you..

Thank you..

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

Yeah. Now I have a couple of questions. First, can you – this is more housekeeping. You mentioned in Detroit about the – couple things related to what may happen with taxes. First, you did say, you could repatriate some cash this year. That's behind your higher-tax rate guidance. Yet the prospects for tax reform are certainly out there.

Do you have flexibility to wait to get clarity on the new administrations tax fund?.

All right. This is Ron, Brian, okay. First, let's talk about the current environment that we operate for BorgWarner. We've worked very hard over the last couple of years to put in place what I would say is a very liquid repatriation strategy.

And as I said, we bring cash back from Asia and we are bringing cash back from Europe, and we are comfortable where we sit right now to be able to bring cash back, if nothing were to change now. We all noticed something is going to change here. Going forward, there is two bills that everybody knows is the blueprint and then there is the Trump.

We've analyzed it very carefully. There are some friction costs, as you get into this tax structure. It's going to be very complicated and create a lot of friction issues. Our perspective is in the long run, I think it's net-net benefit for BorgWarner, but it would take some time to get to that benefit.

Now James has also said that in his opening remarks that we are very flexible in North America and we can compensate for that tax cover to change very quickly. We could start taking some flexibility actions that would put us in a more neutral position..

Okay. But is that just looking at the border tax part of it and not the 20%....

Right..

...offset, because I thought you said in Detroit that he might pay more on imports but could be offset by a 20% tax rate..

Right. So I was referring to a just a border tax rate....

Right..

...that we would have to adjust our potential manufacturing footprints in North America, that's one aspect to it, but we have that flexibility.

And then as you get into the absolute corporate tax rate, whatever you picked the 15% or 20%, once we get there to the friction transaction part of it, that I think coupled with the repatriation would basically be free to come back in the future. In the long run, it's very beneficial for us..

Okay. So two quick follow-up questions. First that, I have seen a number, I think from Detroit, around $200 million of U.S. net imports.

Is that the right starting point to think about?.

That's correct..

if you start seeing bills in Congress that would lower the corporate tax rate and provide a repatriation holiday, could you defer that tax repatriation, the cash repatriation plan for this year, and hence not get the cash this year but not suffer a higher effective tax rate?.

I understand the theory behind what you're saying there, Brian, that's something we'd have to take into consideration and that there was certainty where that tax is actually going to be passed then we would probably take something.

The most important part is that we can be flexible depending on what we see actually is going to happen in the tax code..

Okay. Okay. So it's not some strange required distribution..

No..

And then just final question, and I will just throw it out there, and I'm sure will you go into more detail on other questions. That 133% incremental margin over an Engine, clearly with flat revenue there's a lot of cost take-out that drove that.

Is that the new base of operating costs that we ought to think about? Or is there a reason not to get too far ahead of where op margins would go when there's actually rev growth..

Brian....

Which I assume we're not going to model at a 133%?.

I don't model at a 133%. I think a different perspective than focusing on the quarter is really the focus is on the full-year margin that that segment did, and the margin expansion was actually pretty impressive. So I would model a full year and then I would also model for the full year margin – some margin expansion probably in top of that. Okay.

But, no, don't launch the fourth quarter, that's – I wouldn't go there with that.

Okay?.

Okay, thanks..

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

Good morning, all..

Hey, David..

I have one question on this asbestos charge.

It would seem to me, and we've seen some other companies take a similar charge to this, that you are in a position that you can estimate this out, going out 50 years versus whatever did you before, and that, that's the majority of what the charge is for?.

Correct..

So there's no adverse experiences?.

No. So okay, I see you what you're getting at, David. Let me just take a moment maybe and give a little bit more color around this instead of just answering quickly.

So basically, over the last several years, management has done some strategic initiatives on the defense side of this and put some stringent litigators in place, that's resulted in a very predictable environment for us on that side of it.

That coupled with a very stabilized tort system came together at the same time, so that we're able to take a look at some actuary's people come in, some other professionals and have a very predictable stable environment. We're now – we're comfortable and actually making a 50-year estimate. In the past, we didn't have that type of environment.

So it's kind of a convergence of several things coming together, that's mostly predictable. That's the most important word that I'm going to say here, it's predictable now..

Yes..

It wasn't predictable before..

Yes, there are a couple of other companies in the same position who have done something very similar to this. So thanks on that. I was hoping that we could dig a little bit deeper into the revenue number here, a touch.

Is there a way for Q4 and for 2016 to give us some sense of the geographic revenue performance, North America, Europe, Asia?.

Yeah. I can – let me – I'll try and take a shot at it for Q4, David. So as I think earlier, if you caught the earlier questions, from a China perspective, let me stop there. Ron said that, we grew it about 30% in the quarter year-over-year, which was pretty amazing.

