BorgWarner Earnings Call Insights: Earnings Performance and Real World Driving Conditions

BorgWarner Inc (NYSE:BWA) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Earnings Performance

Richard Kwas – Wells Fargo Securities: Ron, in terms of the guide, I know unchanged for the year, but Europe is going to be down pretty significantly in terms of production in the first quarter. I know you don’t give quarterly guidance. But just generally speaking, how should we think about the cadence of the earnings performance as the year goes on?

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Ronald T. Hundzinski – VP and CFO: I would say that it’s incrementally improving throughout the year, Rich. So, every quarter-on-quarter it’s improving.

Richard Kwas – Wells Fargo Securities: So, is that kind of the sequential comment on the EPS line sequentially improving?

Ronald T. Hundzinski – VP and CFO: Yes.

Richard Kwas – Wells Fargo Securities: Then anything from a mix standpoint that we should be aware of as it relates to Europe or other parts of the world? I know European mix got worse as 2012 progressed. What’s the assumption there for ’13 as it relates to that?

James R. Verrier – President and CEO: Rich, this is James. Good morning. As we look out into the year, we’ve seen the – not a significant change in mix as we’re looking out. As you know, as we come towards the end of last year the higher contented vehicles caught up a little bit as the year progressed. Now, we’ve got that assumption into our guidance and we feel pretty comfortable that that mix level is not going to shift too significantly. So, that’s where we’re seeing it right now.

Richard Kwas – Wells Fargo Securities: Then just on the ConsumerReports article from a week or so ago, they came out – as you’re probably aware, they came out with some negative comments about the benefits of turbo chargers and the OEM have kind of backed the performance in terms of what they’ve seen. But what are your thoughts on that? I mean, I can imagine where you’re – I know where your stance is, but just what’s your thoughts on the report and what are any – are you aware of any key differences in terms of the testing or any color you could share on your thoughts would be helpful?

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James R. Verrier – President and CEO: Yeah, we’re fully aware of it obviously, Rich, and I would say, with any of those types of reports, we take them very seriously. It’s something I don’t want to dismiss them or anything like that. So, we do take a hard look at anything like that, particularly when it relates obviously to one of our core products. But I think there’s a couple of key points here in that specific report. It’s very difficult to get a sense of what the testing and driving conditions that are associated with the results that are coming out of that report. And as you know, Rich, and I think everybody else, it kind of gets it to – you can get variations in the results, so you get dependent on what test cycle you use, what type of driving behavior, actually independent of any technology. So, that’s our view – I mean, at a simple level though our view is that almost every indicator we look at towards turbocharger penetration continues to be very strong, and we see that in our quoting activity, we see it in our net new book of business. We’re not seeing any slowdown in adoption rates. We’re not seeing any slowdown in activity and interest levels from customers. And I think that’s just driven by, from our view, that the fundamentals of turbochargers remain extremely solid. It’s a key technology to help the engineers downsize their engines and get the type of fuel economy that we need, and we’ve seen that success all around the world after many, many years and we just see that trend continuing on. So, in a nutshell, we pay attention to the report, but we pay attention to all of those reports and there’s awful lot of them that are very positive about turbocharger performance and adoption rates. So, hopefully that helps you a little bit, Rich?

Richard Kwas – Wells Fargo Securities: Yeah, it does. Alright, thanks. I’ll pass it on. Thanks.

Real World Driving Conditions

Christopher Ceraso – Credit Suisse: Maybe just a follow-up on that, James. So, I think the big picture is the difference between what the EPA says fuel economy is versus what real world driving is, and as you point out, it’s not just turbo; it’s a host of different technologies. But I wonder if the EPA sort of figures this out and says, you know what, we need more realistic testing procedures, and window sticker numbers end up coming down a little bit, does that threaten at all what you think car companies will be willing to pay for certain technologies? Had there been a link in the past where they said, okay, if I add a turbo I’m going to get a 15% bump in my window sticker number; maybe now it’s only 10%, so I am not going to pay as much as for turbos? Do you think that’s a risk?

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James R. Verrier – President and CEO: In a nutshell, Chris, I don’t see that as a risk. I mean, there is always a discussion around real world driving conditions and the stated conditions; as I’ve said, independent of technology. So, I don’t see that as a risk to us. And, we remain very comfortable as we work with the OEMs and they go through all the testing and validation that they go through and the data that they’ve seen is still consistently driving towards the type of technologies that BorgWarner has in the profile. So, we’re not seeing this as a significant risk to BorgWarner at all, Chris.

Christopher Ceraso – Credit Suisse: So even the OEM data supports the improvement, so they are willing to go for the technology?

James R. Verrier – President and CEO: Yeah, absolutely. Yeah, that’s why we continue to see the adoption rates and penetration rates of the BorgWarner type products that we offer.

Christopher Ceraso – Credit Suisse: And then, a follow-up again for Ron about the progression of earnings through the year. Not to get too cute, but typically, your cadence is roughly 50% first half, 50% back half do you expect this year it will be more like 40-60 or can you give us some bands around first half versus back half?

James R. Verrier – President and CEO: So we are talking sequentially right. I’d have to go back and take a look at some numbers. I would say it’s more rated to the back half of the year, I wouldn’t say its 50-50. I’d say it’s more backend related than it is front related.

Christopher Ceraso – Credit Suisse: Right of course, the question is normally you are 50-50 is this year going to be more like 40% first half, 60% back half how tilted is it, is the question?

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James R. Verrier – President and CEO: It’s not material, I guess I’ll say it that way. There is going to be slight difference but it’s not material.

Christopher Ceraso – Credit Suisse: Then just lastly on the, the incremental margins Drivetrain you commented was pretty low sub-10% what’s your expectation there for 2013?

James R. Verrier – President and CEO: Our guidance on total company is 11.5% plus or better, right. Very similar to what we saw in 2012. I would suggest that operating margins within those segments would be relatively similar as well in 2013 as they were in 2012.

A Closer Look: BorgWarner Earnings Cheat Sheet>>