Obviously, if you look at what their production numbers were in China, that represents obviously very, very significant outperformance from us. We grew just about double-digit in North America, which again represents pretty solid outperformance.

Europe, I would say, we would kind of below the market – light vehicle market in Europe, but that's a little bit history, where we have commercial vehicle in aftermarket revenue, a lot in Europe. So that's kind of a quick characterization.

We can – Pat and I or Ron can give you a bit more of a full year view if you want offline, David, or in a follow-up call. I just don't have a good visibility on that in front of me. But that gives you a little bit of a sense for the quarter.

Strong in – strong outgrowth in North America and China, and Europe about in line slightly down, it would be a way to think of it..

Great, thanks. And then just one last one. On slide 7, where you labeled the recent product announcements. A bit curious, six months ago now or so that we talked about at your Analyst Day and trying to put some numbers around these types of products.

I'm curious as you're booking the contracts and you get deeper into this process of building the backlog in these non-internal combustion products whether your content, your market share, the size of volume, unit volumes – just some characterization there of how that's tracking relative to what you would have talked about back in September..

Yeah. I can spend a couple minutes on that David. So just a real quickly recap, obviously we talked about the three architectures combustion, hybrid and electric.

What we basically said around combustion back at Investor Day was this is – the combustion is a flat market basically, it's about 88 million vehicles in 2016, and it stays about that slightly down, BorgWarner's revenue growth is about 5% over that same period 2016 through 2023, and we get that two ways, we get that through increased penetration rates, and we also ramp-up a little bit on our content per vehicle.

So combustion goes from 185 to 250. So if you bear with me, and if I do that same kind of approach on hybrid, David, we have a compound annual growth rate of about 50%-something, over that period 2016 through 2023.

Again that's delivered through significant penetration – vehicle penetration, where we go from about 20% up to 40%-something, and again content per vehicle climbs significantly. Similar story on electrics, where we continue to see significant growth content per vehicle evolves there as well.

The upshot of all of that David, is if I was to say where are we sitting here today in February versus where we were, when we were in Investor Day. I would say we're on track, if anything slightly better or slightly ahead of where we thought we were back in September.

And slightly ahead means, what I'm actually seeing as get over the line in bookings in hybrids and electrics and combustion. So we feel probably slightly more comfortable than what we even did back in September based on the evidence over the last four months or five months of booking. In all three areas David, that's the key all three..

Okay. Great. Thank you very much..

Thanks, David..

You're welcome..

Your next question comes from David Kelley with Jefferies. Your line is open..

Good morning. And thanks for taking my questions. Just a couple of follow-ups here. Maybe if you could provide some additional color on the Remy business, maybe how it's progressing relative to your expectations, areas of outperformance, underperformance; and what you think about the Remy opportunity for 2017 would be great..

Let me take a shot if I can, David. I would say we were about a year into this. And so real briefly, I would say fundamentally it's performed pretty much as we'd expected. Top line is pretty much there other than a little bit of end market weakness. Operating-wise, it performed pretty much as expected.

I would say the technology strength and depth that we've been pleased with in terms of the breadth and the strength of the product portfolio.

I think the one incremental area that I would say is a little better than what we thought from when we went in is we're seeing the opportunity to combine the Remy product with the traditional BorgWarner product to differentiate ourselves with our customers on technology solutions, and we saw that with the electric drive module would be a great example very recently.

So I would say that's how I would characterize that. I think the other element that we feel very good about was the divestiture of the non-core light vehicle aftermarket business. I think that was a really important move for us in a number of fronts, so we feel good about that.

So now as we go into this year, the focus, David, just to give you a number in the three-year backlog, we characterize the rotating electric portion of our backlog was about 12%, which was up significantly from a year ago. And that's coming from two aspects.

One is what I alluded to earlier, which is the combining of the Remy core technology with the BorgWarner technology to offer system solutions for our customers. And then the second area is finding ways to gain share with the more legacy product set of Remy, so basically selling more starters and alternators.

Now we've got to leverage with BorgWarner than Remy did in its former life. So net-net all around, David, we're feeling very good about it. It's contributing from a top line perspective in a good way. And we're starting to get some traction on the margin improvements. Remember, when we started this business, it was about a 4% operating margin business.

We'll get some incremental uplift this year without having the non-core aftermarket business, and we're comfortable we can expand margins on the core Remy business. So hopefully that gives you a little bit of color, David, to help..

Great, I appreciate the color there, just a quick follow-up on turbochargers and then I will pass it along.

Regionally, how do you view the category opportunity heading into 2017? What could be markets of outperformance or underperformance? And along that note, if we're thinking about the eBooster technology ramp, how is that progressing? Where are we over the next two to three years with eBoosters? That would be great..

So just from a turbo perspective in its general sense, the core story there really is we're seeing obviously significant penetration uplifts in North America and China. That's where the growth story is playing out. Europe is obviously pretty much a saturated space in terms of turbocharger penetration.

And I would say to you that's playing out as we expected. We're seeing rapid adoption rates in China and in North America. And Pat could give you some detail numbers offline if it's helpful, David. So we're seeing that play out. From our BorgWarner perspective, our market share expectations are playing out exactly as we thought.

So we're winning where we thought we would win and we're doing well from a share perspective. So I would say that's encouraging too. And eBooster, we continue to get more and more traction there.

We have a couple of production awards – or in production I should say in 2017 with a couple of key customer programs, and we see continued pull and demand for eBooster programs that we're quoting on and doing very well with.

So we see that trend continuing from a technology point of view, and we're getting our share and doing quite well in winning that business. So hopefully that gives you some sense, David..

All right, perfect. Thanks again..

Thank you..

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

Good morning..

Good morning, Brett..

Hi, Brett..

A 30,000-foot question, and it's just this. Combustion, hybrid, electric, it seems like regionally we're seeing them grow at different pace, and China seems to be focused heavily on electric.

So can you talk about the combustion, hybrid, and electric growth rates in the different regions?.

I can take a shot at that, Brett, at least start on that for you. I would say first, your assumption is right where the lead space, if I can call it that, for electric is in China.

So we are seeing more focus, more drive around pure electrics in China regionally than other parts of the world, but we are obviously seeing electric production rates in Europe and North America also. I would say all three regions somewhat equally are looking to optimize combustion technologies, so we're seeing that.

And I would say that's pretty uniform around the world in terms of refinement optimization on combustion. Hybrid, also I would say regionally there's a pull, probably an equal pull for hybrids in the different regions of the world.

Brett, what I would say to you on hybrids, where there's not a lot of difference regionally, you are getting different customer strategies around hybrids, and that's where Borg is playing a really key role because they're looking at different hybrid architectures, different ways of getting there, and that's where we're playing a strong role in helping them.

So a little bit of regional variation, but I think ultimately I would say, Brett, the critical 30,000th point for us is, we've seen all the OEMs needing a balance of the three architectures and we're there to help them with that balance of the three. That's the really critical part..

Thank you very much, James..

Thanks, Brett..

Your next question comes from Rich Kwas with Wells Fargo. Your line is open..

Hi. Good morning, everyone..

Good morning, Rich..

Just two quick ones. On the regional split of these new wins, James, just as a follow-up, any difference? Is that pretty spread evenly? And then the second one would be for Ron on the buyback.

The $100 million-plus, what moves that up meaningfully from there? What would you have to see? What's the scenario?.

I'll go to buyback quickly..

Yeah, sure..

As I said on the buyback, it's all going to depend on our M&A activity, Rich. We have some things that we're looking at right now. And if they look like they're not going to materialize till end of the year or next year, we would move it up..

Okay..

In terms, Rich, of the new wins, so to speak, it is pretty balanced regionally. I put those four examples up, Rich. I see that's a good characterization or a good representation of actually how it's playing out. So you've got a really advanced electric vehicle system that's in – at a China.

You've got the latest and greatest turbocharger technology that's in Asia and China. Suzuki, as you see Alfa Romeo is a European, but I wouldn't be surprised when I show you the – in the next call, another four. They could be North American or whatever, see. I'm – it is pretty balanced.

Both regionally, Rich, but also across the combustion, hybrid and electric propulsion space. It's pretty balanced..

Okay, thank you..

Thanks, Rich..

Your next question comes from Adam Jonas with Morgan Stanley. Your line is open..

Thanks, everybody, just a high-level question. Your OEM customers have recently been fairly outspoken in putting real money behind the propulsion changes, and obviously you're seeing that in your order and quoting activity.

But sometimes when we have conversations with them, they suggest that, that could create some volatility in their results as they make the pivot from internal combustion to EVs.

If I'm not mistaken, the message you've been giving pretty consistently now is that, while not easy, you're confident that you can make that pivot while maintaining the incremental margins kind of like phase-in, phase-out, without really any blip.

I'm not holding you to like exact science here, but it seems like your current level of this 17%, 18% with an engine, for example, that we're not going to be in a position a year or so from now where, due to that pivot and some of the internal investments, expenses, you don't think that, that's – you don't see that, have visibility of that creating a near term and necessary blip to capture this great revenue opportunity going forward.

Is that accurate from a perspective?.

Adam, it's James. So I would say, that's a pretty – a pretty good description you gave, and I would give you a little bit color of – kind of why I think that is, because I think it's a – if I can say it this way, it's an incremental evolution to the end game.

They're not – and I think, you've seen this yourself, that it's not a light switch, where we're turning off from – turning off combustion and turning on the light, it's a – it's a – it's kind of a journey and it's an evolution.

And the reason that's important, that does a couple of things, that allows us to be thoughtful and balanced in terms of making our investments, and evolving the portfolio as opposed to throw all of it away and bring a brand-new third on that we've never done before.

And that's why we have the comfort and the confidence in the kind of evolution, because it's not a light switch type event. The other quick comment I would make Adam, that gives us incremental confidence is, as I've alluded to sort of last year, we are in production with hybrid technology, we're in production with electric vehicle technology.

And we've been doing that over the last three years to four years, and still delivering the incrementals over that period of time. And what we're also seeing is the financial performance of those electric and hybrid vehicles is very good.

So I don't want to characterize Adam, that this is easy, I don't want to tell you that, but I would tell you, we feel comfortable that this is more of an evolution than an event and we're comfortable, we can manage through it and deliver what we're saying we're going to do..

Thanks, James. Thanks, team..

Thanks..

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

Good morning. Thanks for fitting me in here..

Thank you..

there was a smaller turbo competitor out there that's up for sale. I think it confirms a lot about what you have been saying about this market over the years.

I was curious, is that helping you at all on the margin in bidding, given uncertain future ownership there? And does that have any – does that asset have any strategic value to BorgWarner?.

Thanks for bringing that up, Joe. I think your note characterized it actually pretty well, frankly. So Bosch Mahle rough numbers is about 4% to 5% market share. And I think what it really, really confirmed is the barriers to entry in that turbo space a pretty hard, it's pretty tough and I think you alluded to that and we would confirm that.

So lot of technology, lot of IP, lot of manufacturing capabilities et cetera, et cetera, et cetera, investment business. And yeah we defend that very, very strongly. And I think you see there is some, it's a tough space for them to do. In terms of how it plays out, I think we'll have to see candidly.

We will see what plays out in terms of what happens with that asset. We do feel extremely positive about our position frankly speaking in turbo and we have about a third share. We talked about that, win rates are good, our booking rates are good, our technology leadership we feel really, really good about.

And, yeah, so we're feeling good about it is the quick answer, Joe, but in terms of the specifics about deal plays out, we'll have to give that a little bit of time..

Okay, thanks a lot..

Thanks..

Thanks, Joe..

Your next question comes from Brian Sponheimer with Gabelli. Your line is open..

Hi, thanks for sneaking me in here. Just one confirmation, Ron, on the asbestos charge. Looking back to your 2015 10-K there was some discussion about insurance recovery.

This is in no way any sort of comment about your ability to recover from insurance companies what you expect to receive, correct?.

Correct. All we really did is, we – that there are two types of liabilities out there, one of them when people file claims, we had to do an estimate of what we expected those settlements to be, which we've always had out there, and we had an asset and liability.

What we did is we true that up, but then more importantly, we took a look at the universe of what we call IBNR incurred, but not reported yet. What we did is, we took a look at that as well, and what we did is we took a look at for 50 years, put that on that balance sheet and then our insurance receivables are still out there.

I'd encourage you, really to take a look at the 10-K that we filed today, it gives more clarity around it, and also it gives you more of what the asset values and liabilities are on the balance sheet, okay.

I don't want to spend a lot of time on the call going through all those details, but there's there is a lot of clarity, I think in the K that we're going to put out today, around this issue..

Great. Thank you very much. Much appreciated and I'll look at 10-K..

Okay..

Thanks, Chris (sic) [Brian]..

We have time for one final question, and that question comes from Chris McNally with Evercore ISI. Your line is open..

Thanks very much, guys..

Good morning..

I just wanted to get a little divisional detail. Obviously, the strength in Drivetrain.

Could you talk a little bit how we should think about growth split, maybe between the divisions in 2017; and as the follow-on, how to think about incremental margins by division over the next couple of quarters?.

I would say, Chris, if you think of what we did in the three-year backlog, where we broke out, the products actually by discrete products, but then also you can clearly see what's Engine and what is Drivetrain. My sense is, I would think that's probably a pretty good barometer for – on an annual basis, is a good way to think of it.

So we provided the detailed breakdown there by product and by segment for you in the three-year view. I don't think you'll go too far wrong if you view the one-year view somewhat similar to the three-year view, if that's helpful for you..

Okay. So there shouldn't be any weird comps in terms of the growth as we think about over 2017..

No, I don't think this – no, it would be my quick answer..

Okay..

And in terms of the margins on the – quick answer, from an Engine point of view, we're pretty high up there, right? So there's we're kind of keeping pace at an incremental bases and absolute are pretty much there. We've talked on the Drivetrain side.

We've always said there's a little bit of room for incremental uplift there and we continue to drive that for sure..

Okay. Perfect. Thanks so much, guys..

Thank you..

Thank you..

With that, we're going to end our call. I'd like to thank you all for participating today and thank you for your helpful questions. Denise, you can close the call..

That does conclude the BorgWarner 2016 fourth quarter and full-year results conference call. You may now disconnect..